It was a day of two halves for YouTube. On one side a big press release went out championing a host of impressive new stats – including hitting 1.9 billion logged in users, following an official launch of YouTube Musicthe day before. Meanwhile, on the other side, the European parliament’s legal affairs committee voted in support of Article 13, whichwill overturn some basic premises of the fair use / safe harbour frameworks under which YouTube operates. The question is which half will prove to be most impactful on YouTube’s music strategy.
It’s complicated
If YouTube was to post the status of its relationship with the labels on its Facebook profile it would be ‘It’s complicated’. The whole value gap argument – which posits that YouTube does not pay as much as other streaming services because it does not have to directly license in the way they do – has created a war of words characterised by obfuscation and disinformation on both sides. Its super-recent new premium strategy was almost certainly timed to coincide with this vote and it helps present YouTube as a premium player, doing what the labels want.
But fundamentally, Google and its YouTube subsidiary are all about selling advertising. If you put too many of your most valuable customers behind an ad-free pay wall, advertisers will eventually stop paying as much for ads. Google is not about to kill off a large scale, high-margin business for a small scale, low margin one. In short, Google cannot afford for music subscriptions to be too successful.
The three numbers that matter
The EU vote will likely get pushed to a full parliamentary vote, so the legislative picture is still far from resolved. When determining the outcome, policy makers, YouTube and rights holders should consider three metrics: $0.0020, -51% and 171:
- $0.0020: In the US, where there is a strong video ad market, effective per stream rates for YouTube actually increased by 14% in 2017 to $0.0020. Bet you haven’t heard that spoken about much by rights holders? Globally however, the rate fell for labels but, interestingly, was about flat for rights holders overall (publishers get paid on videos—such as cover versions, so there are more videos they get paid on, labels do not).What it means:YouTube’s US experience shows market economics can reduce the value gap.
- –51%: This was Spotify’s gross margin on ad supported in Q1 2016. By Q1 2018 it had risen to 13%. This was in large part because the labels had cut Spotify better deals on ad supported, which meant that the difference between what YouTube pays and what Spotify pays now is smaller than it was in 2016 when the value gap lobbying was in full effect. What it means: the labels have reduced the value gap!
- 171: This is how many days it took on average for music videos to reach one billion views in 2017. In 2010 it took 1,841. YouTube has become far more effective at turning songs into hits, thus making it more valuable to the music business than ever before. Major record labels are in the business of making superstars, but superstars need massive global audiences to turn them into global brands—much bigger audiences than you get behind a Spotify paywall. The majors need YouTube’s scale to make global successes. What it means: the labels need YouTube as much as it needs them.
Commercial sustainability is the core issue
At the heart of the value gap argument is a fight for control. Rights holders want more control over YouTube to extract better deals and YouTube does not want to cede that control. But there is an argument that YouTube’s greater control enabled it to build a commercial sustainable model. Spotify, which does not have YouTube’s negotiating power, is still not generating a net profit on streaming. On a sliding scale, there are label-defined rates with a non-commercially sustainable business model at one end, while at the other end there is YouTube, which does not pay rights holders what they want, but has a commercially sustainable model. The solution clearly lies somewhere between the two extremes. Moreover, what is crucial, if YouTube is going to remain incentivised to continue to make music videos a success, is that rights payment need to be a share of revenue, not based on a minimum per track fee.
Would YouTube walk away from music?
Spotify is, for now at least, all about music, so it has to make it work. YouTube is not. If music suddenly becomes lower margin for YouTube with fixed per stream costs, then it would be commercially foolish for YouTube to do anything other than push its viewers to other forms of content than music. That 171-day metric didn’t happen on its own. YouTube honed its algorithms to ensure it can make hits faster for the music industry, but it can dial that back in an instant.
There is even a possibility that paying more for music rights could scupper YouTube’s entire business model as other types of rights holders might start demanding better rates too. The crux of the matter is that the current economics suit YouTube but not rights holders. What we have to be careful to avoid is a new paradigm where roles are reversed. As important as music is to YouTube, Google could walk away if it really wanted to. Rights holders—labels especially, need to think whether that is a price they are willing to pay.
Music Industry Blog 
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Mark,
This is some crazy shit. Your upside down defense of the status quo and suggestions that the market is working mistakes market distortion for “market economics.” You celebrate, without mentioning it, that YouTube/Google was able to drive the perceived value of music to zero, establish legal safe harbors for irresponsible conduct which reinforced the notion that music was free, and then negotiate favorable licenses based on this distorted environment. It is the tale of the orphan pleading for mercy after having killed his parents. You write that “there is an argument that YouTube’s greater control enabled it to build a commercial sustainable model.” Yes, it’s control over exercising lack of control which prevented the development of an actual marketplace based on supply and demand.
I examine this in this piece: Out To Sea: Safe Harbors & the Unmooring of the Foundations of a Healthy Online Music Marketplace (https://medium.com/@nturkewitz_56674/out-to-sea-safe-harbors-the-unmooring-of-the-foundations-of-a-healthy-online-music-marketplace-b2e5d90f0302?source=linkShare-89807c3fc929-1529669466). Indeed, as noted there, safe harbors for content distribution platforms don’t just affect services that operate under such safe harbors, but distort the entire ecosystem. “YouTube’s safe harbors affect services like Apple Music and Spotify which operate without regard to such safe harbors. And of course, this makes eminent sense: there is competition for users, and advantages enjoyed by one competitor will affect the entire ecosystem. Just as piracy undermined (and continues to undermine) the ability to effect a market-based transition to digital services, sub-market licenses undermine the ability to generate revenue on basic economic principles of supply and demand.”
You write: “The crux of the matter is that the current economics suit YouTube but not rights holders. What we have to be careful to avoid is a new paradigm where roles are reversed. As important as music is to YouTube, Google could walk away if it really wanted to. Rights holders—labels especially, need to think whether that is a price they are willing to pay.”
But that entirely misses the point. It’s not that “current economics suit YouTube,” but that current laws suit YouTube. Those laws distort competition and should be amended—immediately and globally. You argue that right holders need YouTube as much as YouTube needs them. If that’s the case, then licensing negotiations in a fair legal environment will produce sensible and rational outcomes. Denying rightholders the ability to define the terms of their consent is not a sound principle for building a sustainable online music market. Every distributor would like to pay less for the goods which it distributes, and YouTube is no exception. But allowing a distributor to unilaterally determine its costs is straight out of Wonderland.
Finally, you state that: “At the heart of the value gap argument is a fight for control.” I’m sorry, but no. At the heart of the value gap argument is a fight for fairness. A fight to safeguard the role of consent in an environment that celebrates lack of permission. A fight to empower individual decision-making and the exercise of free will. A microcosm of a larger battle to preserve our humanity in a technological age premised on the notion that breaking things is more important than nurturing them. What side are you on?
You speak of economics but miss the single aspect that brought us here. Regardless of “right” and “wrong”, creators won’t get paid for access to their creations when no one is buying. The driving force here isn’t unfair market distortions, it’s simply demand. Youtube isn’t defining demand or even influencing it to any significant extent because demand has options beyond anyone’s purview. Without a price reflecting that reality, no one will buy. Content providers including Youtube are just trying to find an equilibrium given that fact. That equilibrium will reflect what people are willing to pay, and as much as it pains me to say it, an equilibrium hasn’t been found yet because it’s not low enough yet. It’s obviously at least closer to what Youtube is aiming at, regardless of their motivations, and this article seems to get that to some extent.
While I write this, I’m on Spotify listening to music without paying a monetary fee. An ad is playing. It’s drilling into my brain, but putting up with an ad or two is the price I’m willing to pay to listen to this particular album through a single click before I buy it. And it’s not much more than that. If they played more than a couple of ads I would just walk away from the whole thing. Actually they just played four now, so I’ve closed that browser tab, that’s that. The days of things like a customer being effectively forced to buy music before knowing how much they actually value the product are most definitely over. Too many creators put great creations out there for free for me to put my neck in a vice over something as anti-art as price arguments and overbearing access restrictions. Especially given the history of label greed. That’s just the reality of it. The only way I’ll put myself through anything even resembling that is by using an outlet where I can pay an artist directly.
Well – if YouTube pull out of pushing music videos etc – there could be room for a new company to take over??
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