Chad Stokes has learned about the recording industry by not being in it.

Stokes was a member of the successful independent trio Dispatch. He’s taken the knowledge he gained in Dispatch to help him lead of his current band, State Radio. Despite being offered major record contracts — the kind college bands dream about — Stokes has chosen to stay independent.

“We’ve had some fancy lunches and penthouse offices in New York and that stuff’s a trip,” Stokes said. “Sometimes you come away from those meetings with a bad taste in your mouth.”

The recording industry is increasingly leaving a sour aftertaste for many artists, including superstars like Madonna and Radiohead. Low royalty rates, lack of creative freedom and an industry that is slow to adapt to a digital world have begun to push artists away from the major record labels. At the same time, the public face of the record labels, the RIAA, has alienated and angered many fans by suing tens of thousands of consumers for illegally downloading music.

The movement of artists against the traditional model has been symbolized by recently independent band Radiohead’s decision to offer their new album, In Rainbows, for as much as consumers wanted to pay, whether that be $5080 or nothing. And other artists are following suit.

As a promotion, Prince gave away 2.8 million copies of his latest album Planet Earth through a newspaper in England, much to the dismay of his distributor.

The decision to give away albums, the traditional unit of the music industry, is a sign that some artists are changing their business models and focusing on merchandise sales and touring. This decision may be partially because sales of records or individual songs make very little for artists signed to major labels. Of the 99 cents paid for each song on iTunes, the artist usually only receives around 10 cents.

“Today I want to talk about piracy and music. What is piracy? Piracy is the act of stealing an artist’s work without any intention of paying for it,” said Courtney Love in a 2000 speech at the Digital Hollywood Online Entertainment Conference. “I’m not talking about Napster-type software. I’m talking about major label recording contracts.”

Love, a multi-platinum recording artist, then laid out a hypothetical scenario about a band that gets a record deal with a million-dollar advance. This advance is then used to pay for recording an album, shooting two music videos and a tour. After a long list of expenses and a low royalty rate, the band ends up with zero profit while the record company has made $6.6 million dollars.

Major artists, like Madonna, are trying to get out of their contract with major record labels. The Wall Street Journal recently reported that Madonna left her record label, Warner Brothers Records, to work with an unusual partner: concert promotion company Live Nation. The $120 million deal allows Live Nation to promote three studio albums, her tours and her name for the next 10 years, according to The Wall Street Journal.

The independent model

Chad Stokes admits that switching from a major record label to an independent model is a trade-off between serious marketing, radio and tour support on one side and artistic freedom and better royalties on the other. Despite this, Stokes says he is happy with how State Radio is doing.

“There is a chance when you sign with a record company you could go huge,” Stokes said. “But there is more of a chance that they will shelf your albums if they don’t see any singles on it. And then you’ll be sort of stuck in a contract for a couple years.”

Instead of risking being shelved, Stokes has followed the independent band business model to create the success of Dispatch and the rising popularity of State Radio.

“We are a live band, and we tour around,” Stokes said. “We have a couple records that are out there, but really the nuts and bolts of what we do is touring.”

This mentality that merchandise and touring is the foundation of an independent band instead of record sales is partially why State Radio decided to offer a free download of all their previous albums before the release of their new album Year of the Crow.

Even though record sales are a smaller portion of the band’s income, it makes more per song than most artists. For every single sold on iTunes, State Radio gets between 60 and 70 cents, six times what artists signed to major recording labels get, according to Stokes.

Not only are the income models different, but also promotion and marketing for independent bands focus on a whole different set of tools. Major record deals come with radio play, which is paid for, but independent bands can hope to be discovered through online radio stations that suggest artists based on a listener’s tastes. Pandora and Last.fm use different methods to pair consumers with new bands, but both are avenues for discovery for the bands that don’t make it on the radio.

State Radio won’t be seen on many billboards or buses, but like most musicians they have capitalized on the marketing opportunity of MySpace.

Almost every musician from Northwestern’s The Foster-Walk Complex (16,000 profile views and 2,500 friends) to Justin Timberlake (44 million profile views and 950,000 friends) is on MySpace, but independent artists and rising musicians have the most to gain from the social networking giant.

The biggest MySpace success story is singer, model and reality TV star Tila Tequila. Her profile has 93 million views and she has 2.4 million friends — almost the population of Nevada. Though Tequila had done some previous modeling, her MySpace fame helped her secure a record contract and her own reality TV show on MTV: A Shot at Love with Tila Tequila.

Tequila’s single “I Love U” was included in a compilation released by newly formed MySpace records. The record label was created in part because MySpace has become a gathering place for unsigned musicians. The label is partnered with Universal Music Group for distribution and marketing. The first ever MySpace music tour started this fall and is featuring Hellogoodbye and Say Anything.

As the industry changes and more artists choose to be independent for financial or artistic reasons, the model for making music is shifting away from record sales and towards touring and merchandise.

There have been many critiques by consumers and artists of the record industry, but few have been as clear as the one from heavy metal band Throwdown, which is still under contract.

According to punknews.org, in a letter sent to former industry-executive Bob Lefsetz, Throwdown said, “If you wanna really support a band, ’steal’ their album… help bury the label… and buy a t-shirt when you show up at their show and sing every word.”