Last Wednesday, when I read Corey Rusk’s announcement that Touch and Go Records was shutting down its distribution operation, the first thing I had to do was swallow my disbelief. But then I began to think of the labels that could fall victim to the move. Since the 90s Touch and Go has been a crucial incubator for newer labels, generously sharing resources that helped the likes of Thrill Jockey, Drag City, and Merge grow from hip little imprints to key indie forces. By consolidating the manufacturing expenses of the labels in its family, Touch and Go helped them achieve a relatively smooth cash flow–vital to running a successful label.

As part of these “production and distribution” deals, Touch and Go would front labels the money to press new records, then make quarterly payments to each of them that represented any profit the records were making balanced against those expenses. Rusk declined to comment for this piece, so it’s hard to be sure why he decided to scrap this system, but the brutal financial climate, coupled with rise of downloading and file sharing–which has seen record stores drop like flies and sales of music plummet–must be a big part of the reason. (In his official statement he mentions “the current state of the economy.”) His company has long been praised for its efficiency and refusal to chase growth for its own sake, so it’s hard to imagine it would make such a traumatic change unless it were necessary for its survival.

Twenty-three labels are listed under Touch and Go’s distribution arm. Some are inactive and for years some have used only Touch and Go’s distro service, not its manufacturing operation; several others just recently entered the fold. For some of these labels the deal was perfect; Touch and Go could be a one-stop shop. How were they going to survive this shocking change of course?

None of the four labels I spoke with had any inkling that this was afoot. But the same terrible circumstances that doubtless led Touch and Go to make this decision have been felt across the sector–Drag City, All Natural, Flameshovel, and Kill Rock Stars were already expending energy and creativity to find new ways to do business, even before Rusk notified them. “We’ve been sitting around here looking at various doomsday options for the better part of the last year, and we’re going to continue to do so,” says Drag City sales manager Rian Murphy.

Drag City hasn’t used Touch and Go to manufacture its catalog in six years, with the exception of two dozen or so titles originally released prior to 2003. But Touch and Go remained one of four major distributors of Drag City’s physical product, accounting for 10 to 15 percent of physical sales. “We’re going to miss them very much as a distributor,” says Murphy. “We’ll work with those who remain in the game to make sure that contact with all of Touch and Go’s accounts is maintained.” He adds, “It’s an incalculable loss. We don’t know how to measure it. It’s shocking, saddening, and horrifying. Talk to Bettina [Richards at Thrill Jockey] or [Drag City founder] Dan [Koretkzy] or any of those people and they’ll say that what they’re doing is based on what Touch and Go did.”

Indeed, many prominent Chicago labels share Touch and Go’s model of a 50/50 profit split with artists, and a few have followed its example and taken smaller labels under their wings for production and distribution–Drag City, for instance, works with Language of Stone, Yaala Yaala, Blue Chopsticks, and Moikai, among others. Because these imprints generally focus on experimental or niche-market releases, Murphy says sales expectations are more modest, but by and large they’re breaking even.

Tony Fields (aka DJ Tone B. Nimble) of Chicago hip-hop imprint All Natural shares Murphy’s sense of gratitude, and believes Touch and Go’s P & D deal was essential to his label’s growth. “I’ll never be able to repay the debt I owe to those guys,” he says. Luckily All Natural has always handled its own digital distribution, and according to Fields the low overhead of that part of the label’s business will help it weather the storm. He knows there are some big headaches on the way, but for him they’re just part of running an independent label.

“For me it’s been a struggle from day one,” he says. “This will present new struggles, for sure, but I’m not more stressed than I usually am. It’s just another hurdle. It also forces us to change with the times, to adjust and restructure and become as modern as possible.” All Natural has three releases ready to be manufactured, and when I spoke with him Fields had already decided to press one, a new album by Rita J., on his own; he was still deciding what to do with the other titles, by Capital D and the BSTC.

Portland’s Kill Rock Stars has an exclusive production and distribution deal with Touch and Go, but the label seems to adapting quickly and smoothly to Rusk’s announcement. Label president Portia Sabin says KRS is already close to signing a new P & D deal. Under the terms of this deal, the label’s physical distribution (in North America and Europe) and digital distribution will remain in the hands of just one company, though KRS will have to start paying manufacturing costs up front. “We’re lucky because when I took over Kill Rock Stars a couple of years ago, I severely curtailed the number of releases we put out,” Sabin says. “And this spring we had really cleared out the schedule because we’re doing the new Thermals record and we wanted to give it a lot of attention.” The Thermals album will be manufactured through Touch and Go in April, but it will soon be transferred to the new distributor.

Flameshovel co-owner James Kenler says he was assembling a press mailing for the new Mannequin Men record, due in June, when Rusk called him Tuesday night. (Reader columnist Miles Raymer is a member of the band.) The album’s release date has been put in jeopardy by the situation; like KRS, Flameshovel has been using Touch and Go as its exclusive manufacturer and distributor for physical and digital product worldwide. The label only signed with Touch and Go in September, and now it has to scramble to line up new distribution.

“We’ve reached out to the people we’ve worked with in the past to see if there’s a solution there,” says Kenler. “But we’re going to take a hard look at everything. We’re going to play with some new business models.” He mentions as an example the label’s decision to release the latest Make Believe album only on limited-edition vinyl and as a download. “When you see someone like Touch and Go fall, even if we weren’t connected with them, it would be a sign that something’s not right. There’s a lot of downward momentum in the industry right now, and not a lot of answers.”

The news isn’t all grim, though. Secretly Canadian, based in Bloomington, Indiana, occupies a niche in the indie-music ecosystem that’s similar to (if somewhat less exalted than) the one Touch and Go has filled: it distributes a healthy roster of labels, including Asthmatic Kitty, K Records, Table of the Elements, and the Social Registry, and operates a CD-manufacturing brokerage called Bellwether, which gets bulk discounts for clients by pooling orders. And for the time being at least, its future looks reasonably bright. “We’re doing OK,” says co-owner Darius Van Arman. “We’re continuing to grow, we’re not currently in debt, and we’re not foreseeing any cutbacks over the next few years. I think we’re still trying to tighten the belt a bit, like all businesses are right now, in as many smart and reasonable ways as possible. That just seems like the responsible thing to do. But, in general, we’re not insecure about the future. Even with the part of our company that handles physical media manufacturing, an area that is in general decline industry-wide as digital distribution emerges, we’re doing OK. Knock on wood, we might even grow a tad in that area this year.”