Major success in a minor key: Laura Ballance and Mac McCaughan made merge records a hit with artists who don't believe bigger is always better.

• Author: Kemp, Mark
• Position: Merge Media Ltd.

Barbra Streisand seemed a bit flustered. Wearing a majestic necklace with shiny black stones and a flowing maroon dress, the veteran actress and pop star was standing at the podium during the Grammy ceremony in Los Angeles Feb. 13. Next to her, in a dashing black suit, was Streisand's grizzled costar in the 1976 blockbuster A Star Is Born, country singer/songwriter Kris Kristofferson. The venerable pair had just announced the nominees for the coveted 2010 Album of the Year award.

Leaning into the microphone to read the name of the winner, the normally chatty Streisand was suddenly tongue-tied. "And the Grammy goes to ..." She paused, apparently unable to distinguish the artist's name from the album title, then continued with a stutter. "The ssssSuburbs--Arcade Fire!"

To longtime North Carolina punk-rockers Mac McCaughan and Laura Ballance--founders and co-presidents of Durham-based record company Merge Media Ltd.--the win was a glorious surprise. Merge had released Arcade Fire's third album, The Suburbs, six months earlier, and artists on independent labels don't normally win Grammys. "To get the Arcade Fire's name out there to all these people who don't care about Merge and don't care about alternative music is big," McCaughan says. "You rarely have an opportunity like this to get in front of these people." To many of "these people"--mainstream pop fans unfamiliar with the critically acclaimed Canadian band or its Carolina-based label--Arcade Fire's win was a shock.

Television personality Rosie O'Donnell took to her Twitter account and immediately addressed it in a snarky tweet: "album of the year? ummm never heard of them ever." Her comment kicked up a firestorm among fans of the more famous nominees, including rapper Eminem and pop singers Lady Gaga and Katy Perry. "Who the hell is Arcade Fire" became a mantra in flame wars on blogs such as Tumblr.com, where someone posted a page called whoisarcadefire. In France, a tongue-in-cheek line of T-shirts appeared emblazoned with the phrase "Who The F*** Is Arcade Fire?"

You can't buy that kind of publicity on an indie label's budget, McCaughan says. The 44-year-old musician and entrepreneur is sitting with Ballance at a window table in a small coffee shop near Merge Records head-quarters, a blond-brick building tucked between an alleyway and a furniture store on Chapel Hill Street in downtown Durham. McCaughan is dressed in casual indie-geek chic: a blue sweater, jeans and sneakers. Ballance, also 44, is more stylishly hip: designer glasses, a brown RLX Polo Sport hoodie, muted-green shirt and turquoise necklace. They come here often to sip coffee, nibble on croissants, discuss business or--in today's case--talk to a reporter about the surprise success of their little record label that could.

Over the past two decades, Merge has grown from a tiny punk-rock label operated out of Ballance's Chapel Hill bedroom into one of the longest-lasting and most well-respected independent music companies. Not bad for two people who never expected to become record executives. "We didn't start out with any expectations at all," McCaughan says, his high-pitched and somewhat squeaky voice sounding like it belongs more to the president of a computer software company than to that of a record label. "Our ambitions were pretty small in terms of what we thought we could do." In fact, McCaughan and Ballance were barely out of their teens when they started Merge. Romantically involved, they were only interested in starting a label to put out singles by their own Triangle-based band, Superchunk, and some of their friends' bands. The only reason to start an indie label, McCaughan says, is to release fringe music that mainstream labels wouldn't consider economically viable. Indie labels depend more on fan loyalty and conservative budgeting than big record sales for their survival. "If someone starts up an indie label and it fails because of lack of record sales, then that person...