The jist: by seeing what people are downloading and swapping, record companies can get an accurate idea of emerging trends and hot new acts. For example, The Arcade Fire is one of those bands that up-to-date music fans and college radio stations love (deservedly so), but that nobody else has ever heard of. By looking at online trading stats, their record company might notice this and decide to embark upon a major marketing push to try and turn them from indie-rock sensation (I think they might have gone gold, but not sure) into bona fide super stars (multiplatinum, like the albums of yesteryear). Of course, they’re on a pretty small label–Merge–which probably doesn’t have the money to take full advantage of this data.
Anyway, seems like a lot better way to conduct research than asking radio listeners to fill out diaries or calling random people and playing them song samples over the phone. And it sure beats payola, which is all about short-term gain (record gets airplay; radio station gets money) in exchange for long-term pain (listeners avoid radio because it’s out of touch and turn to alternatives like iPods or satellite; radio becomes ineffective vehicle for music promotion).
BTW, I’m one of those idiots who bought that Chumbawamba record. Occasionally, that song comes up on my iPod and I wonder what I was thinking. It’s not even worth $0.99, much less $17.