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YouTube Saga Mirrors iTunes Negotiations

Editor's Note: Since this story was posted, Apple announced that it is introducing a tiered pricing plan and getting rid of DRM on all songs in the iTunes Music Store. See full article here.

With music industry business models in disarray, from the free-fall of CD sales to the potentially revenue-generating lawsuits of the Recording Industry Association of America, music labels have repeatedly turned to digital distribution.

That music is moving even further toward digital distribution and the web is no big story: all the major record labels (and the vast majority of the independent labels) have deals with Apple for music to be sold on the iTunes Music Store. The tactics for extracting a better contract, however, appear to be news again, this time on the combined front of music and video, with Warner Music removing its videos from YouTube in late December.

The major labels, for purposes of this article, are EMI, Sony Music (BMG is part of Sony), Universal Music Group, and Warner Music Group. The majors feel they've been burned multiple times when it comes to ownership of the distribution ecosystem. From as far back as the 1920s, when radio was allowed to play music content in a promotional model, and up through the advent of MTV and on into the iTunes era, the labels and their parent companies have looked for ways to share in the revenues beyond just the wholesale cost of their product. It's somewhat equivalent to Ford or GM making money for every mile you drive or every tank of gas you purchase.

Once the major labels figured out the size of the legitimate paying audience for iTunes digital files—more than 5 billion songs have been sold on iTunes between mid 2003 and mid 2008—they began negotiating via a four-pronged strategy: threaten to withhold their music from iTunes, stonewall against DRM-free music on iTunes while offering DRM-free music elsewhere, argue to raise the price of tracks for additional profit, and threaten to create an alternative service. They also stepped up lawsuits against consumers who they claimed illegally downloaded music, but backed off that strategy as discussed in an article last week.

What’s Past is Prologue
So what does this rehashing of the iTunes-major label dispute have to do with more recent news about some of the label's threats against YouTube? Like iTunes, YouTube has grown to become a dominant force in its market, including user-generated content that uses popular as well as actual music videos. Over the past three years, according to comSore, YouTube has become the largest online video site.

In October, YouTube apparently had more than 100 million U.S. viewers, so a comparison between iTunes and the current YouTube situation is warranted. Let's do a quick comparison on the four prongs of the music labels' strategy:

Threaten to withhold their music
In the case of iTunes, this was done as part of a two-pronged sub strategy, as the labels wanted to sell albums instead of singles and were—some would argue, rightfully—concerned about a single digital distribution system. With iTunes accounting for almost 70% of total legitimate music downloads, and consumer preference showing a desire to buy singles instead of whole albums, the labels early on felt they needed to negotiate with a strong hand against the upstart iTunes distribution process.

The threats to withhold music have been ongoing, but so far no label has pulled its content. On the video front, NBC did choose to pull its content in 2007 but brought it back within months, although the reasoning is nebulous and both Apple and NBC claim they were the victor in the dispute.

The YouTube saga reflects iTunes, with Warner negotiating a deal in 2007 and then, late in 2008, yanking its content, including any video—user-generated or otherwise—that uses Warner music. The Warner decision to yank its music from YouTube occurred after a failed attempt to renegotiate another deal, which we'll touch on a bit more when we look at pricing.

DRM-free content
Consumer demand for DRM-free tracks, such as MP3 or AAC files that could play on multiple portable players, has been strong since before the outset of iTunes and concerns continue. EMI, the privately-owned major label from the United Kingdom whose financial difficulties have been widely publicized, has been on the forefront of releasing DRM-free content. Back in mid-2006, the label released songs from Norah Jones and Relient K for 99 cents on Yahoo's online music service. It followed up this test with a mid-2007 move to iTunes Plus, a DRM-free offering of higher-quality (256Mbps) AAC files.

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