While Big Content steadfastly refuses to take advantage of the opportunities that the internet is providing, there are a few using the internet to their advantage. For established musicians, Trent Reznor Nine Inch Nails is leading the way (see Mike Masnick's presentation on how Trent Reznor Represents the Future of the Music Business).
However, it's also possible for unknown artists to build a following, if you have a little talent and personality. Julia Nunes is a college student from Upstate New York who has created some great videos of herself performing cover songs and put them on YouTube. Through her YouTube videos she has generated enough of a following play in shows, open for Ben Folds and record two albums of her original songs.