Making records d'Or

Indie label shows majors a profitable alternative

PUTTING IN HIS OR: Michael Caplan, the creative half of Or Music, is taking a fresh look at the business after 20-plus years at Epic.

by Valerie Block

On a sweltering August night in Austin, Texas, two New York record executives waited for a local band to take the stage at a dingy nightclub, lured by a promising demo tape.

Not the hottest ticket in town, the group drew just a handful of followers. Several major record labels had already passed. But the minute that Los Lonely Boys began to play their set--a potent mix of Stevie Ray Vaughan-style guitar licks and Santana's Latin rhythms--the New Yorkers knew that this roots-rock trio could become their gold standard.

"We freaked out," says Michael Caplan, the creative half of independent label Or Music, who made business partner Larry Miller take over video camera duties so he could boogie during the show. "We decided right then and there we had to have that band."

As business decisions go, it was a good one. The group's debut album has sold an impressive 200,000-plus copies since its June 2003 release and reaped reams of favorable press clippings. It was picked up in December by Epic Records, a division of Sony Music Entertainment.

While major record companies continue to struggle--racked by downloading teens, a creative drought and a bloated cost structure--independents such as Or Music are setting an example for the big boys.

Nineteen-month-old Or expects revenues of $4.5 million in 2004, triple last year's take, and says it has already turned a profit. Razor & Tie, another New York indie, says that this year's first quarter was the best in its 14-year history. In the past few years, indies have launched several superstar acts, including John Mayer and Creed, that have helped redefine the business.

"Companies like Or Music are really showing the way the independent sector should work," says Dave Novik, a music industry consultant and former RCA Records executive.

Mr. Caplan, like most of his indie brethren, espouses a simple remedy for the tattered record business: Put the emphasis back on nurturing artists whom consumers will fall in love with and follow for years. He also advocates embracing the Internet.

On a recent Tuesday afternoon, Mr. Caplan sat in his cramped Chelsea office, where stacks of compact discs and piles of press clippings clutter his desk, singing the praises of his latest pet project, pop group Pity Sing. Wearing jeans and a faded T-shirt, he looks more like a sports bar denizen than a slick record executive. But the music maven spent over two decades at Epic, one of the big names in the business. He brought in acts like Living Colour, Ginuwine and G. Love & Special Sauce.

He doesn't miss his old haunt.

"I really felt the whole model was breaking down," says Mr. Caplan. He complains that Epic came to depend on his million-sellers and ignored the less flashy acts he championed.

Economies out of scale

"If you had a group that sold 200,000 records, the economies of scale were such that they didn't care," he says. "I was miserable. I used to close the doors to my office and smoke cigars."

He met Mr. Miller just as pink slips began making the rounds at major labels. The two were introduced by their wives, who dragged them to a UJA fund-raiser. Mr. Miller, an entrepreneur who founded digital music startups during the boom years, was working at venture capital firm Chazen Capital Partners and looking to invest in a music company. Mr. Caplan talked him into a partnership.

The odd couple--the dapper Mr. Miller dresses in suit and tie and is more comfortable deciphering financial statements than predicting musical trends--raised $3 million with Chazen in the rather inhospitable atmosphere of the economic downturn. They began looking for acts in August 2002, assembling a solid roster that included Tower of Power, instrumental jam band Particle and critically acclaimed singer-songwriter Phil Roy.

The label has hit some sour notes. Essence, Or's first act, stiffed. Then, despite lush production and rave reviews, Mr. Roy's album sold a disappointing 10,000 copies.

The partners then struck gold with Los Lonely Boys' debut album, which sold so briskly that it attracted attention at Epic. Though Or will now share the group-and future profits-backing from a major label will mean more exposure, as well as access to deep pockets to shoulder marketing costs. The extra muscle is expected to push the record to platinum sales by December. This week, it hit No. 64 with a bullet, which signifies a quick rise, on Billboard's Top 200 album chart.

Last month, Or released a record from another act that the majors passed up, Particle. The group snagged a coveted spot in Rolling Stone's "New Faces" column.

"Everyone wants that spot. Capitol Records wants that spot. And little Or Music got it," says Mr. Roy.

Like many artists fed up with the majors, he considered it essential to sign with an indie. He's now recording a second album with Or.

Cashing in

Basking in its early success, Or is in the midst of raising an additional $3 million to $5 million, through venture capital firm Crest Advisors. Crest principal Jim Kuster believes that the climate for music companies is improving. He points to the fact that Edgar Bronfman Jr. and backer Thomas H. Lee Partners coughed up $2.6 billion for Warner Music Group, as well as the success of Apple's iTunes and the upturn in CD sales that began last fall.

"Some smart money has come into the industry recently," Mr. Kuster says. "We can use the high-quality reputation Or has earned in a short period of time to help build interest in the financial community."

With new capital in hand, the partners expect to sign acts and maybe even buy other labels or music publishers. But they insist that they intend to stay small. Or now has just six acts and seven employees.

"The mistake most indies make is that they have a taste of success and they want to be Sony," Mr. Caplan says. "We don't want to be Sony. I've already done that."