The little labels that could

August 8, 2012: 10:47 AM ET

Independent music labels are gaining a bigger slice of market share by changing up the formula so that label, artist and consumer all win.

By Ben Toren, reporter

Danny Brown

Fool's Gold recording artist Danny Brown

FORTUNE -- Kaseem Ryan, better known as The Brownsville Ka, peruses the bins at A-1, a small, unassuming New York record store. Hailing from Brooklyn, the 39-year-old has been a fiercely independent artist for the 20+ years he's been rhyming, believing "if you can make money from art, that's a beautiful thing."

In February, with distribution help from Fat Beat Records, Ka independently released Grief Pedigree, which culls his lifetime of experiences, years of crate-digging for samples and lyrics that employ his self-taught literary tricks. Grief Pedigree is a masterpiece, and Ka isn't signed to a major label. How do artists like Ka -- those who don't have the resources of a multinational entertainment conglomerate behind them -- achieve success?

The independents and majors have been going head-to-head before a U.S. Senate committee regarding EMI's -- the smallest of the major labels -- dispersal and Universal Music Group's bid to acquire their prior competitor. European regulators initially blocked the absorption, and on August 2, UMG filed remedies to their offer. The move would tip the balance of market share steeply in UMG's favor and, as Senators Herb Kohl (D-Wisconsin) and Mike Lee (R-Utah) wrote in a letter to the Federal Trade Commission, "present significant competition issues."

Nonetheless, independent labels are developing business models that will help them weather the storm. Says Simon Dyson of Music & Copyright, Universal buying EMI is "a certain guarantee that their market share isn't going up to the detriment of independents."

Indie labels, meanwhile, have seen a 2% rise in their physical and digital-revenue market share from 2010 due in large part to the astronomical success of UK artist Adele's album 21, released in February 2011. She swept the 2012 Grammy categories in which she was nominated, going six-for-six, broke David Bowie's record for career weeks spent at no. 1 in the English charts, and became the first artist to go double platinum -- 2 million downloads sold -- solely on iTunes. She achieved it all under the indie label XL Recordings, with some help from Sony, who distributed 21 in the U.S. for XL.

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Majors may dismiss indie success by citing Adele as an anomaly, but she's not the only successful independent act of late. Sub Pop's Fleet Foxes sold 1.4 million records in the U.S. & Europe, Bon Iver of 4AD and Jagjaguwar sold 350,000 units in the U.S., and rapper Mac Miller's Blue Slide Park on Rostrum Records was the first independently distributed album to top the charts since 1995.

In simplest terms, the major label business strategy is to choose the most singles with the biggest hit potential and get them on the radio. Out of, say, 12 tracks given airtime, at least one is sure to take off, and executives need to turn it into a chart smash so they can cover losses from the 11 also-rans. Majors are swinging for the fences with every pitch, and because of sheer scale, are bound to strike out more.

But some indie labels are competing with majors at the uppermost echelons of music sales, by coasting on grassroots success of smaller projects. They're growing every year -- even if gradually -- without compromising artistic integrity. Their pillars: flexibility, accurate spending, ground-level knowledge, and the use of the Internet as the "new radio."

While major labels have the potential to be a bureaucratic quagmire -- Universal has nearly 10,000 employees; Warner has 4,000 -- indies typically retain less than 20 employees, and they can react to problems, such as a inefficient marketing campaign, faster.

By prioritizing lasting talent over pure marketability -- shooting for singles and doubles instead of home runs -- indies have organically increased their profits. "There's no one better than the majors to drive a record home," says Simon Halliday, head of label 4AD, but the indies' "knowledge to budget accordingly on any of a wider range of albums means we lose less when we miss, and everybody misses sometimes."

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The indies have potential to become lifestyle brands that pervade pop culture, while major labels tend to embrace the corporate culture they sprung from. In the corporate offices of most majors, there isn't any music playing. "You can hear the drop of a pin," says Nick Catchdubs of Brooklyn-based Fool's Gold, an indie that combines its offices with a store to add to its clubhouse feel. Artists on the roster stop by to film videos, or just to hang out. Rapper Danny Brown, a Fool's Gold signee, described the company's infrastructure as a "family." Artists are on a constant quest for three things: acceptance, stability and freedom to create their music.

Traditionally, says Kathryn Frazier of publicity firm Biz3, the only way for an artist to get his record on the airwaves was through a handful of "schmucky" old men who looked "like they didn't even listen to music." But that's no longer the case. The Internet is the indie label's new radio, and there are numerous outlets where artists can be heard.

Music sharing sites like Soundcloud have changed the face of music marketing. New York-based label Mad Decent formed an "incubator label" where they offer a number of tracks for free. Named Jeffree's, the sub-label embraces the theory that the more you give away, the more money you make. Label representatives comb through artists' postings on Soundcloud to sign artists, attain licensing and promote the music. If something, in label manager Jasper Goggins' words, "really pops off," the artist might be offered a more conventional record deal with parent label Mad Decent.

Meanwhile, to replace their losses from piracy and decreased consumer interest, major labels have sought other methods to make money. Majors like Warner Music Group, headed up by Lyor Cohen, embrace the "360 record deal" or "participation deal," which allows labels to accrue money from an artist's merchandise and tour sales. Some artists are against the controversial arrangements, but majors retort that they, after all, are the ones who make artists big and put money in their pockets. Indies, however, are unlikely to embrace the same tactics.

Ka still thumbs through records. He's an extreme example of success attained without a major's help:  he's not selling 500,000 records (he brings up 10,000 as a "hypothetical" number, but won't reveal exactly how many he's sold), but he's achieved his success himself, acting as his own label by using Tunecore.com, a digital service that allows artists to distribute their music where it matters: namely on iTunes, Amazon and streaming service Spotify. For as low as $9.99 per single, Ka is able to keep all his rights, 100% of his royalties, and receive free iTunes sales data.

And like other indie artists, Ka is happy with his home: at the end of the day, he says, "stay true to yourself, make the music you love, and it'll pay off."

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