The removal of Warner Music Group's videos from YouTube over the weekend highlights the growing tension between music labels and websites over what is becoming an important source of revenue for the beleaguered recorded-music industry: advertising and licensing fees from music videos, the foundation that built MTV but which has now largely migrated to the Internet.
The impasse comes at a time when all four major labels -- Warner, Universal Music Group, Sony BMG Music Entertainment and EMI Music -- are renegotiating their licensing deals with YouTube, the largest video site.
YouTube and social networks such as Last.FM pay for the rights to stream music videos. Typical licensing agreements pay either a minimum fee based on the number of times a video is viewed or, if the sum is greater, a share of the ad revenue, helping to make music videos a small but fast-growing source of revenue for the labels. One label executive estimates that music videos will generate about $300 million for the industry this year.
Record labels are eager to explore ancillary revenue to help offset free-falling CD sales. This year's album sales are down 45% from 2000, according to Nielsen SoundScan. A recent Forrester Research report projects that disc sales will continue to decline by an annual rate of about 9% over the next five years, as retailers reduce the shelf space allotted to CDs and music fans shift their purchases online.
As a result, music executives are increasingly pressing for what the industry calls 360 deals, in which the labels grab a share of revenue once reserved for the artist, such as concert ticket sales and proceeds from the sale of T-shirts and other merchandise.
"The idea of getting as many revenue streams [as possible], licensing as broadly as possible, and making those digital pennies add up to dimes and hopefully add up to dollars is clearly the game everybody's playing right now," said David Card, research director at Forrester.
Music videos are just one of myriad ways in which the music companies slice and dice a music single, from 99-cent downloads on iTunes to mobile-phone ring tones.
"Video is not the largest category, but it's a significant category, to the tune of 5% or 10% of the total," said Thomas Hesse, president of global digital business for Sony BMG Music Entertainment. "It's a significant and growing number."
No one considered music videos to be anything other than telegenic billboards when MTV launched its 24-hour-a-day music channel in 1981. Those were the days when labels spent lavishly on cinematic-quality productions such as Michael Jackson's 14-minute "Thriller" music video, directed by Hollywood filmmaker John Landis, which cost $1 million.
"The irony is, back in the day when the production budgets were more in the seven-figure-plus range, we weren't monetizing them at all," said Jeff Dodes, senior vice president of marketing and digital media for Zomba Label Group, whose artists include such pop acts as Jordan Sparks, Justin Timberlake and Pink. "It was a time when the media landscape wasn't as fractured as it is now."
Those days -- like MTV's dominance as the one place to watch music videos -- are a memory.
The major labels quickly recognized the business potential of the polished, short-form content, which Internet users consumed like digital candy. Music videos allowed sites to build an audience, and Universal Music was among the first to enter into licensing arrangements with America Online, Yahoo Music and Microsoft Corp.'s MSN to request payment for the videos offered free to Internet users.
YouTube's launch, in December 2005, remade the digital video landscape. The site grew quickly in the U.S. and now attracts 100 million monthly visitors, thanks to quirky homemade videos and the mini-celebrities who emerged. Universal Music's own research shows that YouTube is the leading source of music discovery for teens, who increasingly turn to their computer screens, instead of radio and television, to find new tracks.
Universal Music, the world's largest label, expects revenue from online streaming of music videos to approach $100 million this year -- up from zero in 2004. Though that amount doesn't reach the level of consumer spending on song downloads, cellphone ring tones or CD sales, executives nonetheless anticipate that the advertising revenue that flows from the music videos will increase. Revenue for the label from videos is up 80% from last year.
"It's definitely on a significant growth trajectory," said Rio Caraeff, executive vice president of Universal Music's ELaboratory, a division responsible for the label's new technology business initiatives. "As Madison Avenue and advertisers in general learn to start embracing video advertising as a viable medium, there is no content that's more popular on the Internet, more well suited, than music videos as the ultimate snack-size programming."
Brands such as Coogi, a clothing maker, are so eager to be associated with music videos that paid product placement underwrote the entire $1-million production cost for the Universal Motown music video of Akon's "I'm So Paid." In the opening of the video, a helicopter deposits the urban artist on the deck of a 40-foot yacht, where he disembarks and saunters past two Coogi bikini-clad women perched on the edge of a hot tub.
Paid product placements are "the smarter way to do it," said Aliaune Thiam, who performs under the stage name Akon.
The popularity of the music video as its own form of entertainment has emboldened the labels to restructure deals and demand bigger payments from their digital distributors -- setting the stage for the stand-off between YouTube and Warner Music, the third-largest label and home to such acts as Madonna, rapper T.I., Red Hot Chili Peppers and Linkin Park.
"We want to offer the most complete array of music possible, but we need to do that in a way that makes economic sense," said Chris Maxcy, YouTube's director of content partnerships. "Some labels are clinging to a model that makes no sense economically. We'll be sad to see that content go, if it gets to the point where we can't agree on terms."
The licensing issue is so sensitive that some smaller social music networks, such as iMeem and iLike, declined to discuss it for this story.
At least one of the major labels is seeking a mandatory minimum licensing fee of $20,000 a month, said Ted Cohen, an industry veteran who now heads digital consulting firm TAG Strategic. Though it's understandable that music companies are looking for alternative revenue streams, he said, such sizable payments threaten to drain budding ventures of the cash they need to remain in business.
"We need to come up with sustainable models," Cohen said. "What's happening is [that the labels are saying], 'Give us a bunch of money; we don't care if you're around in six months.' "