With vinyl in the midst of a renaissance and CDs tanking in almost direct proportion to the uptick in digital downloads, it's hard for a record label to peg the best strategy for releasing music. If they were to release digitally only, they risk lost sales from less tech-savvy demographics, but if they stick to meatspace distribution (i.e. CDs), they could end up the last rat on a sinking ship.

Nielsen reports that in the coming year, sales of digital albums could climb from 41 percent to 50 percent of all album sales. Some of the outfits best poised to capitalize on this trend are independent labels, which have traditionally been ahead of the digital curve out of necessity.

By 2003, big box retailers had shouldered out many of their mom and pop counterparts leaving indie labels struggling for shelf space. 'Independent record labels had more to gain from the digital download model than major record labels because, for the first time, they had a marketplace that was completely open to them,' says Matt Laszuk, president and co-founder of IRIS Distribution, a San Francisco-based digital marketing and distribution company.

Smash Hit Music, one the labels IRIS works with, releases its music entirely in digital format. But they didn't start out that way. Soon after Smash opened, five out of their six vinyl distributors went the way of the 8-track, so they were forced to evolve or die. 'We were actually very excited to do this because as soon as we looked at the math, we realized that we were going to be profitable right out of the gate,' says Layne Fox, president of the San Francisco-based dance and electronica label who also doubles as IRIS' marketing VP.

As a caveat though, Smash's annual revenue is relatively small, in the ballpark of $100,000. Laszuk says that many of IRIS' larger, most successful labels are closer to 50 percent digital distribution. Basically Smash is opting for a 'trade off of scale and total dollars in exchange for better turnarounds, better timelines, and better margins,' says Fox.

Thinking about breaking into digital music distribution? Here's some tips to help you get started:

•    Even if your distribution is largely digital, you can partner with another label to produce your music physically and then split the profits without taking on any risk.

•    Aim for broad distribution across downloading platforms and transaction types. Though the iTunes store is the most successful venue for many digital distributors, getting your tracks on Zune, Rhapsody, and eMusic, or sites specific to your genre can be a real boost. You can explore everything from permanent downloads to ad-supported streams and subscription services.

•    Emerging bands should always put their best foot forward. Don't hold back your stellar tracks. Laszuk even recommends giving them away to build a fan base.

•    Know your demographic. Is your audience made up of digital natives? Do they go to many concerts? Digital sales probably won't help your label if you specialize in classical music, which tends to appeal to an older, less tech-savvy demographic.

•    Be realistic about digital revenue expectations and be open and communicative about these prospects with your artists.