The only way an artist could hope to sell a substantial number of recordings was to have the awesome marketing power of a major label behind him or her. This arrangement leaves a bit to be desired, as I think both music fans and musicians will agree. You don't need those greedy old record companies at all. Well, I hate to admit it, but record companies do serve a productive purpose. Making records and selling them is a business like any other, and it's a business that requires some investment up front.
Record companies are like musical investment banks or venture capitalists.
The reason that there so often isn't any, is the huge marketing costs required to stand out from the thousands and thousands of new albums released every year. Without the access to distribution and mass marketing channels that record companies have, a new release wouldn't have a prayer of any serious national recognition. For the musician, there's also the question of the prestige of being on a real record label. In this way, record companies are tastemakers in a good sense. These issues will not disappear because of the Web, so record companies will continue to exist.