What do you call a digital-music subscription service without the four major record labels?

A good start?

But, seriously now, when Microsoft (NASDAQ:MSFT) announced last week that it was breaking off negotiations with the recording industry's biggest players because the labels wanted too much in return, it should have been the start of something special. For starters, even if Mr. Softy had managed firm handshakes on the licensing front, it still would have lost. There was no point in launching a "me too" product in a crowded market. It wouldn't have been able to compete against Yahoo! (NASDAQ:YHOO) on price and it never stood a shot against Napster (NASDAQ:NAPS) or RealNetworks (NASDAQ:RNWK) on personality.

The days of Microsoft wowing the spectators at Muscle Beach with its monogrammed trunks are over. It has to earn every new fan at this point. It has to play the game of one-upmanship to matter. If it isn't going to bring anything new to the table, it has no reason to come down for supper.

So I'm glad that it seems that Microsoft will spare us yet another homogenized online music service, though it's still more than happy to sell downloads piecemeal. That's just another unfortunate reminder that it can't flex those pecs the way it used to -- in this case because the digital downloads market is dominated by the more sculpted physique of Apple Computer (NASDAQ:AAPL) these days.

Letting go, reaching higher
There was a time when Microsoft was able to do as it pleased because it controlled the computer. With its choice position as the top provider of PC operating system software, it was able to shove anything it wanted -- be it productivity software or a Web browser -- down consumers' throats.

The juicy open-source mastery of Linux and worthy rival browsers like Firefox haven't toppled Microsoft. However, they have started nibbling away at market share. A lot of that munching has been coming from the inside out, with popular online destinations like Yahoo! and Google (NASDAQ:GOOG) quietly going after Microsoft in many different areas.

Microsoft isn't desperate, but it definitely seems stagnant. One of the greatest growth stocks of our generation has been stuck in the proverbial mud for five years. In that time, its rivals have been bulking up. It's why Microsoft should try something bold in an effort to win the popular vote again. And, yes, I just happen to have a suggestion scribbled away on a cocktail napkin.

A couple of years ago, I was part of the founding group for an online music site that had some pretty lofty aspirations. 1Sound had many of the right ingredients in place. We were led by one of the founding partners of MP3.com and a pioneer in the personal blogging space. We had plenty of crafty artisans on board to boot. Independent music sites were commonplace at the time, but they were mostly hubs populated by fellow musicians. 1Sound had an ambitious collection of vetted, unsigned music and editorial content to succeed where the others had failed to draw a mainstream audience. It was working, too, until a series of unfortunate events led to the site's demise last year. At the time, I was mapping out the next logical step for the site. Since I don't sense a resurrection anytime soon, let me offer up the perfect digital-music business model to Microsoft. It's one that would win it an audience, mindshare, and warm fuzzies.

Microsoft Music version 2.0
Ever since MP3.com faded away as the top indie scene site, there has been a clear void in original music distributors when it comes to monetizing unsigned artists. The original MP3.com had its flaws, but it always knew how to draw a crowd. These days, there are plenty of sites where unsigned artists can upload their musical works. The problem is that they are either cursed with small stages or they lack a plan to financially motivate the aural content providers.

Here is a plan that will work, Microsoft. You already have the music-subscription interface in place. Just open up the submission process. Let all interested artists upload their self-created MP3s to be freely available on the subscription service. Yes, many sites offer online access, but you would offer the better carrot. You would distribute a certain percentage of paid-subscription revenue to the artists on the site, with payouts based on pro-rated streaming and downloading habits of every individual paying member. A limited free service would be essential at first, but by motivating the artists to promote the more feature-laden premium subscription services (through affiliate programs and the lure of revenue-sharing), it would escalate into a vital -- and viral -- online musical community. You would matter again on a grassroots level, and that alone may be worth the price of admission.

Of course, it gets better than that. You're Microsoft. You could attract even more artists to upload to the site by setting up contests to feature winning tracks on Xbox video-game releases. You could offer music-licensing services to corporate clients. You could flesh out an editorial staff to offer monthly -- or at least quarterly -- compilations as a way to encourage premium subscription sign-ups.

You would be beating Apple, Yahoo!, Napster, RealNetworks, and definitely Google to the punch. In these nascent days of localized search, appealing to the local music scene is priceless. Do it for your future fan base. Do it for your media player. Do it because if you don't, someone else will. And those overly demanding major labels? They'll come back. On your terms.

Don't stop there, of course. Give artists the ability to create their own one-off, on-demand CDs the way the old MP3.com used to. Give every person jamming out in a suburban garage tonight a reason to bookmark MSN.com. Become more than just a default factory setting. Become the source of user-initiated opportunity. And do it soon -- you are starting to matter less with every passing day.

Slap on the body oil. Get back to Muscle Beach. Don't let them kick sand in your face ever again.

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Longtime Fool contributor Rick Munarriz really did this through. He does not own shares in any of the companies in this story. T he Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.