WEST HOLLYWOOD, Calif.--At the Music 2.0 conference this morning, George White, senior vice president at Warner Music Group, sought to paint a relatively rosy picture about the ability of digital music sales to make up for the continued decline in CD sales.

Ok Go's treadmill routine at the 2006 VMAs.

"Yeah, and we're winning the war in Iraq too," quipped Fred Goldring, a music attorney who represents such artists as Beyonce and Black Eyed Peas.

A panel of record label execs told an audience of industry insiders today that they continue to fight an uphill battle in finding ways to make money off the digital music revolution.

"CD sales continue to drop off dramatically, and there is a lot of concern about CD sales dropping off a cliff at some point, and digital not being able to grow fast enough to make up for that," said David Ring of Universal Music's eLabs division.

"Peer-to-peer file-sharing continues to plague the business, but record labels must find a way to monetize the P2P world instead of focusing too heavily on digital downloads," Goldring said. One way to do that would be to apply licensing fees on P2P services much in the way the labels do with radio stations.

"There is a real disconnect today with the labels--there are more people consuming music today than at any other time," he said. "We need to put a dollar value on all the file sharing that is going on. Until the labels wake up and find a way to create an ASCAP-BMI-type license around all of the file-sharing in the same way that the industry monetizes consumption on mediums like radio--that's when this business will start to come alive again."

But despite the uphill climb, labels are doing plenty of experimenting, several execs said.

Ken Bunt, whose Hollywood Records was one of the first major labels to test sales of music in open MP3 format with teen singer Jesse McCartney, said his label has used file-sharing services and video-sharing sites like YouTube to scout new artists.

He said his label signed both Atreyu and Plain White T's largely on the basis of file-sharing and YouTube data.

"Plain White T's had file-sharing and YouTube numbers that were blowing people away," Blunt said. "Word of mouth is the best tool you could have."

Capitol Music Group exec Ted Mico said Capitol band Ok Go has made more money on their videos than on track sales. The Chicago-based group has made a rep in recent years of making eye-popping music videos for songs like "Here It Goes Again"--best known as "the treadmill song"--and watching the videos spread virally.

Mico also noted that Lily Allen, an artist who has used sites like MySpace to become a virtual household name long before her debut album hit US stores this week, will be doing a tour in the virtual reality world of Second Life, complete with T-shirt sales.

"We're still working all the details out, but there's a ton of promise there," he said.