Viva Vevo: UMG, Google seal online video deal

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Universal Music Group and Google finalized a long-awaited deal to create a music video service called Vevo, expected to launch before year's end.

Vevo is designed as a central repository for all UMG video content initially — music videos, interviews, concert footage, etc. — eventually to include that of the other major labels and independents.

YouTube will provide the technology behind it and be the first streaming-video service to syndicate its content. As UMG's existing licensing deals with other services including Yahoo, MTV and AOL expire, they also will syndicate their content from Vevo.

Many details remain unclear — such as whether Vevo will have better-quality video than YouTube or exactly how other labels will share in the business arrangement — but Google chairman and CEO Eric Schmidt said on a conference call Thursday that he believes the Vevo service will solve YouTube's recent spate of music-licensing disputes.

"I'm quite convinced that we are dependent on the success of a growing and profitable music industry," he said. "We need the economics to work so that great content — in this case, music — becomes available. We've been previously struggling as to how to come up with this."

In December, a licensing dispute with Warner Music Group caused the service to either remove or mute any videos that contained music by the label's artists. In the past month, YouTube stopped hosting music videos of any kind in the U.K. and Germany after balking at licensing fees sought by the PRS For Music and GEMA, respectively.

At the heart of these disputes is money, and YouTube has underperformed. The company estimates it is selling ads against about 9% of videos on the site, up from 6% last year, but CreditSuisse analyst Spencer Wang estimated in a recent research note that it would lose $470 million this year even while revenue increased 20% to $240 million.

While YouTube might be responsible for 80% of UMG's online video streams and contributes "tens of millions" in revenue, the label feels that YouTube, and the online video space in general, is leaving money on the table. Rio Caraeff, executive vp of the label's eLabs division, said this year that advertisers pay an average of only $3-$8 for every thousand views that their ads receive. While that has resulted in "tens of millions" in revenue, UMG and other labels would like an ad rate on par with the CPMs that TV and movies command online — upward of $25-$40.

The idea behind the Vevo plan is to create a scarcity of advertising inventory for the purpose of driving up rates. To date, labels licensed their music videos to multiple online services, such as YouTube, Yahoo, MTV and others, in return for a cut of the advertising revenue sold around those videos. With all these services competing for many of the same advertisers, simple supply and demand drove down advertising rates even as views rose. The hope is that Vevo will command these rates by creating a single point of negotiation for advertisers who wish to buy space on music videos. Vevo and YouTube will host the videos, and both companies will split the profits from the ads they sell around them.

"The ads are served in either places or both places, the content is served in either places or both places, and there's a common backend that makes sure all the revenue gets split up the right way," Schmidt said.

The Google CEO credits UMG chairman and CEO Doug Morris for conceiving of the Vevo idea. Negotiations began last year when Morris, at the recommendation of U2's Bono, reached out to Schmidt to rethink how advertising and sponsorship models worked for music online.

"We've gone from $74 million loss in producing videos for promotion to last year we probably had a $70 (million)-$80 million profit," he said during Thursday's conference call with Schmidt. "So this is the next step in taking a video to the next level of monetizing it."

Morris also is tasked with bringing the other major and independent labels on board so that Vevo is not just a UMG service, a process Morris said is ongoing and progressing well.

"We will eliminate the middleman in our transactions for the first time with this service," Morris said. "The record business has always had a store in the middle. This will put us in direct contact with all of our consumers. We look at it as a groundbreaking thing, and I think it's going to change everything between music and the Internet."

Antony Bruno is a contributor to Billboard.
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