Last Monday, 21 employees of the Touch and Go record label came to work in their three-story Ravenswood office to find the company some of them had known for decades was coming to an end.Corey Rusk, who founded Touch and Go 28 years ago and had become one of the most significant figures in independent music, told the staff that economic conditions were forcing him to drastically shrink the label, end its production and distribution services for 23 independent labels, and pull back ” at least temporarily — on releasing new music. The employees were Å“dumbfounded, one staffer said. Å“Nobody said a word. Jobs would be cut, though specifics of how many and when were still being worked out.As recently as 2006, Rusk said Touch and Go was enjoying the most profitable years in its history. But Å“the current state of the economy has reached the point where we can no longer afford to continue operating a multi-faceted label, he said. Though the label will release a new album by the band Crystal Antlers in a few weeks, it will focus in the near term on catalogue sales.The announcement was symptomatic of a broader picture of economic decline in the music industry, and focused attention on the fragile state of independent labels. They operate with considerably smaller budgets than majors such as Universal Music Group even as they are a breeding ground for some of the most significant artists of recent decades, including Nirvana, Green Day and former Touch and Go band s TV on the Radio and the Yeah Yeah Yeahs.As word filtered across the independent music community nationwide, the dramatic downsizing of Touch and Go was met with expressions of shock, sadness, and anxiety. As Mac McCaughan of North Carolinaâ„¢s Merge Records said, Å“It makes you think, if Touch and Go canâ„¢t do it, who can? If they canâ„¢t pull through this economy, what does the mean for the rest of us? Chicago has long been home to dozens of independent labels, none more respected than Touch and Go, which has released more than 400 albums since the early Ëœ80s. Å“Corey created the blueprint for labels like mine, created the system many of us use, said Bettina Richards, who founded the Chicago-based Thrill DJey Records 17 years ago.Touch and Go and punk-era contemporaries such as Dischord Records in Washington, D.C., set up a community atmosphere for underground artists to create music in the early Ëœ80s, and share equally in the profits of their work. This stood in vivid contrast to most major-label deals, in which artists received only 10 percent of profit from record sales, and then only after recovering expenses for recording, manufacturing, marketing and publicity. Fewer than 10 percent of major-label artists are paid royalties from record sales. In contrast, artists at well-established independents such as Touch and Go usually see royalty checks more quickly and frequently than their major-label counterparts, though the amounts are far more modest.The revenue pie is much smaller for independent labels, but they have survived for decades because of their frugal business practices. It is estimated that independent music makes up about 30 percent of the $17.6 billion music business worldwide, and accounts for as many as 80 percent of all releases. Whereas the four multinational conglomerates that control the business (Sony BMG, Warner Music Group, Universal Music Group, and Capitol EMI) try to create stars with well-funded blockbuster albums that sell millions of copies, the indie labels and their artists can profit from records that sell fewer than 5,000 copies.The most commercially viable artists at Touch & Go were typically paid in the range of $20,000 up front in anticipation of selling at least 20,000 albums. A typical major-label advance could be ten or twenty times that amount, much of it going to cover studio recording costs. The independent labels can make money with low-cost, home-recorded music that appeals to a hardcore niche audience. Thrill DJeyâ„¢s Richards recently put out new music by German artist Lithops with a limited-edition run of 2,000 specially packaged compact discs and vinyl albums. Å“Weâ„¢ll break even as soon as we sell 1,100, and weâ„¢ll probably sell out of all of them by March and make a profit for everyone involved, she said. Subsequent sales of the music will be digital downloads, which require no manufacturing or production costs.File-sharing of illicit digital music files has been cited by some music executives as the reason that the industry has lost one-third of its business in the last decade, mostly in declining compact-disc sales. Paid digital sales account for 30 percent of the revenue at independent labels, but physical product (both compact discs and vinyl albums) remains the financial bedrock of most. So the folding of Touch and Goâ„¢s production and distribution service is a major blow to the 23 independent labels who used it. Touch and Go served as a middle man between the small labels and record stores, ensuring their product would be manufactured and shipped to outlets in a timely manner.Å“Distribution is a ton of grunt work, and getting your own CDs made is costly, said Jesse Woghin, co-owner of Chicago-based Flameshovel Records, one of Touch and Goâ„¢s distribution clients. Å“Touch and Go didnâ„¢t make us pay up-front for manufacturing our CDs, and then got them into stores. Plus they were friends. We trusted them. It was a dream come true to be able to work with them. So to have it all come crashing down is really disheartening. Woghin said the future is uncertain for his two-person company. Å“Weâ„¢re a small operation, and canâ„¢t afford to have too many balls in the air. Do we become an entirely digital label? I donâ„¢t know. We got into this because we like to make collectible things, things that people would be excited to hold. But thatâ„¢s becoming less practical. Even bigger independents such as Merge are living on a thin economic edge.Å“The reason Touch and Go was successful for so long is that it was a reality based business, Mergeâ„¢s McCaughan said. Å“As opposed to a lot of the industry, which seems like a gambling operation. For them to shut down, itâ„¢s a shock. But indies will survive and keep making great music, because itâ„¢s easier for us to be flexible. We can scale back if we have to. Itâ„¢s never been about making the most money. Itâ„¢s always been dictated by the music. Thrill DJeyâ„¢s Richards concurs. Å“Itâ„¢s back to the underground. Last summer, I had to lay off one employee. I now have five in Chicago and two in London. Iâ„¢ve always been a cheap bastard, but now Iâ„¢m a really cheap bastard. We find ways to cut corners, and make a little bit at a time. We make music for a certain kind of connoisseur, and as long as we focus on that, weâ„¢ll be alright. Indie labels wary in wake of Touch and Go’s downsizing | Turn It Up – A guided tour through the worlds of pop, rock and rap.