Thanks to the overwhelming amount of support for the first installment of the Hip-Hop Stimulus Plan, I’ve decided to continue to elaborate on my optimistic vision for the future of hip-hop.

To recap Part I of The Hip-Hop Stimulus Plan called for an overhaul of the hip-hip industry, starting with the reformation of the music distribution system. Stating what must be obvious to all but those in total denial, I announced that the album is dead. I also warned that the demise of hip-hop is to soon follow. The morale of the hip-hop community is at an all-time low thanks to the inactivity of artists and the failure of labels in adapting new technologies. I encouraged all creative parties to start liberating their best material, for free, in order to reinvigorate the spirit of the hip-hop community. I also suggested that major changes are needed in all label offices to properly begin profiting from the distribution opportunities created by the Internet.

In Part II of the Stimulus Plan, I illustrate a gaping disconnect between current marketing strategies of labels and the refusal to accept the emerging dominance of the Internet as the primary distribution network for hip-hop artists. Labels are facing problems with file sharing and free distribution while ignoring the possibilities of increased profitability.

As I discussed in Part 1, bloggers are the new gatekeepers of cutting edge hip-hop. Blogs may specialize and create individual niches, but the one thing common among most hip-hop blogs is an abundance of free music downloads. These downloads are never directly hosted by the site, however, and appear, instead, as links to sites specifically created to allow easy file-sharing like zShare, Megaupload and Sendspace.

Here is what the typical user experiences when trying to download a recent hip-hop track from a blog:

A user finds a song of interest while browsing through the posts in a hip-hop blog. When he clicks the download link, he is redirected to Sharebee, a file-sharing service that allows a single file to be uploaded to five different file sharing sites. As soon as the user hits the Sharebee link page, the page will attempt to re-direct him to a full-screen advertisement. To skip the advertisement, the user must hit a “Skip This Ad” button before being able to get to the next step. Additionally, Sharebee will launch at least 2 other pop-up browser windows promoting various advertisers. Before the user can access the actual links to other file-sharing sites, he will find a page plastered with banner advertisements. As if the process wasn’t already frustratingly slow, when the user finally gets to pick his favorite file sharing service in order to download the actual song — you guessed it — he has to repeat the previous process all over again before actually being able to download the track.

By the time a user is able to get an actual song download in queue he has been subjected to 15 banner ads, six pop-up windows and three page redirects. This equates to millions of consumer eyeballs on spam ads while creating mass amounts of revenue for the owners of the file-sharing sites. This process starkly demonstrates the perversion of today’s music business model: While the music industry is hemorrhaging money with each day that passes, sites like Sharebee and ZShare are getting rich from advertising dollars being generated by music they don’t own.

Why is this happening? Why have labels allowed this kind of perverse arrangement to develop? The answer to that question is a complicated one, but, I think, can be attributed to at least two factors: 1) the corporations that own major music labels are stuck in a 20th century business model, and 2) the people running the labels are more concerned with product control and litigation than growing business or developing artists.

Labels can go on bleeding out while businesses like Sharebee and Zshare thrive. Or they can wake up and start using a marketing system that already exists but apparently is not on their radar screen at all. In other words: Labels, stop being so fucking greedy and pay bloggers to get your music out!

The labels need to launch a file-sharing service of their own. They can easily take control of dissemination of products by piggybacking on a distribution system that already exists — Internet blog sites. Bloggers are already distributing music to millions of fans in much the same way that music stores of the last century delivered albums and CDs to fans. Label executives need to recognize the power of this distribution network. By adopting a marketing strategy that reimburses bloggers for distributing tracks, labels not only cut out the middle man (the file sharing sites) but also eliminate the use of spam ads.

It would be relatively easy to create a reimbursement system for driving this new marketing arrangement. A formula can be established to quantify downloads from each site, which allows each blogger to earn money based on the amount of traffic his site generates for the labels. High-volume bloggers who send a lot of traffic to these links would be paid in proportion to that traffic. Part-time bloggers would still have the opportunity to earn some supplemental income each month.

In other words, by using an existing distribution system already in place, labels would create a business model that acknowledges and embraces the Internet as the strongest marketing tool in the label’s arsenal.

Once bloggers are integrated into a new marketing strategy, the labels need to refine the current intrusive nature of the online advertising. Not only will refining this process build goodwill with frustrated users, but it also will improve profitability for the labels. Rather than flooding fans with pop-ups and spam attacks, the labels could simply strike deals with advertisers to place a 10-15 second ad tag at the beginning of each track which users will be required to listen to before hearing the actual song. The blogs would still host download links provided through the label affiliate program, but would be able to offer a quick and spam-free user experience.

Some might worry that bloggers would be inclined to remove the ad-tags from the beginning of the tracks and offer up ad-free versions, but I don’t think that makes much sense. Why would they host an illegal version of the file while making money for some faceless file-sharing company when they could be making money for themselves with the same content?

Under this system, the labels are still able to offer a high-quality ad-free version of the song through sites like iTunes and Amazon. I’m sure plenty of users will still be willing to toss the label some change for the ad-free version. Either way the label is at least in a position to monetize from the distribution of the material. This will allow them not only to openly support the free file-sharing model, but will encourage labels to work with rather than against the various blogs in order to jointly develop artists.

The same theory can even be applied to video streams. If the labels were to set up an exclusive video service resembling Hulu which would feature only high-quality licensed content from affiliated majors and indies, the labels could broker a similar performance-based deal with bloggers. The more streams, impressions and clicks the video gets, the more money the blogger makes. The blogger would finally have a legitimate use for all that site traffic they’re constantly competing for.

Let’s do some math and just see how quickly a label-owned video portal could begin kicking YouTube’s ass by aligning themselves with the blogs:

We’ll start with 10 blog sites who have become affiliates of this new video portal.

Each site delivers 100K page impressions per day for the videos they are hosting, which contain advertising that automatically appears on the embedded players.

The video portal pays each blogger at a rate of $0.10 for every 1,000 page impressions their embedded content receives.

For the 100K page impressions the blogger provides each day they are generating $10 in revenue and earning a total of $300 per month for hosting video content.

At the end of the month the label will have paid a mere $3000 in commission to have gained 30 Million impressions for ads that are producing revenue for them, while also assuring strong marketing assistance from bloggers who want to provide these videos with as much exposure as they can.

Again, this is just a hypothetical application using only 10 sites. It would be expected that there would be hundreds or even thousands of affiliate sites competing for the ad revenue being offered, which would make the numbers staggering.

Adopting this model for videos would clearly require a lot of cooperation and compromise by a bunch of greedy entities, but if the benefits of this type of model are not clear yet, wait until Hulu outperforms YouTube this year in ad revenue.

To make the whole thing work, I must reiterate what I said in Part I: labels need to stockpile a bunch of Internet geeks, web designers and programmers to run the show. Underlying the obvious short-sightedness of the whole industry seems to be a more basic problem of staffing. Executives have trouble understanding the type of people they need to recruit, so here’s a hint: It needs to be not what you have now. One benefit that has occurred from the economic crisis is there are a lot of young, Internet-savvy people out there now, so the talent pool would be thick.

To put this new business model in motion, the labels really need to rearrange the budgets on a couple of those phantom albums they know are never coming out. Once they do that, the whole business could see a turnaround within a few months. Inaction will not be an option much longer.