By Kevin Plumberg

NEW YORK (Reuters) - The crowd roared as blue lights flickered, and images of skulls and three-eyed creatures were superimposed behind the Swedish electronica music duo The Knife.

Clad in their signature body suits with ski masks, the enigmatic brother-and-sister band wooed a packed audience at New York's Webster Hall with their angular, often foreboding sound and computerized graphics projected on a translucent screen that covered the stage.

"This is so sick!" said a concert goer to her companion. "Yeah, it's so tech," he replied.

In their first performance in North America last week, The Knife were voted the "hottest show" at the CMJ Music Marathon, an annual bonanza of up-and-coming music artists that this year concluded on Saturday.

Music fans, starved of novelty and overwhelmed with choice thanks to the ever-growing onslaught of music online, are increasingly finding what they are looking for at music festivals all over the country. Festivals are also becoming an important way that struggling musicians can make it big amid an industry slump.

"It's a good time for talented musicians who understand the business world," said Bobby Haber, chief executive of CMJ.

"That just means you have to work harder and longer hours to not just be a great guitarist but a great marketing executive as well, and do that while simultaneously working two other jobs and paying your rent."

This year's CMJ Marathon offered more than 1,000 screened music acts from 15 different genres and will likely result in millions of dollars in revenue, according to Haber.

DIGITAL UNDERGROUND

In the last decade, the music scene has become a Babel-like muddle of tastes and experimentation. Access has been thrown wide open to a wealth of bands on small record labels and even self-recorded albums thanks to internet retailers of digital music such as Apple's iTunes and the online community MySpace.com. A year ago MySpace teamed up with Interscope records to launch MySpace Records.

"I don't think things are getting better for the mainstream music industry," said Mark Jenkins, freelance writer for the Washington Post and Washington City Paper and co-author of Dance of Days: Two Decades of Punk in the Nation's Capital.

"The music industry keeps consolidating while the music gets more diversified," he said.

Indeed, overall U.S. music sales fell 6 percent in the first half of 2006 to $4.9 billion compared with the first half of 2005, according to the Recording Industry Association of America.

However, in the digital sphere, business is seriously booming. Revenues from downloads, online music kiosks and digital videos grew by 86.6 percent in the first half of 2006, with digital's share of the overall industry doubled to 18 percent in the first part of 2006.

WELCOME TO THE REAL WORLD

Kurt Irmiter, co-owner of Festival Network Online in Asheville, North Carolina, said despite the growing popularity of music downloads, live music is still what fans ultimately want. So, festivals are the best way for emerging musicians to get their name out.

"It's such a real-world experience," said Irmiter, whose Web site (http://www.festivalnet.com) has information on everything from Christian rock festivals to world music conventions. "In our cyber-impacted world we live in today, people want to go out and be in the real world."

James Mercer, singer and guitarist for the alternative rock group The Shins, said that performing at music festivals was a big way for his band to break through to a wider audience.

The Shins played a sold-out show at New York's Bowery Ballroom on Thursday as part of the CMJ Marathon.

Mercer said it took a long time for his band, which formed in Albuquerque, New Mexico in 1997, to find a fan base and to garner attention. But playing at music gatherings such as the South by Southwest Music and Media Conference & Festival certainly helped, he said.

South by Southwest held annually in Austin, Texas, organized nearly 1,500 acts this year at 64 venues.

"You have to find people who are into what you are and make connections that way. You also have to get used to recording yourself," he said.

From the perspective of music fans, festivals large or small offer a way to reach an emotional connection with an artist or band -- something sometimes lost in the impersonal process of downloading music.