YouTube's traffic machine may finally be turning into a cash machine.
For the first time, there are signs that YouTube is driving significant revenue for itself and some of the video site's partners. In an interview with CNET News this week, Rio Caraeff, executive vice president of Universal Music Group's eLabs, said the largest of the top recording companies is bringing in "tens of millions of dollars" from YouTube.
"(YouTube) is not like radio, where it's just promotional," said Caraeff, who heads up Universal's digital group. "It's a revenue stream, a commercial business. It's growing tremendously. It's up almost 80 percent for us year-over-year in the U.S. in terms of our revenue from this category."
Universal, the home of such acts as Akon, the Black Eyed Peas, and U2, has a two-part licensing deal with YouTube, as do the other major labels. Under the deal, the recording companies post music videos on the site and share advertising revenue with YouTube. The two companies also share ad revenue for music posted to the site by users.
"YouTube is the ideal place for labels to promote music and for fans to discover new artists and old favorites," said Chris Maxcy, YouTube's partner development director. "We're committed to being a good partner to music labels and are pleased they're having success on the site."
Caraeff declined to give specifics on Universal's deal with YouTube, but a music industry source close to the label said Universal will likely book nearly $100 million in revenue from video streaming this year. That figure includes video-streaming money from all of the company's partners, such as iMeem, MTV, and MySpace. The source said, however, that most of the cash comes from YouTube.
Universal is starting to see some significant cash from its deal with the video-sharing site for two reasons: first, YouTube's recent efforts to find a business model are working. The other is that music, by far the strongest single segment on YouTube, has always been a major draw.
"It's really coming to fruition I think in part due to YouTube's recent focus on monetization," Caraeff said, "and really trying to drive revenue around premium content more so than they have in the history of their short existence. They have finally turned their spotlight on 'How do we turn this into a business?' And that's benefiting the entire ecosystem of content owners as well."
This year, Google CEO Eric Schmidt pledged to wring more profits out of YouTube. Google paid $1.65 billion for the video-sharing powerhouse in October 2006. In the two years since, YouTube appeared to take tentative steps toward generating revenue while trying to avoid alienating users with too many ads.
This year, the company has become more aggressive. Among the long list of changes was last month's announcement that YouTube would sell keyword search terms. To make the site more attractive to advertisers as well as video producers, YouTube has improved the quality of video and rolled out a test version of a wide-screen player. More importantly, YouTube has improved the quality of its filtering technology so unauthorized copies of television shows and films can be removed quickly by copyright owners.
But the big question is whether the growth in music-video revenue says more about the music industry than it does about YouTube.
Universal's YouTube channel is overwhelmingly the largest on the video site. The record label is the all-time most viewed channel, with nearly 3 billion views. Second-place Sony BMG, the second largest recording company, trails by more than 2 billion views with 485 million total views.
Of the top 10 channels on YouTube, 7 are music related. They include channels from Warner Bros. Records, Soulja Boy, and Disney's Hollywood Records.
Only a few years ago, the record labels saw music videos as promotional vehicles only. Some argue one of the music industry's biggest mistakes was giving videos away to MTV nearly 30 years ago. Doug Morris, Universal's CEO, has led the industry to set up videos as a revenue stream. Since 2005, Universal has gone from making zero dollars on music videos to nearly $100 million.
"Certainly, in the last year the rise of free to consumer ad-supported video has become a very significant part of our business coming from a variety of areas," Caraeff said. "YouTube is driving a very large quantity of that... We have a great relationship with YouTube, and the future for us will be more than with YouTube than we're doing today.
"We're working with them on a variety of new concepts and new businesses to take the groundwork we've done in the last year and half and do a lot more with it," he added. "I wouldn't expect to see us just do business with YouTube like we used to do."