Defying Labels : Indie Epitaph Records Is Hoping to Upend the Major Record Companies

Brett Gurewitz, owner of tiny Silver Lake-based Epitaph Records, believes the balance of power is about to shift in the $12-billion record business.

Within months, he notes, independently distributed labels will corner a collective 20% of the U.S. market, ahead of the largest of the nation’s six entertainment giants for the first time in decades.

It’s a revolutionary development in the history of the business, Gurewitz says, and he couldn’t be happier.

“I know this might sound like big talk coming from a little pipsqueak, but I see this as the beginning of the end for the big conglomerates,” Gurewitz says. “There is going to be a transfer of power from the majors to indies because the big guys don’t understand that this is not a growth industry anymore. What it’s about now is being a customized service company that serves the artist. Remember when the power shifted from IBM to Microsoft? Well, that’s about to happen in the record business.”

Not many major record company executives agree. “There are some very talented indie entrepreneurs out there right now, but does the fact that one of them has a huge hit somehow diminish our importance or make it more difficult for us to be successful?” asks Strauss Zelnick, president and CEO of Bertelsmann Music Group North America, the fourth-biggest conglomerate in the business. “Of course not.”

Gurewitz stunned the music industry last year when Offspring, an underground act on his roster, sold more than 8 million copies without the aid of a major record company distribution unit.

The Orange County punk act’s 1994 “Smash” album sold twice as much as recent releases by such superstars as Madonna and the Rolling Stones, shattering the myth that a tiny independent firm could not compete neck and neck with the majors.

Major record companies have historically viewed indie labels as little more than breeding grounds for new talent. Indies, loosely defined as the companies that distribute their records to stores without the help of the Big Six labels, have long accused the majors of poaching their top acts with big buck offers.

Over the last decade, the global conglomerates have gobbled up such hot companies as A&M;, Geffen, Island and Motown. In recent years, the majors have taken to purchasing a chunk of such booming start-ups as Interscope, Def Jam and LaFace Records.

Gurewitz, of course, has already received a plethora of bids--one in excess of $200 million--for his company, but insists that he is neither wooing partners nor planning to put his thriving label or music publishing company on the auction block.

He denies speculation by competitors that financial problems stemming from his pending divorce will force him to unload the company this year for cash. But he says it is not inconceivable that somewhere down the road he might consider selling 25% of his company to a passive investor unconnected to the music industry.

Still, he acknowledges that Epitaph, which generates 30 times the revenue it did five years ago, has certainly gone through some serious growing pains since its inception.

Following a year of friction between Gurewitz and the band’s management, Offspring is expected to announce next week that it will join Sony Music after delivering its next album to Epitaph. Rancid, the other top act on Epitaph’s roster, is also a free agent and can sign elsewhere.

Gurewitz, however, discounts criticism from competitors who view his fledgling firm as little more than a one-hit wonder.

“Empowering the artist is not a popular concept in the music business and the big companies don’t want guys like me to succeed,” says Gurewitz, who broke into the music business in 1980 as the lead singer in the rock band Bad Religion. “Artists who work with us get customized service and make more money. We educate them about the business and that is not a philosophy to which the giant companies subscribe.”

How did Gurewitz, a high school dropout and former crack addict, beat the corporate giants at their own game? The 33-year-old entrepreneur, who comes from a line of self-made businessmen, simply created a company that breaks all the rules.

Epitaph bears few similarities to the traditional record company industry model. For starters, it’s so lean and efficient it has maintained a lucrative 30% profit margin since its inception, Gurewitz says.

The firm has thrived by patiently developing the careers of cutting-edge bands, most of which never receive mainstream exposure on either commercial radio or MTV. Although most of its $60 million in revenue come from Offspring sales, the company makes substantial grosses from the sale of albums by such underground cult favorites as NOFX, Total Chaos, Pennywise and Down by Law.

Located in a converted trolley building on Sunset Boulevard, the firm has just 25 employees and operates without a standard publicity, talent acquisition or touring department.

Epitaph utilizes an improvisational architecture under which each new release is overseen by a two-person team responsible for developing the project from start to finish over an 18-month period. Employees are empowered to make key decisions and supplement their salaries with performance-based bonuses.

The company has also developed one of the industry’s most sophisticated telemarketing systems. Invented by Gurewitz’s right-hand man Andy Kaulkin, the system has six computerized databases that allow Epitaph employees to call or fax thousands of mom-and-pop record outlets, concert deejays, media firms, snow-board shops and other specialty merchants across the nation where punk music fans shop--all just by pressing a few keys on the computer.

Unlike other companies that lock entertainers into strict long-term deals, Epitaph typically signs artists to one-album contracts and pays them royalty rates above the industry norm.

Thanks to recent advances in digital technology, the company can record state-of-the-art albums cheaply and monitor sales and radio airplay without a giant staff of researchers. And in most cases, artists recoup their advances after selling a mere 30,000 units, the same point at which the company begins to make a profit. For the majors, the break-even number is about 100,000 units on a budding act.

Epitaph has its own royalty, accounting and promotion divisions and works with a consortium of independent manufacturers and distributors to deliver products to retailers at about $2 less than the standard $10.80 wholesale CD cost.

Tom Silverman, chairman and CEO of New York-based Tommy Boy Records, thinks Gurewitz’s success represents the “biggest threat to the Big Six that has ever come along.”

“The belief system that ‘bigger is better’ is fast losing credibility,” says Silverman, whose independently distributed joint venture is financed by Time Warner Inc. “At some point, there is going to be a superstar of Pearl Jam or R.E.M.’s stature that may want to break with the old system and try something more creative that pays them more money.”

Gurewitz, who has set up an Amsterdam office to handle European distribution and is about to launch a national advertising campaign to attract artists currently signed to major labels, welcomes the challenge.

“The day that a superstar quits his label and joins us, man, it will be like the little Dutch boy pulling his finger out of the dike. I mean, when that happens, it will hit the fan. It’ll truly be all over. And that’s why the majors are so terrified about guys like me.”

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The Independent Edge

Epitaph Records, an independent record label, has thrived by developing the careers of cutting-edge bands, most of which never receive mainstream exposure.

Revenue, in millions:

1991: $1.25

1995: $60

CATCHING UP WITH THE MAJORS

This summer, for the first time in decades, independently distributed labels are expected to corner nearly 20% of the U.S. market, a larger share than any of the six entertainment giants. Projected market shares for mid-1996 based on SoundScan data:

Independents: 19.98%

Warner Music: 19.65%

Sony: 14.91%

Polygram: 13.85%

Bertelsmann: 13.16%

EMI Music: 9.37%

MCA: 9.08%

Source: Epitaph