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AUSTIN, Texas—As CD sales keep falling and the business is reshaped by the Internet, the music industry doesn’t know what the future holds.


But at least it knows where the music is: Right here in the capital of the Lone Star State, where last week’s 23d annual South by Southwest Music Festival was the biggest ever, with more than 1,700 bands playing to 12,500 attendees at more than 70 venues from Wednesday to Saturday night.


And that’s only counting official showcases, where acts like Philadelphia’s carnival shamans Man Man and Brazilian rockers Telerama and New York indie-Afro-poppers Vampire Weekend, and Mexican noise-punk band Los Llamarada and Chicago rappers Cool Kids played clubs packed with bloggers and booking agents, giddy indie music fans, and even a few specimens of that endangered species: the major-label record executive.


Amidst the action, music bizzers convened over beer and barbecue to try to figure out how, in the phrase of former Pink Floyd and current Billy Bragg manager Peter Jenner, to “monetize the chaos.”


It used to be that the major labels—now down to four—were major players at SXSW. Now there are only about 50 A&R (artist & repertoire) execs left in the business, down from 500 in the late `90s. And the power has shifted to movie, television and video-game music supervisors, who might catch a cool band at SXSW and give them the exposure they came here for.


The festival mirrors the changes the Web has wrought. There’s too much music for even the most energetic fan, and bands are playing for exposure rather than money. As sales of recorded music have dried up, the importance of live performance has grown—and SXSW is where you come to show you have what it takes.


In a Saturday morning show at the Continental Club, Austin singer Jon Dee Graham said he understood the importance of SXSW. “That’s why I’m playing 17 shows this week and only getting paid for one,” he said, tongue only partly in cheek. “But I’ve got a box of CDs up here, and if you put some money in the box, I’ll give you one. That’s still what this business comes down to.”


That’s what the industry hopes. If they can just figure out how to use the Internet to put some money in that box ...


R.E.M. at SXSW. Wednesday night’s outdoor show at Stubb’s barbecue joint by the trio of Michael Stipe, guitarist Peter Buck and bass player Mike Mills—augmented by Scott McCaughey and drummer Bill Rieflin—was a textbook example of how older, revered, maverick artists use the media confab to jump-start their careers.


R.E.M.‘s “Accelerate” is due April 1. It comes at a time when the band’s in danger of disappearing into irrelevancy. So this show, broadcast by National Public Radio and available on NPR.org, was all about whether these guys are still worth caring about more than 25 years down the line.


After hearing the fivesome rip it up over a full-length, 90-minute set that was heavy on the punchy new CD, I’d have to say yes. If you’ve heard the single “Supernatural Superserious,” you get what “Accelerate” sounds like: tight, pedal-to-the-metal stuff that is thankfully without the we-can-still-rock! desperation of 1994’s “Monster.” “It sounds very R.E.M.-ish,” the guy standing next to me said happily.


Wednesday roundup. I caught two excellent sets at the convention center, starting with Ra Ra Riot, the six-piece Syracuse, N.Y., indie rock band whose multifaceted attack includes orchestral flourishes, a cello and a violin, plus front man Ryan Hadlock’s sax.


They were followed by Saul Williams, the spoken-word poet whose “The Rise and Fall of Niggy Tardust,” produced by Trent Reznor, beat Radiohead last year to the give-it-away-free Internet price model. “N- is a horrible word,” he said, in reference to his album title, “but Niggy is cute. What I’m trying to do is deal with all this hate but through creativity, not sweeping it under the rug.”


The nuevo-retro groove. What with the success of Amy Winehouse and Sharon Jones—both of whom rose to prominence last year using Jones’ horn-happy band, the Dap-Kings—there’s no shortage of full-on soul revue outfits. Black Joe Lewis & the Honeybears are an Austin blues variation on the young-guns-gone-old-school idea. They’re an interracial seven-piece band who pump out a rough, ready and brassy Texas blues blend in the tradition of T-Bone Walker, Hop Wilson and Johnny Copeland. I caught them in the Yard Dog Folk Art gallery backyard on Thursday, after similarly excellent sets by Okkervil River and Blitzen Trapper, whose arty roots-rock was most impressive.


Looking for this year’s Amy Winehouse. Last year Winehouse was the biggest thing going at SXSW, and before long the rest of the world (and the Grammys) followed suit. So, naturally, there’s a run on `60s British neo-soul pop chanteuses at SXSW this year. And the smart money is on Duffy, the 23-year-old Welsh singer born Aimee Anne Duffy, who made her U.S. debut Friday at the Parish on Sixth Street.


Let’s not take the Winehouse comparisons too far. Though she has a throwback hairdo, too (Brigitte Bardot’s), Duffy has no tattoos, and her debut album, “Rockferry,” is No. 1 in the U.K. Her single, “Mercy,” has been on top of the British pop charts for five weeks.


On stage in a six-song set, Duffy radiated composure and wholesome self-assurance rather than danger and self-loathing. Her songs conjure up a happier version of the `60s: “Serious” rides a breezy groove that reminded me of Aretha singing Felix Cavaliere’s “Groovin’.” And without ever getting all that gritty, terrific tunes like “Syrup & Honey,” “Warwick Avenue” and “Mercy” sashayed confidently down the avenue, reveling in their affection for Motown and Stax. Around this time next year, everyone’ll likely be looking for the next Duffy.

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