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UMG, Google Partner for Video Service

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

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

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

While 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 -- Google chairman and CEO Eric Schmidt said he believes the Vevo service will solve YouTubes's recent spat 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."

Over the new year, 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 last month, YouTube stopped hosting music videos of any kind in the U.K. and Germany after balking at licensing fees asked for by the PRS For Music and GEMA, respectively.

At the heart of these disputes is money and, to this point, YouTube has underperformed. The company estimates it is selling ads against about 9% of all 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 revenues increased 20% to $240 million.

While YouTube may 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. UMG executive VP of the label's eLabs division Rio Caraeff earlier this year said 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 -- upwards of $25-$40.

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