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Little Bugs in a Big Web

Elizabeth Elmore is nervous. A couple months ago Mud Records, the Champaign-based label that’s released both albums by her band Sarge, and its mother company, the indie distributor and label Parasol, entered into a four-year contract with EMusic–a California company that sells singles and albums as files that can be downloaded directly off the Internet. Sarge did not have a written contract with Parasol, so Elmore could’ve refused to be part of the deal, but as a show of good faith she signed on for a year.

While some artists and A and R types view the indies as a farm league for the major labels, Elmore says she likes the control Mud affords her over what kind of music she plays and how it’s marketed. “We’re an indie band because we want to be, not because we can’t do any better,” she says. The EMusic representative who approached Parasol was a guy who understands that sentiment: Jeff Price, a founder of the New York independent label Spinart.

But CEO and president Gene Hoffman, a 23-year-old computer whiz who recently appeared on the cover of Forbes, told that magazine he’s never played a vinyl record. He founded EMusic (under the name GoodNoise) less than two years ago with Robert Kohn, the attorney who literally wrote the book on music licensing–Kohn on Music Licensing–with his father, Al, a retired vice president for Warner Brothers. EMusic’s own VP of business affairs is Gary Culpepper, a lawyer who over the past two decades has held high positions at A&M, ABC Records, Casablanca, Capitol, Paramount, and Sony. Though it has yet to turn a profit, Forbes reports, EMusic is presently worth $743 million.

Independent labels have often sniffed out trends and discovered talent before the major labels, and now for better or worse they’re blazing trails in the field of digital music distribution. The big five music companies have taken a wait-and-see stance toward the dominant format–MPEG-1 Audio Layer 3, or MP3–because they think it’s too easy to pirate, though most claim to have some kind of digital distribution venture in the works. A number of significant independent labels also harbor reservations; Chicago labels Thrill Jockey, Touch and Go, and Minty Fresh have all rebuffed several suitors. But those who’ve made the leap seem optimistic. “We’re looking at it more as a marketing tool than as a way to sell actual music,” says Doug LeFrak of the local Sugar Free label, which recently signed an 18-month contract with a company called CDuctive, joining peers like Flydaddy, Kill Rock Stars, and the local Beluga imprint. Whereas an independent label can only get its records into so many stores, LeFrak says, on the Web its wares can be inspected by almost anyone with a computer. And while the sites charge for most downloads–on EMusic a single track costs 99 cents, an LP $8.99–they also offer dozens of free samples.

Spinart was the first label to sign up with EMusic; its catalog appeared on the site late last summer. The label had only sold about $1,000 worth of downloads at the end of its first quarter, though Price (who has stock options in EMusic) says he expects the next quarter’s sales to be higher. But the label recently posted a free download from the new release by the Apples in Stereo, and Price says that as the number of takers has increased, so has the number of Apples in Stereo CDs shipped to stores, traditional distributors, and mail-order customers. On EMusic customers are also presented with a link to Spinart’s site, where they can order a copy of the CD direct from the label. Such links will eventually work both ways: the more labels it gathers under its umbrella, the more Web sites will be sending shoppers to EMusic.

There are quite a few other major digital distribution sites on the Web already, including Tunes (formerly JamTV), Liquid Audio (which has its own format, a harder-to-pirate alternative to MP3), Atomic Pop (which is run by former MCA head Al Teller and released the new Public Enemy LP), and AMP3 (where anyone can post songs). There are also some smaller-scale startups, like the locally based Epitonic (cofounded by Justin Sinkovich of Atombombpocketknife) and Zerofi (run by former Number One Cup guitarist Seth Cohen). New developments and partnerships are formed frequently–EMusic just announced a cross-marketing deal with Crunch Music, a British MP3 site that specializes in dance music. And as more and larger companies form, competition for labels’ allegiance will undoubtedly get fiercer, which is to the labels’ advantage for now: both Sugar Free and Parasol got advances against future earnings, though neither would reveal the amount.

But what’s in it for the Sarges of the world? When EMusic sells a full album, it deducts “mechanical” royalties (paid to whomever owns the publishing rights), credit card processing fees, and any referral fees to other Web sites from the $8.99 price. Once EMusic has made back a label’s advance, if ever, it splits the per-album profit–which Parasol spokesman Michael Roux expects to be about $8 in their case–with the label. Parasol would get about $3 less this way than it would by selling a CD to a traditional distributor, but it also doesn’t have to manufacture or ship what EMusic is selling or deal with the return of unsold CDs. But until digital downloads start to edge out CD sales, this won’t mean much for the bands. If Roux’s estimate is correct, Sarge (which has a generous 50-50 profit-split agreement with Parasol) will get about $2 per downloaded album, a dollar or so less than it gets for each CD sold. And the band won’t see even that until the label has recouped the costs of manufacturing and selling the CD version–and no one in his right mind is pressing fewer CDs yet. Roux is aware of this, but says both the labels and the artists gain in free publicity anything they might lose in revenue: it’s cheaper to put up that free MP3 than, say, to put a track on a promotional CD in Alternative Press. And EMusic, unlike a traditional distributor or indie shop, takes out radio ads (on Q101 here) and has billboards in Los Angeles and New York.

LeFrak and Roux both say they went with their respective choices because they felt the distributors were accessible and eager to hear their ideas for marketing their artists. But what happens if some larger conglomerate–a Time Warner or even an AT&T–gobbles up EMusic, perhaps replacing music fans like Price with bean counters? What if a new conservative regime decides that little labels like Mud aren’t nearly as important to its success as giant indies like Rykodisc and Epitaph (both have deals with EMusic) and prioritize their input accordingly?

“I can’t make any promises that EMusic won’t be sold to someone, and it’s probably more likely than not that it will happen at some point,” says Price. “But if EMusic gets purchased it’s going to happen because it’s successful. I can’t guarantee that the current staff will still be there, but if it’s bought by a bigger company it will only increase Web traffic.”

“If the situation becomes negative for us I think we’ll only have one bad year to wait before the contract expires,” says Roux, who thinks it’ll be two and a half or three years before digital distribution takes off. But for a band like Sarge, a year can be an eternity, and for artists like Elmore, for whom independence is a political choice, this is scary territory. “There’s a point at which you are part of a label,” she says, “even if the distribution isn’t as good, because you can feel comfortable.”

Art accompanying story in printed newspaper (not available in this archive): photo/Jim Newberry.