A spat between Universal Music Group and Web sites that feature music videos is getting uglier. Universal is up in arms over what it says is the illegal appearance of its artists' videos on various sites. The music publisher has made its dismay known in discussions with online video giant YouTube.com and social network MySpace, a property of News Corp. (NWS). But while MySpace may be willing to play along, talks with YouTube have stalled, according to a person familiar with the matter. Universal is weighing a copyright infringement lawsuit against YouTube before the end of September, the person tells BusinessWeek.com.
For months, Universal has been asking YouTube and MySpace to take down unauthorized copies of videos, and the sites have complied. Now, the music label is pressing the companies to develop policies aimed at keeping such videos from appearing in the first place. It also wants compensation—a licensing deal akin to its long-standing agreements with Yahoo! (YHOO), Time Warner's AOL (TWX), and Microsoft's MSN (MSFT), which provide Universal with pay-per-play compensation or ad-revenue sharing for the content's use, according to the source. MySpace and YouTube declined to comment.
Universal also declined to comment, but Universal Chief Executive Doug Morris has publicly made his views on the matter clear. "What doesn't work for us are companies trying to build businesses using our content without our getting a fair share," Morris said at a recent investor conference, according to a press report.
NAPSTER REDUX? Other labels (WMG) are also said to be in discussions with YouTube and MySpace over how to handle the dissemination of music videos through social networks and similar sites. In fact, on Sept. 18, Warner Music announced that it has reached a licensing deal to offer its videos through YouTube.
Should the rest of the music industry gang up, YouTube and its ilk could be up against a lengthy, legal battle akin to the tussles over file sharing that hobbled Napster and Grokster. Napster (NAPS) was forced to revamp its business to offer only legal music downloads (see BusinessWeek.com, 5/02/06, "Napster: New Tune, Same Chorus?"). Grokster was forced to shut down after the U.S. Supreme Court ruled that trading copyrighted video and music files online without authorization from copyright holders is illegal (see BusinessWeek.com, 6/28/05, "A Supreme Slap at Grokster & Co.").
Despite the Grokster case, copyright laws surrounding these Web sites' use of unauthorized content are still murky. As long as the sites take the videos down when requested, they may not be in violation of any laws, says Quinn Heraty, a lawyer at Heraty Law in New York, which specializes in entertainment and music issues and works with indie labels and artists. In the spring, YouTube rolled out tools to identify copyrighted videos (see BusinessWeek.com, 4/03/06, "YouTube CTO Outlines Copy Protection Tools"). Also with copyright protection in mind, YouTube prohibits the posting of videos that are more than 10 minutes long.
"DINOSAUR" LABELS? What's more, studios typically release music videos to MTV for free and use them as promotional tools designed to rev up CD and download sales, Heraty says. So arguably, by getting exposure on YouTube.com and MySpace.com, the studios actually benefit through extra music sales and exposure to millions of young consumers—an exposure that's ever-growing. In August, YouTube's traffic rose 19%, to 19.1 million unique visitors, from July, according to comScore Media Metrix. And MySpace.com is the sixth-largest site on the Web, according to tracker Alexa. "This is just another example of major labels trying to alienate their customer base and cut [YouTube and MySpace, which have millions of users] off as their distribution channels," Heraty says. "They are dinosaurs having trouble adapting to new technology."
But some traditional media outlets have seen the writing on the Web's wall. In June, NBC Universal announced a strategic relationship with YouTube whereby NBC offers video clips promoting its fall lineup through a special NBC channel on YouTube.com. The two sides haven't always been so chummy. Earlier this year, YouTube users posted a skit called "Lazy Sunday: Chronicles of Narnia" from Saturday Night Live, and the clip became an overnight sensation. In February, NBC asked YouTube to pull the video down, and YouTube complied. However, after the clip showed up on YouTube, Saturday Night Live's ratings ballooned, says Gerry Kaufhold, an analyst with consultancy In-Stat. In the end, NBC decided to make even more programming available to the site.
Or consider Fox Entertainment Group, which, just like MySpace, is a property of News Corp. In May, the outfit made four episodes of shows like 24 available for free on MySpace.com. The social networking site's users can buy past seasons of 24 for $1.99 an episode through MySpace.com as well. In fact, to drum up television viewers, MySpace.com created a special social network for Fox where 24 fans can meet and chat about the show.
WAITING FOR A BUYOUT. Some of the music labels battling YouTube and MySpace could opt for a similar partnership, as Warner Music has just done. In August, Warner Music teamed up with YouTube to promote Paris Hilton's album, Paris. Hilton actually recorded an original broadcast for her YouTube.com fans. Hilton's songs have certainly been moving up the charts—though it's unclear how much of that success can be attributed to the YouTube exposure. Alternatively, some music labels might be clamoring for a part-ownership of YouTube, which, according to back-of-the-envelope estimates by New York venture capitalist Fred Wilson, could generate in excess of $440 million a year in ad revenue.
That said, even a threat of a lawsuit isn't good news for YouTube.com, which is still losing money and still trying to rev up advertising revenue. For months, Wall Street has expected a large media conglomerate to take YouTube.com under its wing, following on News Corp.'s acquisition of MySpace.com in July, 2005. Now, with the threat of legal action in the mix, "it would be silly for anyone to buy YouTube," says Kaufhold. Few would-be acquirers want to risk getting sued.