Edgar and The Indies

The name--Arctic Monkeys--is a dead giveaway. Yes, it's an "indie" band--none of that image-molding, superstar-making machinery of a major music corporation for these four chaps. The U.K. alternative-rock act first got a buzz going through Internet downloads and chat rooms. Hometown gigs in and around Sheffield brought more notice. As its grass-roots credibility grew, so did its indie attitude. Arc-tic Monkeys all but banned record-label scouts from its shows. Last year, when the group finally warmed to the idea of a label, it signed with tiny Domino Records, which was based in a London apartment. The debut album, "Whatever People Say I Am, That's What I'm Not," surged to No. 1 on the British charts. But could Arctic Monkeys and Domino cross the Atlantic and establish their indie cred in the United States? There was one sure way. Domino signed on with Alternative Distribution Alliance (ADA), the darling of U.S. indie labels, to get Arctic Monkeys' CD into stores. Since February the CD has sold 300,000 copies, an extraordinary total for an indie. At ADA, "there's a history and culture of understanding these types of bands and who their fans are," says Ian McGregor, Arctic Monkeys' co-manager.

But Arctic Monkeys' indie-minded fans may be shocked by ADA's parentage. Like the cool kid with a black AmEx card in the pocket of his ripped jeans, the distributor, which also handles groups like Matchbook Romance and Panic at the Disco, is not quite what it seems. Strip away its indie pretensions and what you find is one of the biggest Big Daddies of them all--Warner Music Group. That's right: Warner Music, the industry giant that specializes in signing and breaking mega-acts like Madonna, Green Day and rapper T.I. (whose first-day record sales often top what an indie act sells in a year), is the power behind the most successful indie distributor in the business.

ADA is a part of a multipronged strategy to revitalize Warner Music, which, like the rest of the industry, fell on hard times in recent years as sales of high-priced CDs softened and Internet piracy accelerated. Through ADA, Warner Music wants to dominate indie music, the industry's fastest-growing segment, by signing deals with scores of small local and regional labels and getting retailers to stock the distinctive music of the fiercely independent acts. Warner Music and ADA don't own the labels, and merely earn a fee for distributing their records. Yet when Warner's market share is calculated, ADA's overall sales are counted as if the acts belonged to Warner. In addition to the moves at ADA, Warner Music established a so-called incubator system to offer limited financial backing to small entrepreneur-ial labels with promising acts that can be "upstreamed"--signed later to Warner Music-owned labels, if they hit big.

The strategy is paying off handsomely for Warner Music CEO Edgar Bronfman Jr., helping to burnish his tarnished image as a long-aspiring media mogul. Bronfman--of the billionaire family that founded the Seagram spirits empire--led a buyout of Warner Music in 2004 for $2.6 billion. After a tumultuous start under Bronfman, Warner Music increased its market share a full percentage point last year, to 17.3. With hot- selling acts like Interpol (from Matador Records) and the Shins (from Sub Pop Records), ADA's revenues have increased about 30 percent annually since 2003, and it accounted for almost all of Warner's 2005 market-share gain. As a result, ADA is now the leading indie distributor, outdistancing competitors that include divisions of Warner Music archrivals Universal Music Group, EMI and Sony BMG. To bolster its dominant indie position, Warner Music agreed in April to buy Ryko Corp. for $67.5 million.

Warner Music's incubator labels, Asylum and EastWest, have been hot, too, generating an astounding four top-10 debut albums last year. Among them: "The People's Champ" by Paul Wall and "Who Is Mike Jones?" by Mike Jones. Both rappers were upstreamed from Houston-based SwishaHouse Records, which has ties to Asylum. "Across the board," Bronfman told Wall Street analysts this month, ADA and the incubators "increased market share and increased profitability. That's a very positive development ... "

Indie-music distribution isn't new for Warner Music or most of its major-label rivals. ADA is 13 years old, for example. And EMI has owned its Caroline division since the early 1990s. But for most of that time, the indie segment played second fiddle or worse to the core business of breaking mass-appeal, major-label acts.

So what's behind the music giants' renewed interest in indies? Long spurned by radio and other traditional outlets, indie acts and their labels in recent years turned to the Internet to reach rabid fans eager to discover fresh music outside the mainstream. Today, it's not un-common for an indie act to generate sales of 300,000 and more, with low marketing costs. (Matchbook Romance designed its Web site.) Even an old-school behemoth like Warner Music can learn new tricks if the numbers make sense. When it's done right, everybody wins. The upsurge in indie distribution "is bringing independent product and artists into the mainstream," says Don Rose, president of the American Association of Independent Music, a new trade organization. "It might be cool to be in the underground for a little while, but ultimately our members need to have the same opportunities that the majors have."

Warner's rising fortunes aren't going unnoticed by other majors. Earlier this month, EMI made an unsolicited $4.2 billion offer to buy Warner Music, which converted to a public company after the Bronfman-led buyout. Warner Music, whose stock has soared about 64 percent to $28 in the past year, spurned the bid. But industry analysts say an EMI-Warner Mu-sic merger is inevitable, with one or the other emerging as the buyer. Could the biggest major in indie music lose its independence?