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Universal, Sony and Warner seek new relationship with Google-owned video site

After more than a decade of falling album sales and the further loss of revenues to digital piracy, the world’s three biggest music labels are facing a new challenge: a showdown with video site YouTube — and one that has profound implications for the global recording industry.

Over the coming months, Universal Music Group, Sony Music and Warner Music are each due to negotiate new licensing deals with the Google-owned video platform. None of the three music companies has commented in public, but each appears keen to “reset” its relationship with a service that has, to date, paid them relatively little for their content.

In terms of the amount of music streamed on-demand, YouTube has been a knockout hit — drawing more regular listeners and viewers than the likes of Spotify and Apple Music combined. “YouTube is free and is outperforming all the other music streaming services,” says Mark Mulligan, analyst with Midia Research.

However, music executives say their industry has not benefited from YouTube’s success. “We make peanuts from the ads,” says one, adding that YouTube Red, the paid-for subscription service launched last year, has yet to gain real traction.

Of greatest concern is the disparity between the amount of music listened to for free on the site and the revenues those tracks generate from advertising.

Last October, Jimmy Iovine, the head of Apple Music — and the former chief executive of Interscope Records — told the Vanity Fair New Establishment conference that YouTube was responsible for 40 per cent of all music consumption but generated only 4 per cent of the industry’s revenues. “They know that doesn’t work,” he said. “But do they care? I have no idea.”

At present, YouTube licenses music from Vevo, a music site controlled by Sony and UMG, and has separate deals with the labels and Warner Music. Meanwhile, users around the world upload unlicensed music on an hourly basis.

All of that music has made YouTube the world's biggest music platform. And it is still growing: the number of songs streamed for free on US ad-supported sites, of which YouTube is by far the biggest, rose 101 per cent in 2015. By contrast, associated revenues to the music industry increased 31 per cent, according to the Recording Industry Association of America.

In the US, ad-supported streaming earned even less for the music industry last year than sales of vinyl albums — prompting disbelief among senior industry figures. “Technology giants have been enriching themselves at the expense of the people who actually create the music,” claimed Cary Sherman, the RIAA’s chairman and chief executive, last week.

For the music industry, the favoured new format is paid-for subscription streaming. Paid-for, or premium, tiers operated by Spotify and Apple Music generate much better returns for music labels than advertising-supported services. “The monetisation from ad-supported is less than one-tenth of what we get from paid-for streaming music,” explains one senior music executive.

Nevertheless, YouTube insists comparisons between ad-supported music and paid-for subscription services are “apples to oranges”. In a statement released last week in response to the RIAA’s annual figures, it pointed to the more than $3bn it had paid the music industry. “That number is growing year on year,” it said.

A person close to YouTube says it is able to generate money from casual music fans who would never pay for an album or a streaming service. “Only about 20 per cent of people have historically been willing to pay for music,” the person argues. “YouTube is helping artists and labels monetise the remaining 80 per cent that were not previously monetised.”

He adds that the global advertising market is now worth $200bn — giving music acts plenty of potential to earn a bigger piece of the pie. “This is a tremendous opportunity,” he says,

Still, the labels are unhappy that they are not receiving more of the advertising revenues currently generated on YouTube. So the big question is whether they have the leverage to demand a bigger share.

Music now represents as much as 35 per cent of all YouTube traffic, according to Mr Mulligan, a mix of licensed music videos and tracks illegally uploaded by users.

If the companies that owned the legal rights to that music threatened to take it elsewhere — or make YouTube take it down — might the video site them an improved deal?

It is not clear that the music companies have the stomach for such a fight. Refusing to grant YouTube licences for music videos would not stop the video site's users from uploading music illegally. And the legal responsibility for spotting such illegally uploaded content rests with the music labels themselves. They must issue a “takedown notice” to YouTube, which is obliged to remove the track.

However, as soon as an illegally uploaded version of a track is removed, it usually quickly appears somewhere else. “Asking for illegal music to be taken down is like playing constant ‘whack-a-mole’,” says Mr Mulligan.

Critics say YouTube could do much more to filter out music-based content that has been uploaded illegally. “It has the technology to block pornography and other inappropriate content,” points out Jonathan Taplin, director of the Annenberg Innovation Lab at the University of Southern California. “It could use the same tools to screen out every piece of music that hasn’t been specifically licensed.”

Under the law as it stands, YouTube is protected by the Digital Millennium Copyright Act, which gives websites "safe harbour" from prosecution if they are found to be hosting unlicensed content. This has led several music stars — ranging from Katy Perry and Bootsy Collins to Barry Manilow — to support campaigners for a reform of the DMCA.

But with DMCA reform not likely to happen imminently, the three big music companies want better terms from YouTube.

One option that they have floated is to hold new tracks off the site for a period of six weeks to compel the keenest fans to either buy them as a download or take out a paid subscription. Such “windowing” of content is commonplace in Hollywood, says Prof Taplin. “The movie business has worked this way for years . . . it would make a big difference in music.”

Any tightening of the free music available on YouTube could also give the labels leverage in another contentious debate: how much of their music is offered free on Spotify, to attract users who might later be converted into paying subscribers. Most of the Swedish group’s near 100m active users listen for free, with roughly 30m paying. The labels — and the likes of singer Taylor Swift — want to increase this number and limit the free service but Spotify has, so far, resisted.

A person close to Spotify says it might reassess this policy, but only if there was less free new music available on YouTube.

While the labels prepare for a fight, YouTube remains convinced its model can work for everybody. Plenty of people disagree — particularly with the idea that it does not affect the number of people prepared to pay for music. “You can look for any music that you are interested in and find it on YouTube — that has to harm the paid services,” says James McQuivey, analyst with Forrester Research. “There’s never been a commodity in the world where giving it away for free didn’t affect people’s willingness to pay.”

Sound strategy: Vevo plans paid music streaming

With Spotify and Apple Music battling it out for supremacy in subscription streaming, is there space for Vevo to establish itself as a player? The music video business — which is majority-owned by the world’s two largest music companies, Universal Music Group and Sony Music — is working on a paid service, with the aim of launching it by the end of this year.

Vevo does not have the rights to Warner Music content, which means it will probably have to bring the label on board or come to a licensing agreement before launch.

Still, Erik Huggers, the former BBC and Intel manager who was hired as chief executive last year, is keen to launch a subscription offering that would have an emphasis on original video content, using documentaries and other programmes to supplement its music videos.

With Spotify, Apple Music and Facebook keen to carry more music-related video content, and YouTube recently launching paid service Red, a Vevo launch comes at a competitive time for the streaming industry.