Digging downloads: small labels making most of audience's access to digital music files.

Greg Shaw's first reaction to Napster, the trailblazing peer-to-peer file swapping service, was less than enthusiastic.

"I resisted it for a while, because I'm not a tech head," the 55-year-old owner of Burbank-based Bomp Records LLC said of his introduction to music downloading in 1999.

Once he got over his technophobia, however, Shaw fell in love. "I thought, 'This is brilliant,'" he said.

While the major recording labels have fought large-scale music file swapping, which they see as a threat to their bottom lines, smaller labels like Shaw's have taken a more accepting stance. The reason: It gives their artists the type of exposure once reserved for superstars at the big labels.

But just as small labels are starting to take advantage of the Internet, the industry's crackdown on users who illegally download music might scare off the potential audience.

A survey released last week by the Pew Internet & American Life Project found that 14 percent of U.S. Internet users who had downloaded music files said they have stopped the practice as a result of the industry's litigation against individuals who provide or use online music for free.

"This is another indication that the message of deterrence is getting through," said Jonathan Lamy, a spokesman for the Recording Industry Association of America, which represents the five major music labels.

Shaw said it's unlikely that a decline in Internet users will influence downloading for small labels like his. That's because his audience has more of a taste for the avant-garde and is less likely to be intimidated by the prospects of recording industry litigation.

But he notes the threat.

"Small labels could feel threatened by it, too, because when your breakeven point is 1,000 records, even a loss of 100 could mean the difference between making it or breaking it on that record," said Shaw. "It's s hard to break even just to pay the bills. So I could understand why others would say this is scary."

The major record labels--Warner Music Group, EMI Music Publishing, Sony Music Entertainment, Bertelsmann Music Group and Universal Music Group--control nearly 80 percent of the retail music market and have been complaining for years that the advent of file-swapping technology has cost them billions of dollars in lost revenues.

But independent labels such as Shaw's have embraced the free downloading of their artists" work as an inexpensive marketing tool they say actually feed sales.

There may be some evidence they are right.

Independents had a 17.1 percent share of the retail market in the first quarter, according to Billboard Magazine, up from 16.4 percent in the like period a year earlier. Before that, independent share was steadily climbing, coming in 15.6 percent in 2002 and 15.4 percent in 2001.

At the same time, longtime market leader Universal Music Group's share dropped to 26.6 percent from a 2002 high of 30.6 percent.

With Internet downloading. "you can build a following," said Shaw.

"On the downloading sites, you can see who is downloading your stuff," he said. "You can connect with them, you can add them to your mailing list or your networking list and yet! call build an international network of people who like your music, or like a similar band."

With music sales slumping to all-time lows and lay, offs wracking the big labels from Los Angeles to London. the recording industry has placed a hefty portion of the blame on illegal file swapping through networks such as Kazaa, Morpheus and the old Napster.

That was highlighted last September, when the recording industry leveled copyright infringement lawsuits at 261 people for allegedly putting large amounts of music online for others to download.

The association contends that while a decreased number of downloads might hurt exposure for bands from smaller labels, "what's most important is that it is founded on legal principles where the authors have a say' in how it is distributed," Lamy said.

Shaw and other small labels have no objection to the free distribution. "They're shaking in their boots." he said of the majors.

Lee Joseph, founder of Burbank-based Dionysus Records, offers downloads for some of his bands. He says the Internet isn't to blame for the industry's problems.

"Everybody is under the misinterpretation that Internet downloading is what has pretty much murdered the industry and it hasn't, said Dionysus. "The demographics have changed and tastes have changed."

Shaw's tiny Bomp has survived over the years thanks to a thriving catalog business, which distributes albums from his label and others. "That provides cash flow," he said, adding that in the past five years, his label business, mostly involving production and releasing of albums, has cither broken even or turned a profit.

At $5,000 to $6,000 per release, a breakeven point for Bomp would be about 500 CDs selling somewhere between $10 and $12 each.

"If you can sell 700 or something, it's worth doing," said Shaw. "The major labels say they have to sell 3 million of something to break even. We don't have layers and layers of managers, A&R. marketing, somebody's brother-in-law who's the president of some department."

That means if a Bomp artist reaches 20,000 listeners through file sharing and 10 percent of them go out and buy the album, the company will have made money.

The key' is to keep costs low. Bomp employs only a few people in a nondescript industrial building in Burbank. There, they stuff newsletters and fill orders lot the catalog. Bomp employees, Shaw said, "don't get $150,000 a year. They get $8 an hour."

Keeping costs low is where Internet down-loading ties in because, with MPI's, the widely used digital format for music, 'there's no (promotional cost) at all."

Of course, hands don't play for free; their money is made touring. Say a new band that might draw 200 people a night offers music over the Internet for free on their site. The music is then redistributed over networks like Kazaa or Morpheus. If people like the music. that could easily increase attendance at shows.

That's been the case for Brian Johnstown Massacre, which offers its entire catalog online for free download, said Anion Newcombe, the group's guitar player.

"I have every person's e-mail that has downloaded anything," he said. "Wait and see what is popular next summer, it is not going to be some retard from "American Idol," I promise," said Newcombe, whose CDs are released by Bomp.

"What I would like to do," said Shaw, "is to get sufficient exposure for artists."