As YouTube Bleeds, Royalty Questions Remain

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YouTube is having serious disagreements with the music industry, based on valuations tied to video content.

Unsurprisingly, major label groups (including publishers) want more per stream; Google-owned YouTube wants to pay less.  Perhaps the solution lies somewhere in-between, though for the time being, negotiations have crashed on both sides of the Atlantic.

Part of the problem is that YouTube is actually a serious underperformer when it comes to generating advertising revenue.  Despite massive traffic volumes, sell-through is low, and even when an ad runs, the CPMs are usually modest.

That point was hammered home on Friday by Credit Suisse analyst Spencer Wang.  In a note to investors, Wang predicted that YouTube will end up losing roughly $470 million this year, based largely on advertising issues.  Specifically, Wang estimated that YouTube sells just three-percent of its available inventory, based on demand problems and structural issues like ad unit standardization.  “Despite the growth of YouTube’s user base, there is little evidence to suggest Google has been able to materially monetize this usage,” Wang wrote.

The current economic downturn is worsening the issue, though the profitability issue goes beyond macroeconomics.  Instead of targeted viewers and strong conversions, the YouTube experience is vapid, fleeting, and full of affinity problems.  Instead of a controlled environment, advertisers are confronted by the vagaries of user-generated content, and all of its uncontrolled excess.

Despite these problems, a group of British artists led by Billy Bragg are rattling for better royalty payouts.  “In 2007, the UK’s independent Copyright Tribunal established that a minimum royalty per play was an essential requirement in the licensing of online services,” Bragg, Robin Gibb, and other musicians recently expressed in a letter to the London-based Times.  “Google fails to recognize this and ascribes little value to music — in spite of a huge increase in music usage on YouTube’s UK service.”

Google protests that YouTube is simply losing money on every music stream, and any royalty rate payout must make sense for its bottom line.  But are Bragg and the industry entitled to higher rates from the ultra-profitable Google, simply because the company has the money?  In that light, the Bragg demand sniffs of entitlement, and hints at a broader, misguided industry attitude.

On a broader level, the standoff also represents another chapter in a gut-wrenching revaluation of media assets online – the now-famous analog dollars to digital pennies transition.  Either way, neither party is faring well – YouTube is having difficulty monetizing one of the largest audiences online, and the music industry is worse off because of it.

Paul Resnikoff, Publisher.