The war between music labels and online services is a little bloody. Here’s why and how it might finally end.

From Fortune:

If disruption means losing money, then online music services know how to spend like rock stars.
Adoption and revenue growth rates at a few top players like Spotify and Pandora are real — Pandora reported earnings yesterday, breaking even — but what are the costs to play? It’s still unclear in many cases if audience growth will translate to profit.

Every few years a new service rises up, captures audiences but then has the same cost-centric problems as every one that has come before: negotiating terms with rights holders. Music labels, music publishers, and in some cases, emerging artists who circumvent traditional music property conventions by going it alone — think self-managed Taylor Swift — all want or need a stake in streams or downloads, and that can make or break a deal.

“With most other businesses, if a supplier makes unreasonable demands, a retailer can turn to other providers,” wrote Michael Robertson, CEO and founder of MP3tunes.com, about the problems with the industry. “Since copyright law gives record labels and publishers a government-granted monopoly, no such option is possible with music. Digital vendors have only two options: Accept the terms or not include those songs in their offering.”

The profitability problem
From 2010 to 2011, Spotify grew revenues 140 percent to $236 million with a paid-subscription base of 4 million users and a total of 33 million registered users (most of whom use the free ad-supported version via Facebook), the Wall Street Journal reported. Spotify revenue grew from $99 million in 2010. However, the number some analysts and industry watchers are looking at is the rate of loss. In 2010, Spotify lost $57 million, which was an increase from 2009’s $42 million in losses. Similarly, Pandora, paid $60.5 million in the second quarter this year for content acquisition –royalties to the music industry — a number up from $33.7 million in the same period last year.

“It’s still relatively early days,” said David Kusek of industry consultancy Digital Cowboys. “Online music is a still a small percentage of the overall market (CDs still being consumed). There really is no perfected business model yet. .. Remember, the largest online source for discovery of new music and sharing is still YouTube.”

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