If you had to choose a relationship status between YouTube and the music industry, the choice would be: "It's Complicated."
Google's video-sharing website is embroiled in a spat with labels Universal, Sony, and Warner. Artists and managers from Katy Perry to Irving Azoff want legal reforms to stop it relying on so-called Safe Harbor provisions. These protect it from liability when users upload copyrighted content to the site. Streaming services Spotify, Soundcloud and Deezer also begrudge YouTube's lower music fees, and argue that all the free music on there makes it harder to turn a profit.
The truth gets lost in the noise. It doesn't help that Google discloses little about what YouTube earns from online ads (the video site's main revenue source), or how much it pays labels. The music bosses don't reveal much either. So a big hat tip to music biz researcher Mark Mulligan, whose new report exposes YouTube economics to the light. Here are a couple of lessons from his findings, one helpful to YouTube, one less so:
Lesson #1: YouTube is no longer a haven for pirated music
As the chart above shows, a mere 2 percent of YouTube music videos are unofficial, meaning they're technically pirated when put up by a fan. Meanwhile three-quarters are posted by labels as part of promotion efforts, or by Vevo, a joint venture between Sony, Universal and Google. Vevo, a YouTube channel, symbolizes the music labels' contradictory approach. They want YouTube to pay more, but instead of withholding stars to wrangle better contract terms, their marketing departments are popping their best stuff up there for free. This makes it hard to swallow industry bleating about copyright reform.
Lesson #2: YouTube has a much sweeter deal than the streamers
Unlike streaming providers, YouTube pays music labels a share of the ad revenue generated each time a video gets played. This means the payment correlates with ad sales, which fluctuate by country and even by season. By contrast, Spotify pays a fixed royalty each time a song is listened to.
This is important because consumption of music on YouTube is exploding, while ad sales aren't keeping up. So YouTube puts way more music onto the Internet than any streaming service, but its fees are far lower. Spotify paid labels 1.6 billion euros ($1.8 billion) last year, nearly all of its revenue, according to Mulligan. Meanwhile, YouTube paid out only $740 million, leading him to conclude that its revenue could be about $7 billion (although Google doesn't give a number).
So YouTube's payment to labels per video watched is dropping, even as usage soars. The rate fell from $0.0020 per video in 2014 to $0.0010 in 2015. Spotify's rate for its free, ad-supported music -- probably the fairest comparison to YouTube -- is $0.0015 per song.
As the last chart shows, if the labels got YouTube to pay similar rates to the streaming companies they'd double the revenue earned from the site. That may be a pipe dream given the negotiating clout of Web giant Google. But the bosses at Universal, Warner and Sony can play hardball too -- especially if they threaten to rein in the promotion freebies that make up most of YouTube's music content. Even if they push their ad revenue share up a fraction, it would be a huge help to an industry where sales have halved since 1999.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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