The Net Is a Boon for Indie Labels

December 27, 2005
The Net Is a Boon for Indie Labels
By JEFF LEEDS

Even as the recording industry staggers through another year of
declining sales over all, there are new signs that a democratization of
music made possible by the Internet is shifting the industry's balance
of power.

Exploiting online message boards, music blogs and social networks,
independent music companies are making big advances at the expense of
the four global music conglomerates, whose established business model of
blockbuster hits promoted through radio airplay now looks increasingly
outdated.

CD and digital album sales so far this year are down 8 percent compared
with the same period a year ago, according to Nielsen SoundScan data.
And while sales of digital tracks through services like iTunes have
risen 150 percent, to well over 320 million songs this year, that rise
is not enough to offset the plunge in album sales. Overall sales are
down less than 5 percent if the digital singles are bundled into units
of 10 and counted as albums, according to estimates by Billboard magazine.

Still, despite the slide, dozens of independent labels are faring well
with steady-selling releases by, among others, the Miami rapper Pitbull
and the indie bands Hawthorne Heights, Bright Eyes, Interpol and the
Arcade Fire. Independent labels account for more than 18 percent of
album sales this year - their biggest share of the market in at least
five years, according to Nielsen SoundScan data. (If several big
independent companies whose music is marketed by the major music labels
distribution units are included, the figure exceeds 27 percent.)

The surge by independents comes as the four dominant music conglomerates
- Universal Music Group, Sony BMG Music Entertainment, Warner Music
Group and EMI Group - find themselves hamstrung in their traditional
ways of doing business by an array of forces, including a crackdown on
payola (undisclosed payments made to broadcasters in exchange for airplay).

In a world of broadband connections, 60-gigabyte MP3 players and custom
playlists, consumers have perhaps more power than ever to indulge their
curiosities beyond the music that is presented through the industry's
established outlets, primarily radio stations and MTV.

"Fans are dictating," said John Janick, co-founder of Fueled by Ramen,
the independent label in Tampa, Fla., whose roster includes underground
acts like Panic! At the Disco and Cute Is What We Aim For. "It's not as
easy to shove something down people's throats anymore and make them buy
it. It's not even that they are smarter; they just have everything at
their fingertips. They can go find something that's cool and different.
They go tell people about it and it just starts spreading."

There are several signs that as more consumers develop the habit of
exploring music online they are drawn to other musical choices besides
hitmakers at the top of the Billboard chart - a trend that suggests more
of the independent labels' repertory will find an audience.

On the Rhapsody subscription music service, for example, the 100 most
popular artists account for only about 24 percent of the music that
consumers chose to play from its catalog last month, said Tim Quirk,
Rhapsody's executive editor. In the brick-and-mortar world, he
estimates, the 100 most popular acts might account for more than 48
percent of a mass retailer's sales.

"It's no longer about a big behemoth beaming something at a mass
audience," Mr. Quirk said. "It's about a mass of niche audiences picking
and selecting what they want at any given time."

The independent sector as a whole already outsells two of the big four
companies, Warner Music and EMI. And the more ambitious of the
independent labels' managers have set their sights on seizing even more
terrain. This year they formed a new trade organization to establish a
unified front when striking deals with online music services, among
other priorities.

At the major labels, many executives privately dismiss the independents'
quick expansion as a blip that has more to do with consolidation of the
big companies - Sony and Bertelsmann merged their music divisions last
year - than it does with savvier marketing by the small labels
themselves. In fact, the independent labels collectively are selling
fewer albums than they did five years ago, too - they just aren't
sliding as quickly as their bigger rivals.

But the big music companies have also embraced many vehicles that had
primarily showcased independent material. Many labels buy advertising
space on blogs that post free music files, and this year Interscope
Records, a division of Universal, struck a deal to distribute music from
a new label created in partnership with MySpace, the popular social
networking site that claims 40 million members.

Even so, the gains of independent labels appear to stem from more than
online buzz: the small labels have also found themselves the darlings of
television and film music supervisors looking for out-of-the-mainstream
sounds; and the labels are placing their albums on the shelves of
big-box retailers like Best Buy, often with the help of a distribution
company owned by one of the four music giants, like Warner Music.

But no factor is more significant than the Internet, which has shaken up
industry sales patterns and, perhaps more important, upended the
traditional hierarchy of outlets that can promote music. Buzz about an
underground act can spread like a virus, allowing a band to capture
national acclaim before it even has a recording contract, as was the
case this year with Clap Your Hands Say Yeah, an indie rock band.

Yet the independent sector has felt the sting of the industry's slump,
which began more than five years ago. Many small labels complain that
widespread CD burning and trading of songs on unauthorized file-swapping
networks has dampened their sales the same way it has those of the major
record companies.

In addition, the music specialty shops and small retailers that once
provided an anchor for independent label sales are being squeezed out by
mass merchants who heavily discount new releases, and the broader
problems of piracy and competition from other products like DVD's and
video games. Still, the sense of foreboding that sends chills through
the hallways in certain major-label office suites does not pervade the
independent labels.

For many independent entrepreneurs, there is a degree of confidence that
comes from running leaner operations while aiming for more modest sales
levels. Unlike the majors, independent labels typically do not allocate
money to producing slick videos or marketing songs to radio stations. An
established independent like Matador Records - home to acts including
Pretty Girls Make Graves and Belle and Sebastian - can turn a profit
after selling roughly 25,000 copies of an album; success on a major
label release sometimes doesn't kick in until sales of half a million.

"No one's trying to sell six million records; we're trying to sell as
many as we can," said Chris Lombardi, Matador's founder. "We're working
with realistic success."

The market slide, coupled with the pressure on the big companies to meet
quarterly financial targets, plays directly into the hands of small
labels that have the patience to attract new fans over time, independent
entrepreneurs say.

"They're all terribly under the gun to justify every investment and tie
it to an immediate return," said Steve Gottlieb, chief of TVT Records,
which is home to acts like Lil Jon and Ying Yang Twins, two of a handful
of independent acts to secure placement on major radio playlists. "That
type of discipline doesn't allow for the extra time or the extra album
it took to break a U2 or a Bruce Springsteen. The majors are really just
focusing on platinum artists and no longer have an appetite for artist
development except in the rarest instances."

Britt Daniel, the singer and songwriter who leads the Austin, Tex., band
Spoon, agrees, and counts himself among the beneficiaries. After the
band was dropped from the major label Elektra in 1998, Mr. Daniel found
his way to a new contract with the independent label Merge, and Spoon's
third album for the company, "Gimme Fiction," has racked up sales of
nearly 100,000 copies, outstripping the previous two and ranking as one
of the year's best-reviewed releases.

"There are great bands on major labels and bad bands on independent
labels, but it seems like the records made on independent labels are
more about real creativity and more heartfelt stuff," Mr. Daniel said.
"It may just be a three-, four-, five-year cycle where indie music is
cool. Sometimes I get cynical, but people tell me, 'No, this is the way
things are going to be from now on.' "