Gnarls Barkley to the rescue

Can Web 2.0 make music stars and resuscitate record companies? Fortune's Devin Leonard reports on a new approach.

By Devin Leonard, Fortune senior writer

(Fortune Magazine) -- You've probably never heard of Kevin Michael, a 22-year-old singer who has a soul-drenched falsetto and performs with an acoustic guitarist who makes beat-box sounds with his voice. Yet when he performed recently in Los Angeles at a party thrown by Warner Music Group, the room was filled with executives from wireless companies such as Sprint (Charts), Cingular, and Helio, the social-networking site MySpace (owned by News Corp (Charts).), and Doppelganger, a San Francisco firm behind an online "nightclub" called the Lounge.

These people didn't turn out because they have a proclivity for Michael's low-fi street sounds. They were eager to hear him because he's a protégé of Josh Deutsch, CEO of Downtown Records, which broke Gnarls Barkley, the biggest new act of 2006.

The company's success with the postmodern soul-pop band led by celebrated producer Brian Burton, a.k.a. Danger Mouse, and rapper-singer Thomas Callaway, a.k.a. Cee-Lo, may well provide a blueprint for the future of the music industry. Downtown built a large, multiracial audience for Gnarls Barkley almost exclusively by reaching out to listeners in cyberspace. The band's first album, St. Elsewhere, debuted at No. 2 on iTunes. And its ubiquitous hit single, "Crazy," sold more than a million digital copies in the U.S. alone.

The success of Gnarls Barkley wasn't entirely a surprise. Danger Mouse has been a cult figure among Internet music fans since 2004, when he created the Grey Album, the brilliant but unauthorized digital mash-up of Jay-Z's Black Album and the Beatles' White Album. Cee-Lo is a member of Atlanta's seminal "dirty South" rap group, Goodie Mob. He has made numerous guest appearances on songs by OutKast and P. Diddy.

The question now is whether Deutsch can make a star out of an unknown artist like Kevin Michael. The company's CEO insists that, like Gnarls Barkley, Michael has the potential to bridge the balkanized worlds of hip-hop and alternative rock. Deutsch has Michael in the studio with producers who have shaped the work of Jay-Z, Mariah Carey, and Madonna, and he hopes to release Michael's first album early next year. The other day he played me some rough mixes of tracks from the album. The funk-laden songs were slicker than his acoustic fare but still infectious, especially a song called "Philadelphia."

"We're hoping to get [76ers star] Allen Iverson to rap on this," Deutsch told me. "We're also going to record this with a gospel choir and do a 'making of' video."

Downtown thinks the promotional lessons that it learned from Gnarls Barkley can be applied to a newcomer like Michael. Deutsch understands that the music industry's old approach is fragmenting: Labels can't count on radio and music video channels to break acts anymore; MTV long ago became a purveyor of reality shows; and the CD is on its way to becoming a fetish item like the vinyl record.

Downtown is hardly the only record label trying to find audiences on the Net. But judging from his success, Deutsch is doing it better than his peers. If he can find success with Michael, he will establish himself not only as a music industry force, but as one of its most prophetic minds.

Deutsch is a music industry veteran who spent years at big labels like Virgin Records before he grew frustrated - "I felt like I'd hit a wall," he says - and decided to go out on his own last year. So he founded Downtown with two old high school buddies: former VH1 music programming director Terence Lam and John Josephson, a managing director at Allen & Co.

Starting a music company in 2006 may have seemed, uh, crazy. But Deutsch and his partners believed they could compete as a stripped-down operation. They launched Downtown with less than $10 million in capital, only nine employees, and, as the CEO puts it, "a gaggle of interns." The company does its own talent scouting and oversees the promotion for its acts. It has a distribution deal with Warner Music Group (Charts), and Warner's Atlantic Records will throw its sales and marketing teams behind potential blockbusters in exchange for a cut of the profits.

Deutsch and his co-founders were still working out of his living room last November (the company hadn't officially launched yet) when the CEO signed Gnarls Barkley. Deutsch was able to outmaneuver larger competitors in the U.S. because he was ready to make a deal as soon as he heard "Crazy." "Josh was the first label executive to really fully understand the vision," Danger Mouse told me in an e-mail.

Even as Deutsch and Gnarls Barkley were negotiating, disk jockeys were playing a leaked version of the song in England. When "Crazy" was released on iTunes in that country, it became the first song to top the singles chart purely on the basis of download sales. Downtown can't take credit for that. It didn't have the resources to distribute St. Elsewhere overseas. So Deutsch introduced Gnarls Barkley to Warner executives in London, who signed the band there.

In the U.S., however, Downtown spread the word about the forthcoming album on blogs such as Stereogum and Brooklyn Vegan, which were hungry for news about the enigmatic figure behind the Grey Album. Fans were directed to the band's website and its MySpace page, where they could stream "Crazy" weeks before its release. "We had all that blazing before we went to radio," Deutsch says.

The band's website featured blog entries by a mysterious A.B. Vidal, chief executive of St. Elsewhere. Fans were encouraged to sign up and become friends of Gnarls. That didn't just get them e-mail alerts about upcoming concerts; "friends" who bought tickets through the site received special passes that gave them early admission to crowded concert dates. St. Elsewhere went on to sell 1.1 million copies in the U.S., according to Nielsen SoundScan, a very respectable number for a new band these days.

Deutsch says signing Gnarls Barkley was like "trying to hang on to a rocketship." Downtown didn't have enough money to acquire the publishing rights to St. Elsewhere, so it didn't get as much as it would have when the band licensed songs to Grey's Anatomy and Entourage.

Things will be different with Michael. Downtown has already snapped up the publishing rights to a number of his songs. It will be paid in full when one of them is heard on an upcoming episode of Entourage. Downtown is also pursuing advertising deals for Michael. Deutsch has taken his protégé to the San Francisco headquarters of Gap. He plans a similar trip to the Colorado office of Crispin Porter & Bogusky, perhaps the country's hottest ad agency.

The company's web strategy is even more promising. Downtown is creating two tiers of Michael songs and video. There will be "premium content" with a pricetag, as well as free material - for instance, acoustic versions of the album's songs - on YouTube, MySpace, and other sites frequented by young music lovers. "That's one of the things we learned," says Deutsch. "You have to continue to feed content to the audience on the Internet."

Deutsch is also shrewdly seeking alliances with tech companies to ensure that his artist's work doesn't go unnoticed in the digital realm. In recent weeks he has taken Michael to Silicon Valley to perform at the headquarters of YouTube, Apple's (Charts) iTunes office, and Linden Lab, the company behind the elaborate virtual-reality playground, Second Life.

"I think the idea of breaking a new act is exciting to a lot of these people," says Josephson. "It's a recognition that they are truly players in the music business now."

Michael - who has the voice and Afro of a '70s soul crooner but also a thoroughly up-to-date YouTube sensibility - is pumped about a possible upcoming appearance as an avatar in Second Life. "I'm going to start doing virtual concerts," says Michael. "They are going to totally pimp me out with a big 'fro. I can't wait."

Second Life is precisely the sort of untraditional venue record companies have to troll for listeners if they want to sell more than their back catalogs. Will Michael be the next Gnarls Barkley? It's hard to say. But this much is certain: He signed with the right label.

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No, Second Life is not overhyped.

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