Behind the YouTube-Warner divorce

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YouTube and Warner Music Group are getting a divorce in a split which illustrates some of the difficult issues facing the recording industry in the digital era.

As album sales decline and online piracy bites into their profits, major record labels have been forging new arrangements such as deals with MySpace, Apple’s iTunes and Google’s YouTube to generate new revenue streams.

But YouTube and Warner, home to Eric Clapton, Kid Rock, Madonna, the Red Hot Chili Peppers, Green Day and other music royalty, said over the weekend that they were ending their two-year partnership.

In a statement announcing the breakup, YouTube noted that “music licensing is very complicated.”

“We work with the music industry worldwide — with major and independent labels and publishers, rights collecting societies, and with artists and songwriters directly — to build user-friendly licensing arrangements,” it said.

“That said, despite our constant efforts, it isn’t always possible to maintain these innovative agreements,” YouTube said. “Sometimes, if we can’t reach acceptable business terms, we must part ways with successful partners.”

Warner for its part said it is “working actively to find a resolution with YouTube that would enable the return of our artists’ content to the site.

“Until then, we simply cannot accept terms that fail to appropriately and fairly compensate recording artists, songwriters, labels and publishers for the value they provide,” it added in a statement.

A number of music videos by Warner artists were still available on YouTube on Tuesday but some requests were being met with a black screen and the phrase “We’re sorry, this video is no longer available.”

All four major record labels — Warner, Universal Music Group, Sony BMG and EMI — have licensing agreements with YouTube but they have met with starkly different degrees of satisfaction.

While Warner and YouTube were failing to reach agreement in last-ditch talks last week, a Universal executive was quoted as saying that YouTube was bringing in “tens of millions of dollars” to the company.

Rio Caraeff, the head of Universal’s digital group, told the Internet news agency CNET.com that YouTube was “growing tremendously” as a revenue stream.

“It’s up almost 80% for us year-over-year in the U.S. in terms of our revenue from this category,” he said. “Since 2005, Universal has gone from making zero dollars on music videos to nearly $100 million.”

CNET quoted a music industry source close to the label as saying the figure includes video-streaming money from other partners such as imeem, MTV and MySpace Music but most of the revenue comes from YouTube.

The music labels’ agreements with YouTube reportedly call for them to split advertising revenue on videos posted on the site, which Internet search king Google bought for $1.65 billion in October 2006.

The record labels also receive a small fee for each video watched on YouTube — an arrangement which may actually be costing the video-sharing site money as not all videos are ad-supported.

Music channels are among the most popular on YouTube and videos on Universal’s YouTube channel have received more than three billion views.

Warner’s channel has received considerably fewer views — 250 million.

Analyst Rob Enderle of Silicon Valley’s Enderle Group said it was in the interest of both YouTube and Warner to reach a new licensing agreement.

“Look at this like a negotiating ploy,” he said. “It’s how to get the other side back to the table.

“Warner’s not going to be making any money while they’re off the site,” he said. “And YouTube not having the properties means that people are going to be going someplace else for them. Both sides are motivated to find some middle ground,” he said.

Enderle also noted that the YouTube-Warner spat coincides with Google’s efforts to turn YouTube’s massive popularity into a money-making venture.

“They’ve been trying to monetize YouTube pretty aggressively,” he said. “And the different labels just want to make sure they’re getting their fair share.”