Indies vs YouTube

By Yasmin Naghavi

In the latest David v Goliath story, recent news reports have been furiously circulating about YouTube threatening to block independent music from the behemoth platform. Suffice it to say, spectators have been left wondering – what’s behind the beef between YouTube and the independent music sector?

Past (Somebody That I Used To Know)

Basically, the YouTube model operates similarly to a traditional TV platform; the viewer can watch content for free as consideration for being subjected to advertisements. Google generates income from such advertisements and so can afford to keep offering the service to users for free. But the only way to understand what’s going on now and to predict what might happen moving forward (even at a macro level), is to consider how YouTube has operated historically.

When YouTube first launched, rights were not cleared with rights holders and no-one was being paid a revenue share. When I say “rights” and “content” I’m referring separately and collectively to: (i) the composition, (ii) the sound recording, and (iii) the visual content (synchronised with the composition and sound recording). It was only much later when YouTube began to monetise content that licence deals were entered into with content owners. Until then, YouTube flaunted rightful copyright ownership and only removed content when they received a Takedown Notice from owners.

Skip forward several years where YouTube is the undisputed No. 1 streaming service and the revenue generated from advertisements is being shared with content owners. The standard revenue share YouTube “Partners” have traditionally received is approximately 55% of “Ad Revenues” from ads provided by Google or an approved third party, and displayed or streamed in or on the YouTube content a.k.a. AdSense. In the case of music, that 55% is divvied up between the owners of the composition (usually publishers, around 10%) and the owners of the sound recording and visual content (usually labels, around 45%).

Content owners are finally seeing dollars trickle in, and with the shrinking physical music market, such income becomes another vital component of the (otherwise diminishing) music industry income pool. Not only that, YouTube figured out how to monetise, and share the revenues from, user generated content (“UGC”) incorporating third party content. At this point, the independent music sector has realised the value of YouTube as a dominant platform and welcome a way for fans to boost exposure and revenue simultaneously. But that doesn’t mean that independents should be subjected to unfair terms.

Present (Rolling In The Deep)

Enter YouTube’s forthcoming music streaming service, rumoured to be called YouTube Music Pass (which for the purposes of this article will be referred to as Music Pass). It is understood that Music Pass will be a streaming service similar to services like Rdio and Spotify – with free (ad supported) and premium (no ads) subscription offerings. In anticipation of the launch of Music Pass, YouTube has sought to expand upon their existing licence deals with music owners (as explained above) to include rights to exploit content via Music Pass. The “majors”, Warner, Universal, and Sony, have all signed respective licence deals. Of course, the terms of such agreements are confidential but are understood to include a minimum wholesale stream rate and sizeable non-refundable advances (which ties into the concept of “digital breakage” – but that’s another story!). Most importantly, however, the YouTube agreements were negotiated with each of the majors.

This hasn’t been the case for the independents. YouTube thought it was fair to unilaterally dictate to independents a new agreement which not only covered YouTube but Music Pass as well. The revenue share being offered for all of YouTube’s services sit around 55%. When you contextualise the rate for Music Pass against comparative streaming services such as Spotify or Rdio (who offer around 70% revenue share), 55% is quite a haircut – one that is seriously undercutting the income generated from legitimate services.

The consequences of accepting these prescribed terms without negotiation include (i) setting a precedent for low rates which would in turn compel competing services to seek similar terms; (ii) damaging existing and future revenue streams; and (iii) giving the dominant player greater power in an emerging market.

In addition, one of the more concerning aspects of the agreement concerns the “most favoured nations” (“MFN”) provision. Whilst MFN clauses are common in the music industry, they are normally intended to provide positive parity in instances where another content owner is offered a more favourable rate. In this case, the provision provides that if a major label agrees to a lower revenue share in their agreement, then the independent label agrees to reduce their respective revenue share to equal the rate agreed by the major label. Hypothetically, the rate could be reduced to 0% without consultation with or agreement by the independent label.

This is completely ignoring the fact that (a) the majors receive non-refundable advances which can offset such a reduced rate, and (b) the independents are not offered an advance at all. This prejudicial clause could be extremely damaging to labels by virtue of the decision made by a nonpartisan third party.

To emphasize the non-negotiable nature of the deal, Google publicly announced that YouTube would start removing YouTube content owned by any partner that does not sign the new agreement. In other words, independents would have to accept licensing their rights for Music Pass (on the terms offered) or be taken down from YouTube as well. It’s pretty much all or nothing.

The consequences of this could mean that the views, comments, and future income attached to content released by independents, such as Adele’s “Rolling In the Deep”, would cease to exist on YouTube. Keep in mind, however, the removal would only be applied to the content connected to the label’s channel. YouTube wouldn’t automatically remove any UGC which happens to include content owned by so-called blocked channel. YouTube also wouldn’t be sharing any income generated from such UGC with the blocked channel. Basically, it would be a return to the YouTube days where content owners would have to issue Takedown Notices to prevent any third party from infringing upon and monetising its content. This is not dissimilar to the power that Amazon have recently asserted against publisher, Hachette, by slowing delivery times, blocking reviews, increasing prices, etc. Arguably this conduct amounts to a misuse of market power.

So here we find ourselves at the real core issue of this matter – the treatment of independents as second class. YouTube, in thinking that little revenue is generated from individual content owners, have offered non-negotiable deal terms less favourable than terms offered by competing streaming services. But collectively, independents represent around 80% of the music released (not to mention more diverse and interesting content than mainstream music). In other words, the volume of content coming from the independent sector outweighs that of the majors. In light of this, it’s a pretty big problem if a streaming service doesn’t see the value of the independent music sector as a whole. But this seems to be what has happened. Accordingly, independents have banded together to collectively negotiate a better position.

Future (Do I Wanna Know?)

Google claim that 90% of labels have signed their deal; but strictly speaking, that doesn’t provide any clarity as to what percentage of content that 90% actually represents. Is there a clear resolution? No. Is there a resolution in sight? Well yes, it’s foreseeable that deals will be finalised in due course by global rights agencies acting on behalf of independents (e.g. Merlin) – but not without further tussle.

Unfortunately small labels are not in a position to dictate terms to companies like Google. The only way independents can achieve any sort of semblance of equality is to use the collective, vocal voice of the independent music industry. Unless they have a collective voice, they don’t have a voice at all. Fortunately, this is the golden age of independent music and the collective voice is loud and clear and is acting in the best interests of the industry.

Yasmin Naghavi is a media lawyer with Media Arts Lawyers. Yasmin represents local and international digital service providers, graphic and motion design companies, developers, musicians, authors, agents/managers, fashion designers, photographers, and tv/radio talent in relation to a broad range of legal issues.

This article was first published by the Arts Law Centre of Australia in art+LAW (August 2014)