Last year, Radiohead carved out a place for innovative musical distribution strategies with its high-profile move. And, as expected, Nine Inch Nails has forged ahead too, now that the band has broken from label Interscope (part of Vivendi's (OTC BB: VIVEF.PK) Universal Music Group).

Nine Inch Nails' Trent Reznor understands where the industry is going.

Giving the people what they want
The new music industry is all about flexibility and options. The Nails' new four-volume instrumental album, Ghosts I-IV, was released Sunday night in digital form, and it was a bit of a sneak attack. The media just caught on to it late yesterday.

The album in its entirety was made available at the official NIN website (payment options include PayPal), as well as on (Nasdaq: AMZN), for $5. In addition, fans could get a free version of Ghosts I on the band's site.

The album will also be available in the spring in other formats including CDs, vinyl editions, and interesting add-ons, at different price points. For example, there will be an ultra-deluxe limited edition version, which will include discs, vinyl, visual material, and an autograph from Reznor himself -- this will have a run of just 2,500 copies and will cost $300. (Too late, if you were interested -- they're already sold out.)

The album's digital versions are available now in MP3 and Apple (Nasdaq: AAPL) Lossless formats, and it goes without saying these will be DRM free so that fans can listen to the album on any device.

Crashing the party -- literally
Demand for the album crashed the servers Monday night. Reznor cracked on his blog, "We thought we bought enough beer, but too many of you showed up for the party." Traffic turned out to be more than three times expectations and got heavier throughout the day, finally crashing the site's servers and requiring maintenance.

In a rather amusing turn of events, Reznor told fans about other options, such as Amazon and -- get this -- BitTorrent and the "official upload" at Pirate Bay for the free offering of Ghosts I. Giveaways like this are probably giving the traditional recording industry bigwigs, like Warner Music Group (NYSE: WMG), Universal, and Sony's (NYSE: SNE) and Bertelsmann's Sony BMG, metaphorical heart failure. Pointing fans to the industry's sworn enemy, Pirate Bay? Well, hoist the Jolly Roger, yarr.

Prince had tried an interesting distribution experiment, too, when he struck a deal to tuck copies of his CD into the Sunday paper. And of course, Canadian label Nettwerk has long denounced the majors' litigious policies and tried several strategies, including starting a label with video game giant Electronic Arts (Nasdaq: ERTS)

So who's "Mr. Self Destruct" now?
When I've written about the music industry's broken business model, I've been wrongly accused of thinking artists shouldn't be paid. Like many others I believe the traditional media model is broken and needs a complete, visionary overhaul, something established companies have been reluctant to do.

Critics say only superstar bands with massive followings have enough resources to go independent. Others say that many people aren't willing to pay up, as had been hoped for.

But with huge industry disruptions like this one, few people can see the ending from here. Perhaps that's why it's scary for the companies and business models that are left behind, and why they'd rather keep the status quo.

Innovators like Nine Inch Nails are paving the way for new media business models that may bypass the middleman while making sure artists and fans are happy.

I have faith that most fans will want to pay for quality content they really love, especially if it supports their favorite artists. I also believe this is just the beginning of the evolution of the media industry, and it will take time to sort itself out.

For investors, the dichotomy of fear and innovation we're seeing is an illustration of Joseph Schumpeter's economic concept of creative destruction. Investors should avoid being on the "fear" side of that equation, and watch for opportunities to be on the "innovation" side because that's the future.