Independent music: The mouse is roaring

As the dust clears from the music industry's chaotic past few years, one of the emerging winners may be an increasingly strong, united independent music sector.

Despite accounting for close to a quarter of the U.S. music market--between $2.5 billion and $3 billion, at a rough estimate--the indie sector's direct influence over the record business as a whole has long been minimal. But signs of a change in the wind are growing.

Last week, a new indie-label trade group called the American Association of Independent Music formed, promising to wield new collective clout for its members, particularly when dealing with online services.

One person with some experience with this idea is Kevin Arnold, who runs the Independent Online Distribution Alliance. One of the first of a handful of indie label "aggregators," Arnold's company represents a growing number of independent music labels who want their music to be available through Apple Computer's iTunes or RealNetworks' Rhapsody service.

Arnold has been a familiar face in independent music circles for years, as co-founder of San Francisco's 13-year-old Noise Pop music festival and a stalwart supporter of that city's live music scene. Before starting IODA, he worked at Listen.com, leaving the music start-up shortly before its sale to RealNetworks.

His company handles negotiations with the digital music services, giving small labels more negotiating power by grouping them together, as well as providing legal and technology support. It has been an uphill push, but now two years into the business, he says he's seeing indies gain traction.

In part, this is a recognition among the big music services of the importance of the "long tail"--the idea that virtually all back catalog and independent releases will draw a few fans, and that the aggregate consumption of all these obscurities can rival the value of hits. That means the independent labels, which often sell just a few thousand copies of a title, are gaining critical importance online.

CNET News.com talked with Arnold about how the role of independent music is changing in the digital age.

Q: You've been working on behalf of independents for two years now. What have you seen in terms of independent labels being able to negotiate with the big music services?
Arnold: There's a really wide range. It's going to start from "You're not worth it--just sign this contract, if we let you have the opportunity at all." A lot of services are now referring labels and artists to services like ours, or CD Baby. But in general, there hasn't been that much opportunity for indies to negotiate.

Still, when people talk about negotiations, they always talk about rates right off the bat. That's something that's a pretty hard nut to crack across the entire industry. There are other areas that can be pushed and pulled on a little more.

If they work through you, or any of the other aggregators, do indies get the same basic rate as the majors?
Arnold: In general, no, they don't.

Is it a substantial difference?
Arnold: It's not like it might have been back in the early days, when there were cases where a small indie might get 20 percent of what a major (label) or even a large indie might have gotten. There were some really obscene types of inequity. These days it's pennies. But pennies count.

What's responsible for that gap closing? Is it the rise of the aggregators, or the fact that indies are speaking up more and their music is viewed as more important?
Arnold: Without wanting to be too crass about it, I think it's partly an acknowledgment from some of the industry that some more fair treatment is deserved. It's partly an attempt to get some of this content on the services and put a friendly face on it. But it's something that still needs to be worked on.

What does the new indies trade association mean for the business?
Arnold: I think largely it remains to be seen. For indies, it has to be a good thing if someone's out there addressing their interests in a proactive and public way. There's certainly potential for it to benefit everyone. To what extent and how far it goes, that's the big question.

Financially, what kind of revenues are independents seeing from digital download services like iTunes?
Arnold: It could range from someone who earns a few dollars to a couple dozen dollars, to midsize indies who earn thousands or tens of thousands a month, to certainly some of the large guys. You have to take into consideration the range of labels. It goes from V2 and TVT all the way down to your girlfriend's brother's band. Some of them probably make as much as some of the majors.

Are small labels making up online what they're giving up in physical sales or what they're losing to peer-to-peer downloads?
Arnold: I don't think you can answer that question extremely

objectively. Anytime you talk about how peer-to-peer downloads are affecting CD sales, you're talking subjectively.

It becomes an ideological question?
Arnold: Right. You're talking passionately instead of factually. But I think that in any case, any indie label that's not participating in digital music is leaving money on the table. Even your girlfriend's brother's band has some money to be made out there. And like I said, any good, decent operating indie that's able to successfully put out records for more than a few years is probably missing out on thousands of dollars a month, if not more.

I think it ultimately tracks to what the industry does as a whole. People are saying now that digital might be 2 percent to 5 percent of your physical business, and that by 2009, you're looking at about a quarter of your business.

What about subscription services? That's an unfamiliar model, where returns tend to come as a percentage of subscription revenues, instead of a set amount per download. Does that economically make sense for small indies at this point?
Arnold: The sales are going to be certainly incrementally less than download stores are right now. But they're probably proportionate to the amount of people who are using them. Certainly, I believe that revenue pools should be larger, and that there should be more beneficial terms for indies within subscription services, too. But there are a lot of great advantages to participating in them.

That's the "long tail" argument, that there's less risk, or cost, to the consumer in experimenting with new music.
Arnold: Absolutely. To date, I think you see a little bit better browsing and discovery features in the subscription services. The main point is that the barrier to experimentation is pretty much nonexistent. There's none of this thinking that, "I've only got 30 seconds of this clip, so do I really want to spend a dollar--or $10--on this album?" It's just go for it, play it, try everything you want, just roll around in the field of the flowers to your heart's content, which is great.

One part of me certainly likes the dollar coming out of everybody's pocket for music. There's absolutely value to that with regards to portability and ownership, and that just meets some people's needs. But there are a whole lot of other people for whom subscriptions make sense. I do think subscription services are a good disincentive to going out to peer-to-peer networks and getting music illegitimately--and a good way to put some of that money back into the artists' pockets.

But it's still not the same thing as packaged CD sales. A lot of people are interested in supporting the artist in the independent world, and realize there are ways to support these guys so they can keep creating their art, whether it's going to shows or buying T-shirts or buying physical CDs. The indie world has a much better history of making a more attractive, valuable, collectible product than the majors do. Usually, you get something more than just a jewel case with a single insert. People think about the artwork and make it worth owning.

With the subscription services, you've seen a decrease in price over time, first with Virgin and definitely with Yahoo. Is that disturbing to artists in that there's potentially a smaller pool of money available to them, at least from a given subscriber?
Arnold: It can be in the outset. But I think you need to take a high-level view. Getting more people into these services spending more money over the long term is an important thing to do. I think prices will come up. Certainly these companies want to earn as much money as they can. If they convert a majority of people into subscribers, they're going to do just like the cable company does, and ratchet up the prices.

But there are other ways to think about subscription services. When people talk about buying CDs or downloads, they're probably only spending a set amount per year. The average user buys what, five or six CDs a year? With a subscription service, at $5 a month that's more than $50 a year, which is roughly equitable. At $10 you're talking more than $100, at $15 that's $180. Overall, that's more money being put into music by fans. That's a good thing.

The other thing that's nice about a subscription service is that with the lack of a barrier to experimentation for music fans, they can try it as much as they want. That means there's no ceiling on the amount that a label might earn on a record.

With individual song downloads you're going to have a wholesale rate, and that song is that person's forever, whether they listen to it a thousand times or listen to it twice and throw it away. With regard to subscriptions, these songs can essentially earn indefinitely. It's not like when someone listens to a song a hundred times you're not going to get paid for it anymore. The next hundred times you're going to continue to earn on that stream. It's a little more of an open ended platform.

Is there an estimate, even ballpark, how much one stream is worth to a given artist?
Arnold: I'd say a fraction of a penny is a good enough guess.

Does digital distribution fundamentally change the economics of indie music at all? Or is it still fundamentally this garage-based business that's still going to have small revenue, but just happens to be coming from a different source?
Arnold: I hope it does. But I think it really remains to be seen. There's a whole bunch of change. We're taking little evolutionary baby steps right now. We're still talking about a (digital) market that's 5 percent of the overall market.

There certainly are opportunities for people to go out and take advantage of this in creative ways, and do stuff that will blow everyone away and create success stories. Then there's probably a ton of people who will go out there expecting the world and not get it, and it will be a great disappointment for them.

The main thing to realize is that it's still very young, and the rules of the game haven't changed such that this is some magic elixir. It's still a rough game.