A powerful collective of five independent labels is ratcheting up the tug-of-war between indies and major-label-owned distribution companies with a new agreement that allows its members to keep their digital distribution rights.
This article was first published in the April 26th issue of Billboard Magazine.
The labels -- Beggars Group, Secretly Label Group, Domino, Merge and Saddle Creek, which have dubbed themselves the Independent Distribution Cooperative -- are longtime clients of Warner Music Group's Alternative Distribution Alliance. Billboard estimates they were collectively worth approximately $45 million in sales in 2013. Artists in their stables include Vampire Weekend, Arcade Fire, Arctic Monkeys, Bon Iver and Bright Eyes.
The IDC's unique arrangement with ADA delivers a blow to the business model of major-label-owned distributors and sets a precedent other indies may follow. One senior executive at an ADA rival calls the pact his "biggest nightmare."
Major-label distribution companies like ADA, Sony-owned RED, Universal Music Group's Caroline, typically demand exclusive rights to sell a label's assets to both digital and physical outlets because, they contend, combining those efforts creates market efficiencies. It's also lucrative. Billboard estimates the two largest distributors, ADA and RED, each contributed about $175 million to their parent companies' bottom lines in 2013.
For their services, distributors typically claim fees of 10 to 12 percent of digital sales and 12 to 24 percent of physical. In 2013, digital sales for the IDC's five labels totaled an estimated $27 million. IDC's move to retain digital rights will keep millions of dollars out of ADA's pocket.
"Isolating revenue streams may feel like a short-term win, but the long game of how you deliver a record commercially is compromised," says one distribution executive opposed to the move, who notes that geographic streaming data can drive CD shipments.
But independent label heads tell Billboard that the benefits of marrying physical and digital sales are overblown, although they acknowledge that services provided by the major-label distributors, such as marketing, radio promotion and the management of hundreds of retail accounts, are of significant value.
After forming in the spring of 2013, IDC began talks with ADA that stretched on for months. IDC also spoke with other suitors, including Caroline, RED and E1 Entertainment. In June former WEA CEO Mike Jbara took over as president of ADA Worldwide. He was eager enough to keep the prestigious indies and their $18 million in annual physical sales under Warner's roof that he agreed to IDC's digital demands. Papers were signed in January.
Other indie labels are watching closely, although a source familiar with IDC's original proposal says he believes the industry is "still a few years out" from physical-only distribution deals becoming commonplace.