Nothing musical about YouTube, Warner dispute

NEW YORK, USA: First it was MTV, then it was Apple, and now it's YouTube.

The music industry, faced with declining CD sales, has repeatedly tried to find new income streams only to see its partners thrive with minimal benefit to the labels themselves.

So in the new battleground of online video, music companies are desperate to avoid past mistakes, but they are finding it tough to negotiate with a powerful new Internet partner.

Warner Music Group's decision to pull thousands of music videos from Google Inc's YouTube last Saturday, after the collapse of contract negotiations, shows just how far music companies may have to go to gain any leverage.

Some of the major labels are even considering forming a joint music video site to boost their bargaining power, said one music executive, as the dispute between Warner and YouTube underscores the limitations of relying on outside partners.

Such a joint venture could look similar to NBC Universal and News Corp's Hulu.com for putting TV shows online, and it could include YouTube in the partnership, said the executive, who declined to be identified as talks were still at a very early stage.

As CD sales plunge and the growth of digital songs slows, music labels increasingly consider online video to be key to revenue growth. But they do not have a strong hand in licensing negotiations with YouTube, which along with News Corp's MySpace.com, has become one of the most important music discovery tools for young fans.

Echoing the success of Viacom Inc's MTV Networks in the 1980s, or Apple Inc's iTunes since 2003, YouTube has in three years grown to become the largest online video site with more than 100 million U.S. viewers in October, according to Web audience measurement firm comScore.

"The first thing kids do when they hear about a band now is go on YouTube to find out more, according to our focus groups," said an executive at one of the major music labels, who spoke on condition of anonymity.

Warner, the world's third-largest music company, was the first major media company to sign a licensing deal with YouTube in 2006, permitting the site to stream music videos from artists like Red Hot Chili Peppers and rapper T.I.

That deal, which expired months ago, was signed before YouTube was bought by the deep-pocketed Google. Warner's larger rivals, Vivendi's Universal Music Group and Sony Music, only agreed to deals with YouTube as it was about to be bought by Google, and would likely have brokered more favorable terms, industry insiders said.

0.5 Cents per stream

Warner wants more money from YouTube for streaming rights, but YouTube has refused to budge from the previously negotiated terms, according to two people familiar with the talks.

YouTube pays record labels every time a video is streamed, or the label can get a share of advertising revenue around the video. The per-play fee is usually around half a cent per stream and the label gets paid the higher of aggregate per-play revenue or advertising revenue.

Warner has made less than 1 percent of its total digital revenue of $639 million in fiscal year 2008 from YouTube, according to a source close to the company.

Meanwhile, Universal Music, the world's largest music company, is likely to make just under $100 million from all its online video partners in 2008, said a person familiar with the company's plans. YouTube will account for "tens of millions" made in revenue by Universal, said the person.

"The labels have to find a balance between how much money they can make from YouTube itself or if they can make more money from promoting their artists on YouTube," said Ethan Horwitz, an intellectual property lawyer at King & Spalding.

Warner Chief Executive Edgar Bronfman faces extra pressure as his is the only publicly traded music company and will need to start showing shareholders a material return on deals with partners like YouTube. Warner's share price has fallen nearly 60 percent since the start of 2008.

Warner had thought that YouTube would be a significant advertising force by now, but instead the site has focused more on building audience than on increasing revenue.

"They made all these early promises of implementing audio fingerprinting while in the meantime we were losing revenues and they've been lagging behind other competitors," said a person close to Warner Music, pointing to MySpace and Time Warner's AOL as offering better rates.