Could Article 13 Kill Off Music on YouTube?

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.

value gap

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.

Facebook Might Just Have Done YouTube a Massive Favour

The word on the street is that the deals labels have struck with Facebook for its forthcoming music service have been done on a blanket license basis (i.e. a flat fee) with no reporting. This was reported by Music Business Worldwideand has been confirmed to me by various well-placed third parties:

“One controversial element of these agreements is, we hear, that these are ‘blind’ checks: effectively, advances that are not tied to any kind of usage reports from Facebook.”

Now to be clear, this has not been confirmed by either the labels concerned nor by Facebook but, if true, it has potentially dramatic implications, and not where you would necessarily think.

Facebook will bring something highly differentiated to streaming

Facebook is obviously in legislative cross hairs right now because it has proven unable to keep sufficient tabs on user data. The reason reportedly given for the lack of reporting is that Facebook does not yet have the reporting technology in place to track and report on music consumption. Now, there is no doubt that music rights reporting is no small undertaking; it requires expensively constructed systems to manage complex frameworks of rights. Given that Facebook is likely to launch something that more closely resembles Musical.ly and Flipagram (e.g. sound tracking, messaging, social interaction and photo albums) than it does Spotify, the odds are that this proposition will be particularly complex from a reporting perspective. But, and it is a crucial ‘but’, this challenge of tracking, enforcing and reporting on music-integrated user-generated content (UGC) is exactly the same challenge YouTube has been grappling with for years.

Facebook will become the new big player in UGC music

As we all know, YouTube’s relationship with music rights holders (labels in particular) has been fraught with conflict, tension and disagreement. The recorded music industry remains committed to rolling back much of the ‘fair use’ rules under which YouTube operates, to ensure that it can be licensed more like the standard music services. And it appears that genuine legislative progress has been made with big announcements mooted for later this year.

However, if I was part of YouTube’s lobbying team right now I’d be thinking I’ve just been given a free pass. The crux of the industry’s argument is that YouTube does not sufficiently protect copyright, enforce policing nor pay enough. Not paying enough is not directly a legislative issue, but instead a commercial factor. But the labels argue that the unique ‘fair use’ basis on which YouTube operates enables is to pay too little.

If the assumed basic premise of this deal is indeed correct, it transforms in an instant, YouTube from wild west desperado into the closest thing global scale UGC music has to a sheriff. YouTube’s Content ID system is more than 99% accurate at tracking and reporting on consumption. There is so much music on YouTube because in large part the labels need YouTube as a marketing platform. In fact, labels spend more on YouTube marketing than any other digital channel except social.

Fair use lobby efforts may be impacted

Meanwhile Facebook’s position on reporting, according to Music Business Worldwide, is:

“the social media service has committed to building a system which will be able to provide such usage reports – and therefore royalty reports – in the future.”

The deal as a whole could result in three potential legislative outcomes:

  1. Proposed regulations are rethought
  2. Proposed regulations are put on ice
  3. Proposed regulations are implemented but applied equally to Facebook too

The latter is a possibility, but the complication is that the labels – and again this is if the suggested deal structure is correct – have chosen to enable Facebook to behave in many of the exact ways which they do not want YouTube to operate.

Of course, there are good reasons this deal has happened, not least that Facebook will make a massive contribution to the digital music space in a truly different way. But perhaps more importantly in this context, Facebook will have paid enough to make the labels do a 180 degree turn on their approach to UGC. Therein lies the heart of the YouTube problem. Rights holders want to get paid more, and lobbying for legislative change is seen as the only way to make that happen. But some of the fundamentals that underpin that change are potentially put into question by the Facebook deals. So, there is a chance that in their efforts to get more revenue from Facebook, the labels might just have compromised their ability to get even more revenue in the long term from YouTube.

Bruce Willis and the ‘When Owning Doesn’t Actually Mean Owning’ Conundrum

Bruce Willis is reported to be considering legal action against Apple to enable him to bequeath his sizable iTunes music collection to his children.  Whether there is basis in the story or not it shines an unforgiving light not so much on Apple’s terms and conditions but the role of copyright in consumer music products as a whole.

Analogue Era Copyright Restrictions Rarely Left the Realms of Small Print

The issue at stake is that iTunes terms and conditions prevent the original purchaser from giving the purchased music to someone else. But this is not something unique to iTunes, it applies to virtually every single piece of music product that you have ever bought (assuming you have bought some at some time or another).  And not just to downloads, but also to CDs, vinyl, cassette, MiniDisc and just about any other physical format you care to throw into the mix.  With each and every one of those music product formats that you have purchased, all that you actually own is the physical packaging and media, and a license to play the music inside it.  You do not own the music.  And the licenses come with pretty specific restrictions, often including the number of people that are in the room when you are playing it, though the exact number of people who are allowed to listen to music in your living room is defined by national statute.  The restrictions also cover copying, lending and selling.  Of course (personal) copying, lending, listening at parties, gifting and buying used albums have all been integral parts of the music experience for decades.   People simply enjoyed the music how they wanted to regardless of the restrictions, many of which they simply were not aware of.

Take a look at the small print on the back of a CD album – if you still have any – and you’ll see a copyright notice.  The exact wording will vary according to the label and the country of origin or sale, but the same underlying principle applies across all of them: you don’t actually own the music on the album, instead you have bought a license to play that music.  In the physical era people rarely bumped into these restrictions, but in the digital age labels and other rights owners have the ability to enforce them through technology.

So should Bruce Willis really prove to be tilting at iTunes’ windmills, it will be decades of global copyright convention and practice that he will in fact be facing, and any potential judge will be made keenly aware of this.  Which raises the stakes in quantum leap proportions and builds a case for the industry to come up with common sense business solutions before the entire music copyright edifice is challenged.

It is Time for a Business Solution to the Copyright Problem

Copyright is the critical tool for monetizing content and ensuring creators and originators are fairly compensated.  But copyright is at its best when it serves those purposes without placing impractical and unreasonable restrictions on consumers.  Paying music fans are becoming an increasingly self-selective group.  In the analogue era most music fans were also recorded music buyers.  In the digital age music fans often opt out from music purchasing entirely.  Thus when analogue-era copyright legacies affect digital music buyers, it is the valuable, opted-in part of the population that is being penalized, not the freeloading opted-out portion.  A situation which of course has already happened once before online, with rights owners’ earlier insistence on all downloads being shackled with DRM.

 

The indies, and then EMI and iTunes finally broke the DRM hoodoo and one would hope that a similar outcome could be achieved here.  Changing the underlying copyright frameworks and agreements is not going to happen either soon or quickly, but just as DRM was solved with business decisions, so could the issue of transferring ownership of purchased music.  Rights owners and digital music retailers could create a framework agreement to permit certain behaviours within specific parameters or could simply agree to turn a blind eye in certain scenarios.

It would be copyright suicide to suggest that a music customer could ‘give’ their music to anyone they so choose, because a single digital copy can always be legion.  But a ‘fair use’ approach which supports a number of scenarios, such as Willis’ desire to bequeath to his children, would be an eminently workable solution.

Copyright should protect rights but not at the expense of penalizing legitimate customers over those who don’t bother to pay at all.