Music Companies Grab a Share of the YouTube Sale
By ANDREW ROSS SORKIN and JEFF LEEDS
YouTubes young founders may have been the biggest beneficiaries of
last weeks $1.65 billion deal with Google, but they have some
unexpected bedfellows old-line media companies that had been
considered YouTubes biggest legal threat.
Three of the four major music companies Vivendis Universal Music
Group, Sony and Bertelsmanns jointly owned Sony BMG Music
Entertainment, and the Warner Music Group each quietly negotiated to
take small stakes in YouTube as part of video- and music-licensing
deals they struck shortly before the sale, people involved in the
talks said yesterday. The music companies collectively stand to
receive as much as $50 million from these arrangements, these people
said.
Because a significant portion of the videos posted to YouTube contain
copyrighted songs or video material, the Web site had been considered
a litigation land mine. Last month, Doug Morris, the chief executive
of the Universal Music, called YouTube and MySpace copyright
infringers and said the sites owe us tens of millions of dollars.
Just this week, Universal filed suits against Bolt and Grouper, two
smaller video-sharing sites, for allowing users to post hundreds of
pirated music videos of its artists, including Mariah Carey, 50 Cent
and the Black Eyed Peas.
The deals that the music companies struck for stakes in YouTube should
help to shield Google from copyright-infringement lawsuits, an issue
that concerned some Google investors when the YouTube deal was first
announced. Still, other copyright holders, including the Hollywood and
television studios, could pursue legal action if their content appears
on YouTube.
The decision to take a stake in YouTube is a sharp departure from the
tack that record companies took regarding Napster, the pioneering
file-swapping service that transformed the industry in 1999. Back
then, after the major companies filed suits against Napster, the two
sides discussed various settlements that involved the music companies
receiving a big equity stake.
The Napster talks, which were led on the industry side by Edgar
Bronfman Jr., then the chief of Universals then-parent Seagram
eventually broke down.
The record companies went on to win a series of legal victories that
ultimately forced Napster to shut its site, but the labels have been
fighting an uphill battle against free peer-to-peer services ever
since. The music industry has also filed thousands of lawsuits against
individuals, hoping the threat of civil fines will reduce unauthorized
sharing of songs.
But the failure to end digital piracy and the continuing slump in CD
sales has slowly pressured record executives to rethink their approach
to Internet distribution.
These days, music marketers are eagerly pursuing fans by advertising
on independent music blogs and on vast online social networks like
MySpace. (Universals Interscope unit even struck a deal to distribute
a label created by MySpace.)
Lately, the music companies have begun trying to wring more revenue
from their music videos. Instead of offering music videos at a nominal
fee as a way to promote CD sales, the companies have struck deals with
services like Yahoo to share in revenue from advertisements that run
in front of the music clips.
Indeed, the companies deals with YouTube call for them to share
revenue from ads that will run alongside their music videos. As part
of the deal, YouTube will use new technology to identify copyrighted
material that users have uploaded to the site without permission.
It was Mr. Bronfman, now chief executive of Warner Music, who struck
the first deal with YouTube. Universal and Sony BMG followed suit.
Details of the stakes that the music companies received as part of
those revenue-sharing and content-licensing deals could not be learned
last night. Of the four major record companies, only EMI did not
strike a deal with YouTube.
Spokesmen for YouTube, Google, Universal, Sony BMG and Warner all
declined to comment. EMI did not return a telephone message left late
last night.
Other old-line media companies, including CBS and NBC, which also
negotiated content licensing deals with YouTube before its sale to
Google, did not receive stakes in YouTube, these people said.
The deal with the music companies could result in other content
companies seeing similar arrangements as a requirement before agreeing
to similar pacts with YouTube.
YouTubes deals with Universal and Sony BMG came hours before it
announced its deal with Google.
Indeed, people involved in the discussions said that the music
companies rushed to complete the deal ahead of the YouTube deal, in
part so that it could benefit in the jump in YouTubes value.
Record companies have benefited from investments in online companies
before. In 1999, EMI made $40 million literally overnight by selling
part of its stake in Musicmaker.com during its first trading day. That
sum dwarfed the companys earnings from American CD sales for the
entire first half of that year.
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