Every digital music proposition from iTunes, to Zune, to every startup in between, is in danger of being disrupted by a seismic shift in the way the music industry will and must, for sake of survival, engage fans and consumers.

Nobody within the value chain of music creation is going to survive on selling songs for $.99 cents. After 30% is carved off to the digital music platform/distributor, there’s not much left over to justify making and promoting music. I tell friends, imagine if in 2006 all cars sold for around $15,000, and then in 2007 consumers decided they would only pay $1,000 or less for a car, and 50% of the car buying public just decided to steal cars all together! This is the music industry and digital music, and unless your band is U2-sized, you cannot survive on $.69 cents of margin, t-shirts, banner ads and touring revenue. The small and medium sized players are getting annihilated, and the larger players are merging and contracting to reach some sort of economic equilibrium. It’s not pretty; the industry needs high-margin, high-volume products to fund the development of unproven artists and to survive in general.

So, I think about the problem of minimal margins constantly, and while ingesting an omelet the other day, I was reading an article in Billboard Magazine by Tom Silverman, the CEO of Tommy Boy Records. Tom says that “the next physical product for consumers should have: 1) high perceived value; 2) strong emotional connection – touch and feel components (high touch not high tech); 3) status association – peer pressure; 4) best possible sound quality and audio features; 5) be a great gift item; 6) be collectable (infers resale value and possible appreciation); and, 7) be easy and convenient”. Bloody hell, I said to myself. Tom’s article combined with the food buzz from my omelet, and something I believe I heard Bob Lefsetz say three months ago, just solved all of the industry’s problems.

Lefsetz was talking about some form of “pay for access”. This phrase has been rolling around in my head for a while Let me repeat it three more times: “pay for access”, “pay for access”, “pay for access”. Combine this phrase with Tom Silverman’s article and an omelet fueled biochemical reaction and you get the dongle! Yup, the dongle. The dongle is the answer to the music industry’s problems.

A dongle is a small security device invented in the 1980’s to limit access to software. Modern dongles plug into any USB port and provide the encryption key that enables the user to access software or a remote system. What’s great about the dongle is that only one person can use it at a time and normal humans can replicate it. So, if you want to limit access to 1,000 people, you sell or give away 1,000 dongles. Dongles can even be programmed to expire. Now, you could definitely accomplish the same thing with a cell phone; one cell phone equals one person; but, that would take a couple of extra steps and it doesn’t satisfy all of Tom’s requirements as listed above.

How does the dongle (or any other secure token) disrupt the digital music world? Here’s how: artists or labels put everything (music, pictures, video, messaging, ticket deals, etc.) behind a secure wall on the web, and consumers have to buy a dongle to go behind the wall. The dongle costs $25.00 per artist and it expires in one year. Once behind the wall, dinner is served. Consumers can download, interact, stream and play unfettered and unlimited – until the dongle is pulled from the USB port of the client computer. It’s beautiful; dongles could be gifted, hung from a keychain, branded, collected, shipped, shared, swapped, etc.

And, so what about downloaded and shared music. Who cares? Artist will learn how to deliver value beyond the songs that are swiped and shared. The most important thing is getting back to selling a high volume product that carries a hefty margin. In this dongle-driven system music is essentially free, and everything else we are giving away now on YouTube and MySpace is not; fans can’t get to it without a dongle. If you think about it, I am advocating that we turn everything upside down. Right now, we do everything to sell music, when perhaps we should be giving away music to sell access to everything else.

Finally, the opportunities are: create a dongle/token system (perhaps with cell phones) that can be used by every artist; create an ecosystem that enables any artist to go behind the wall; and, provide value-add services that help artists sell dongles. Dongles rule, selling tracks for $.99 cents sucks.