The Net is a boon for indie labels

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whose established business model of blockbuster hits promoted through radio airplay now looks increasingly outdated.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, 60GB 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," 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 DVDs 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 6 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, Texas, band Spoon, agrees, and counts himself among the beneficiaries. After the band was dropped from the major label Elektra in 1998, 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," 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.' "