I've seen a few blog posts about what the financial crisis means for startups.  Jason Calcanis, most provocatively, calls it the Startup Depression and goes on to give specific things that entrepreneurs can do (scroll to the bottom).  Fred Wilson offers up his thoughts as well including the fact that venture-backed companies are in better shape than angel-funded ones (read with slight grain of salt since it would serve Fred to make that point!).  I've talked to several people in the startup and ad-funded world.  There is some optimism that advertising will hasten from offline to more-accountable online mediums.  That may be somewhat of a mitigating factor, but I'm skeptical.  My advice and thoughts are:

• Advertising will decline.  Plan on it so that you're pleasantly surprised if it doesn't happen.  There will also be a 'flight to quality' even in digital, where money is spent on 'tried and true' sites vs. less-established ones.
• Take a hard look at your costs and cashflow.  As Jason counsels, look to renegotiate contracts where you can.  You can save good money this way.  If you can even adjust payment terms from net 30 to net 60 or even net 90, it's better than nothing and you deserve a pat on the back.
• We will see more and more startups go under as their funding dries up if they can't show any significant traction.  My sense is that they'll be in crowded segments like video sharing or social networking where there are large incumbents.  And a lot of them won't be missed…I mean does the world really need another music recommendation/video sharing/social bookmarking service?
• Focus.  Focus on the product and the features that will be needle-moving for your business.  They could be 'boring' things like scalability and 'fit and finish' of what's there now and tweaking the UE to get better conversions.  
• If you're thinking of starting a company, it will no doubt be harder to raise money.  BUT, it will be easier to hire good people and you'll get more breathing room.  Some of the best startups were born during down cycles.

It is common to run into people in the finance and investing industries in London and there's no shortage of stories on the changes and implications of the financial crisis.  Here's what I've heard:

Justin, the founder of Muxtape, has a heartfelt and interesting story about its founding and the trials and tribulations he's faced over the past few months as well as the new direction he's taking.  It's riveting. One of the more colorful passages:

In May I had my first meeting with a major label, Universal Music
Group. I went alone and prepared myself for the worst, having spent the
last decade toeing the indie party line that the big labels were
hopelessly obstinate luddites with no idea what was good for them. I’m
here to tell you now that the labels understand their business a lot
better than most people suspect, although they each have their own
surprisingly distinct personality when it comes to how they approach
the future. The gentlemen I met at Universal were incredibly receptive
and tactful; I didn’t have to sell them on why Muxtape was good for
them, they knew it was cool and just wanted to get paid. I sympathized
with that. I told them I needed some time to get a proposal together
and we left things in limbo.

A few weeks later I had a
meeting with EMI, the character of which was much different. I walked
into a conference room and shook eight or nine hands, sitting down at a
conference table with a phonebook-thick file labeled “Muxtape” laying
on it. The people I met formed a semi-circle around me like a split
brain, legal on one side and business development on the other. The
meeting alternated between an intense grilling from the legal side
(“you are a willful infringer and we are mere hours from shutting you
down”) and an awkward discussion with the business side (“assuming we
don’t shut you down, how do you see us working together?”). I asked for
two weeks to make a proposal, they gave me two days.

I know a couple of people looking to potentially get into the music industry and to join a major label.  Yes, I asked them the same thing going through many of your heads: "Why??"  Actually, the labels are doing some interesting things but, even when they innovate, it's often an uphill battle as they have to deal with a complex web of relationships and history between artists, managers, publishers and other stakeholders.  Most of the innovation is coming from start-ups.  From innovations in business model, like Sellaband (crowd-sourced funding for music), to the development of music platforms like iMeem, iLike and MySpace Music, to new forms of finding and sharing music such as playlist.com and 8tracks*, to online karaoke services like kSolo and Talentrun.  Larger companies are also innovating such as Live Nation with their 360-degree deals.  On the A&R side, I think we'll see some hybrid companies emerge that act as marketers, brand managers and agents for the artists that they find and sign.  But this is by no means comprehensive…so what have I missed?  What other companies are innovating in music?

*I am an advisor to 8tracks

Some people I know just launched BirdSmack.  From their site: