YouTube is said to be in talks with Universal Music Group to create an online music video site.
The reports come at a time when Google-owned YouTube is searching for ways to monetize its vast amounts of video content and Internet traffic. The major record labels have also been exploring a number of online strategies for monetizing their music content as compact disc sales continue their steep decline.
Google paid $1.65 billion for YouTube a few years ago.
Google’s stock was down 4 percent to US$306.10 per share in mid-day trading on Thursday.
No deal has been officially announced by YouTube or Universal Music Group yet.
YouTube Trying to Emulate Hulu?
YouTube could be trying to steal a page from Hulu’s playbook. Hulu is an online video site owned by NBC Universal, News Corp. and Providence Equity Partners. It shows network TV programming with commercial interruptions through the user’s Web browser.
“What’s the most successful video site in terms of momentum right now?” asked Colin Gillis, director of research at TheStreet.com. “Hulu. YouTube is clearly the largest, but Hulu has significant momentum. And Hulu has professional, licensed content like “The Simpsons,” “30 Rock” and movies, and it’s a slick interface.”
Google clearly sees the success at Hulu and that Hulu has a straightforward revenue model — licensed content that viewers want to see combined with advertising, Gillis told the E-Commerce Times.
“If you’re going to watch a movie on Hulu, you can choose to watch the ads upfront or during the movie, and Hulu even provides you with a selection process,” he observed. “That’s something that YouTube is lacking.”
A potential partnership with Universal Music Group could be part of a concerted effort by YouTube to be more than a site dominated by user-generated content, Gillis said.
Record Labels Want to Monetize Music Libraries
In the past, music videos on cable channels such as MTV and VH1 were written off by the major record labels as promotional costs, said Michael McGuire, an analyst at Gartner.
Now, it appears the major labels want to squeeze some actual revenue out of their music libraries via services like YouTube, he told the E-Commerce Times.
However, the labels and YouTube will have to find a way to separate licensed or premium content from user-generated content.
“I’m still not sure what a premium music video is,” he said. “It’s probably a video that’s been produced and posted on the Internet by the rights holder as opposed to something a user has captured and posted on YouTube. Premium could also mean new or previously unreleased footage. That’s just my guess.”
YouTube’s been working on its identification and filtering system to spot which videos are produced and posted by rights holders and which are not. This way, the site can return those high-quality results first when users conduct a search under an artist’s name or a song title, McGuire said.
At the same time, it will take a while for YouTube and the record labels to work out the best way to maximize revenue and structure contracts and agreements around new revenue models, he said.
“With these portals that are aggregating large audiences on the Web, it’s better for the labels to try and work with them as opposed to going to the legal department first and sending out cease and desist letters,” McGuire said.
Online Video Here to Stay
At this point, it’s not clear who will come out on top in the online video segment.
“Hulu’s revenue stream is probably smaller than YouTube,” TheStreet.com’s Gillis noted. “But Hulu is doing a better job of monetizing their content. This is the classic Internet race to build eyeballs and page views, because that’s what attracts the advertisers. This market is not going away.”