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Warner Music and YouTube Not Hearing the Same Tune

record-rights-issue-sm.jpgIf you missed the headlines, Warner Music Group, the first of the Big 4 record labels to partner with YouTube has pulled off the site.  Accounts and press releases differ over culpability – whether YouTube bailed or Warner Music punted – but the material fact is the same.  From Bad Company to the B-52’s, James Blunt to Jane’s Addiction, the videos are down.  The reason is simple: money.

For several months, the two companies have been trying to renegotiate their expired license agreement.   Under the prior terms, its reported that Warner received either a fraction of a cent per video play or a share of any ad revenue generated alongside their content, whichever was greater. 

Neither, it turns out, was great enough. According to the New York Times, in 2008 less than one percent of Warner’s $639m in digital revenues came from YouTube; that despite the fact that music videos are among the most watched content on the site. 

According to Ad Age “Forty-seven of the top 100 most-watched creators on YouTube are musicians or labels.”

In a blog post, Google announced the split saying that “despite our constant efforts, it isn’t always possible to maintain these innovative agreements. Sometimes, if we can’t reach acceptable business terms, we must part ways with successful partners.”

WMG countered that they are still looking for a solution but “until [one is found] we simply cannot accept terms that fail to appropriately and fairly compensate our artists, songwriters, labels and publishers for the value they provide.”

To some extent, the dispute is a case study in the challenges facing the young online video marketplace.

On one side, there is YouTube.  Explosive in audience growth, the site has become the fourth largest website and the second largest search engine in the world.  In November, according to Nielsen, they served 5.56 billion video clips out of about 9.5 billion watched in the US.  That’s equal to nearly sixty percent of the US market. 

On the other side, lie the content owners.  It is on their backs, that YouTube has grown.    These licensors know a distribution platform is no good without desirable content. They want to be recognized and compensated for the contribution.

The trouble is YouTube’s audience growth rate far exceeds its revenue growth. Monetization of online video, especially short form (as opposed to full length television programming or movies) , is still evolving.  You can’t, for example, put a bunch of thirty second ads in a three minute video and keep audience attention.   You have to rely on sponsorships and overlays – newer formats that advertisers are adopting more slowly. (Case in point: reports suggest most of WMG’s revenue from YouTube has been from the per play license fees and not ad revenue). 

By the numbers, there’s a big difference between these structures. Breaking out the situation into simple math for illustration: if music related video clips account for 30% of YouTube video views, at a conservative rate of 5 billion total video views in the U.S. for a month (September, October and November all exceeded 5billion according to Nielsen), the total number of music related videos served to US audiences on YouTube in a year would be about 18 billion streams (e.g./ thirty percent of sixty billion streams). 

Warner Music has 21% of the U.S. music market.  Applying that share to the video audience on YouTube, the rough estimate of Warner Music clips served on YouTube in a year would be 3.78 billion.

If the New York Times numbers are correct on WMG’s digital earnings from YouTube, then, by these rough numbers they’re drawing between a tenth and two tenths of a cent per song stream.  A tiny sum.

If YouTube were more effectively monetizing the videos with ads, the numbers would be vastly different. if each view were monetized with the metrics of traditional advertising, for example,  at a CPM of just $8 (an amount very low by any video ad standard, and well below what Google’s rate structure for video overlay ads),  the video’s would be drawing just over $30 million a year in ad revenue if fully sold (e.g. assuming all videos are paired with ads).  At a CPM of 20, they’d be pulling in a gross of over $75m.   (For comparison, broken out per view instead of CPM, that’s close to two cents per video view instead of the two tenths of a cent estimated paid presently in the per-play fee structure. )

At that same CPM of $20, adjusted to recognize ad inventory sold for only half the music videos, they’d still be grossing more than $37m.  If WMG took fifty percent of that, it would be more than triple their current YouTube revenue. 

These are back of the napkin, rough calculations….but its clear that there’s a sizable difference between the current license fee doled out per song and the kind of earnings possible if better monetization occurs.

YouTube takes a long view. They’re emphasizing growth now and expecting to see value returning on their investment in the future.  

Content owners, have a shorter time horizon.  Passive marketing benefits, the indirect rewards  they reap in audience exposure, don’t impact their bottom line. Moreover, they don’t want to watch YouTube continue to grow, especially given the site gains more and more negotiating leverage along the way, without receiving compensation for what they contribute.  Content owners want to be paid for the growth they’re helping to fuel- or at least have the contractual assurances of compensation. 

But how do you value a business model that’s just beginning to appear? The CPM numbers for an market that’s not mature? Per song play fees? A better hybrid than exists now? a minimum payment? something else? There are a lot of options.

An equity stake would be a possible solution, something that would align the incentives of both sides.  In fact, that was part of the early structure. Warner Music had a stake in YouTube before Google acquired the company.  Now, however, that stake apparently forgotten, the present contribution of a few million dollars a year isn’t enough.

Negotiating, the two sides have to find a way to meet in the middle – a way to reconcile what appear to be different approaches and needs. The have common ground in the fact that they both need each other. Content needs distribution and distribution needs content. Beyond that though, there’s a lot of differences.

So the talks continue. 

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