THEIRTube: Why Indie Labels Shouldn’t Be Surprised By YouTube

by Keith Nelson, Jr.

“I am concerned with YouTube entering the market because for YouTube everything is about dominance. And dominance is connected to destruction. That’s what I am concerned about, that it’s more about market dominance,” –Horst Weidenmueller, head of indie label !K7 at 2014 Midem conference in Feb 2014

On June 17^th, 2014 YouTube’s head of content and business operations, Robert Kyncl, stated that the company would be removing videos from artists on record labels that did not sign up for YouTube’s impending subscription streaming service. Being that Google already acquired rights agreements from the major record labels (Sony, Universal Warner), that leaves a vast majority of independent record labels on the brink of having millions of views (and thusly revenue) removed with their videos, due to their disagreement over YouTube’s royalty package. YouTube is offering major labels higher royalty percentages, more influence on future royalty agreements for all labels (indies included) and does not guarantee that all of the video content will be monetized according to a copy of a standard indie contract with the new music service.

Why would YouTube proceed with starting a music service that stands to alienate the largest market in the music industry? According to Kyncl, “it’s our responsibility to our users and the industry to launch the enhanced music experience.” YouTube has and will always be based on fan engagement simply due to the inherent nature of its business model: users sharing content in an online community. However, the vast majority of YouTube’s nine-year existence has been dedicated to a methodical shift from being based solely on the cultivation users and its community to being based on the monetization of its users and its community. 

YouTube Stopped Being YouTube Years Ago

Google purchased YouTube back in 2006, a year after the video-hosting site’s inception, and four years later YouTube made its first profit. In between those four years Google made concerted efforts to change YouTube from a user-generated content based company to one which profited off of user aggregation of video content, legal or not. While there isn’t a definable moment when YouTube’s fundamental shift occurred, November 22^nd, 2008 That was the date of YouTube Live, YouTube’s first “celebration of YouTube talent” according to the event’s producer Salli Fratini. YouTube Live was not only YouTube’s first large-scale showcase of the internet stars that made the company famous but also an experiment in testing the monetary value of their homegrown stars, as it was YouTube’s most expensive production to date headed by its first ever director of marketing Chris Di Cesare.

The event was a failure, as it was planned to be an annual event, but the 2008 event was the only iteration of the show. Also, very few videos of the event can be viewed online even though YouTube partnered with digital video recorder company Flip Video to give free Flip Video Minis to YouTube Live audience members to capture the event. Google may or may not have anticipated its demise but ten days before the event, Google began placing advertisements in YouTube search results. Two years later, YouTube began monetizing user-uploaded videos which contained copyrighted material by identifying those videos, placing appropriate advertisements and shared 55% of the ad revenue with the rights holders of the copyrighted material. Later that year YouTube made its first revenue profit and its co-founder Chad Hurley was replaced as CEO by Google’s senior executive Salar Kamangar, the man who created Google’s AdWords.

The very next year after Google successfully transformed YouTube into its new advertisement cash cow, the company started an 18-month, $200 million endeavor to provide TV-quality channels and videos from established brands such as WWE, Jay Z, Mariah Carey and Ashton Kutcher. Two years later, Google began charging subscription fees for premium YouTube channels and, not surprisingly, content providers that generated billions of views complained about YouTube’s “low [revenue-sharing] numbers and lack of marketing infrastructure.”

Essentially, instead of cracking down harder on pirated content from its user, YouTube transformed their audience into unpaid miners of commercially viable products. YouTube users are now Uber drivers allowed to travel the information superhighway in cars they never purchased, undeterred, and share free rides as long as Google can place ads on their radio.

YouTube’s Playing Monopoly While Everyone Else Is Playing Checkers

“We think it is wrong for YouTube/Google to threaten to ostracize certain independents – denying fans the opportunity to hear their music, and labels and artists the chance to earn a living from it – because they are unwilling to surrender to a take it or leave it ultimatum” -Geoff Taylor, chief executive of the BPI

The music, television and movie industries have suffered significantly since the advent of peer-to-peer and torrent sites which allow for illegal file sharing, but none more than the music industry. The solution was thought to be a centralized music store (iTunes) placed in a territory most of the music consumption was taking place (online) in a legalized music consumption model the fans were becoming used to (digital download). However, from 1999 to 2009 alone, music sales decreased by over $8 billion with the RIAA reporting declines in nine of the past ten years.

Within the last five years a new answer was proposed: subscription music streaming services with services such as Spotify, Pandora, and Rdio leading the charge. On March 12^th, 2012 Billboard incepted the On-Demand Chart, which tracked streaming service data and used that to help determine artist and song placement on their Hot 100 chart. A year later, they added YouTube views to the formula and eight months later, Jay Z, Eminem, and Drake had accomplished the feat of having 10 songs chart on Billboard concurrently due to the change. In a statement obtained exclusively by Soundctrl, Billboard’s Director of Charts Silvio Pietroluongo explained that not even the sales charting company itself knows the ramifications YouTube’s exclusion of indie labels would have on its charts:

YouTube’s changes are still speculative at this time. Billboard can not assess the impact on the charts until any changes are activated.

While Billboard may not be able to assess the damages, as they have not been incurred, it’s almost translucent how clear YouTube’s future negotiation tactics will be and the shift that may happen given its ad-centric business model. One of the controversial provisions of the YouTube music streaming service contract is the premium tier, which is based in YouTube’s ad-supported service. In this tier, YouTube will only pay rights holders for videos with ads placed against them instead of every piece of copyrighted content because advertisements on every video would drive away viewers, according to a YouTube source speaking anonymously with Billboard. Accepting these terms would set a precedent throughout the music industry for other streaming services to follow suit.

YouTube Could Die

Weeks before YouTube’s grave ultimatum to indie labels became public, IMPALA, the European independent music association, started a campaign to have the European Commission provide regulatory action against YouTube’s apparent attempt to disrupt “real competition and diversity in the digital music market,” according to the association’s joint statement with Worldwide Independent Association (WIN). This will not bode well for Google given the current climate. Since 2012, both Apple and Amazon have been hit with anti-trust accusations over pricing and distribution tactics on eBooks and its publishers. Amazon specifically has been accused of using its immense eBook market share to abandon its core philosophy of customer satisfaction by delaying, overpricing and under promoting books from publisher Hachette in order for the publisher to agree to its payment terms. Sounds familiar?

YouTube understands that the subscription services is the most profitable way to monetize their fans’ engagement in an industry that has shown dangerous fluctuations in revenue over the last 15 years. Google tried their hand at streaming music subscription with Google Play Music All-Access in 2013, however sign-up rates have been low and Google Play Music’s product manager Paul Joyce admitted that less than 20% of its subscription users continues to buy music. But, look at this from Google and YouTube’s perspective. Last year, 79% of all artist revenue from subscription services went to the 1% of artists deemed “superstar artists”. YouTube is simply following the money for THEIRtube.

Keep in touch with Keith Nelson Jr. on Twitter @jusaire.

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