Digital Media

The disagreement between Warner Music Group and YouTube over music licensing appears to be coming to an end.

(Credit: Warner Music Group)

The two sides have managed to reach terms on most of the major issues and a final deal could be announced within the next few weeks, sources with knowledge of the talks, told CNET News on Friday. What that means is the music and videos from such Warner acts as Green Day, Red Hot Chili Peppers, and the White Stripes may soon be back on the Web's largest video site.

The thaw comes nine months after the prior licensing agreement between the companies expired and negotiations to renew broke down. Warner's music videos were removed from the Google-owned YouTube in December and users were banned from including the label's songs in their clips.

Representatives from both companies declined to comment.

CNET reported in July that the companies had begun a new round of discussions. When the deal is signed, it will mean that YouTube once again can boast agreements with all four of the largest recording companies: Universal Music Group, Sony Music Entertainment, Warner, and EMI.

A Warner partnership will continue YouTube's string of signings with major content companies. In the recent past, YouTube has locked arms with Disney, Sony Pictures, and the U.K.'s Performance Right Society.

(Credit: Joost.com)

At the same time Sony Pictures prepared to post some of its TV shows and films onto YouTube, the studio's material quietly began disappearing from Joost.

Earlier this month, Joost CEO Mike Volpi, who is attempting to engineer a comeback for the once high-flying company, wrote on the company's blog that Sony Pictures' shows were removed but was vague about why. He said that content from entertainment companies often comes and goes due to licensing restrictions and "we are optimistic that we'll be able to reach a new arrangement with Sony soon."

He can stop waiting. The licensing deal with Sony Pictures expired and the studio decided not to renew, according to industry sources. The reasons are not totally clear but one thing is certain, YouTube and Hulu are landing full-length content partnerships while the already thin Joost library shrinks.

Kerry Vance, a Joost spokeswoman, confirmed that the licensing deal with the studio ran out but said it "was a mutual business decision by both companies" to remove the content. Did Joost's anemic traffic have anything to do with it? Vance denied that. "We continue active conversations to reach a new agreement."

Whatever happened, this much is clear: Hulu and YouTube are much more like the Internet video service that Joost once promised to become.

Joost, is the brainchild of founders Janus Friis and Niklas Zennstrom, the duo that brought us Skype and Kazaa. They declared that Joost would one day deliver a reasonable facsimile of the TV-viewing experience to the Web. With the help of a downloadable peer-to-peer video client Joost was supposed to offer crystal-clear high-def images and be super simple to navigate.

As for offering the best shows and other video content, Viacom and CBS (parent company of CNET News) were investors, and these strong Hollywood links would help it acquire premium shows and films. Those things all occurred of course--at Hulu.

During the dark period, when Joost was wrestling with management shakeups and technology setbacks, Hulu pounced. Formed by NBC Universal and News Corp., Hulu provided the best streaming video on the Web and offered plenty of full-length episodes from hit TV shows, such as "24," "30 Rock" and "The Office."

Hulu began attracting the audience that Joost dreamed of.

Now, YouTube, Godzilla of Web video, is scoring full-length features and TV shows.

Is there room for a third top-tier player in this market? Maybe, but if Joost wants to hop into that spot, the company has to offer more, not less, content for viewers to watch.

YouTube is in negotiations with Sony Pictures to get licensing rights to some of the studio's movies. 'The Professional' is from Sony Pictures and is available at Crackle.com.

(Credit: Crackle.com)

YouTube is in talks to acquire licensing rights to full-length content from Sony Pictures, home of such films as "The International" and "Spider-Man," sources familiar with the negotiations told CNET News. Details about what a final agreement could look like are sparse, but any partnership between the two powerhouses would likely benefit both.

Representatives from both companies declined to comment.

Word of the negotiations comes a week after Disney announced it had licensed short-form content to YouTube. Those clips will come from a range of Disney brands, including ABC and ESPN. For YouTube, obtaining short-form clips from Disney is an important step but still doesn't provide what YouTube needs most.

Founded in 2005, YouTube made a name for itself by showcasing amateur-made snippets as well as hosting scores of illegally posted clips from the best TV shows and films. YouTube has done much to rid the site of pirated content, but the flip side is that most of the hot shows and films that generated big viewership are gone. At the same time, a host of Web video services are offering full-length films and TV episodes online. To compete, YouTube is trying to get access to the same premium content but has so far only acquired a handful of films from the archives of Metro-Goldwyn-Mayer.

Sony Pictures' Web video property, Crackle, could mean a major boost to YouTube's long-form hopes.

Is YouTube a movie channel?
YouTube is trying to become a player in Hollywood at a time when the online video sector is bursting with an increasing number of savvy and very watchable Web video services. YouTube, which did more than any company to create the online video sector, is at risk of falling behind when it comes to offering the kind of content most sought after by audiences as well as advertisers.

Hulu, the ad-supported video portal formed by News Corp. and NBC Universal, has become synonymous with long-form content. The service is easy to use and provides a high-quality viewing experience. Netflix's Web streaming requires a monthly subscription fee to access movies but can boast a much larger movie-library than Hulu. Netflix has also made the all-important jump from showing films on a PC to delivering streaming video to a TV, via set-top boxes, such as Roku and Xbox 360. Apple can offer mobility to those who download movies and TV shows to iPhones and iPods.

The cable companies are also talking up their own online-video plans. After decades of pumping money into Hollywood, the cable operators and premium movie channels could have an advantage when it comes to acquiring studio content.

Here's where Crackle and YouTube can help each other. Sony Pictures presumably wants to promote Crackle, so it needs to get in front of a large audience. YouTube needs popular movies and TV shows and that means striking deals with studio and networks willing to post long-form content on the Web. Not all of them are.

Some studio executives have told CNET that they don't believe full-length movies can make money online. To generate a decent return, a large number of ads must accompany a film. Tests show Internet viewers resent this, according to film-industry sources.

The good news is that at this early stage at least, managers at Sony Pictures' digital unit appear to believe in long-form Web video.

Sony Pictures embraces long-form Web video
Sony Pictures acquired Crackle for $65 million in 2006, shortly before Google paid $1.65 billion for YouTube. The site began as Grouper, a video-sharing site and YouTube rival. In July 2007, the studio swapped business models and names after it became obvious YouTube had locked up the video-sharing market.

A visit to Crackle shows Sony Pictures is a trailblazer when it comes to posting movies online. Not only is the studio posting more full-length films on the Web (more than 60) than competitors but the quality of the movies appears to be better. At Crackle are such films as "The Opposite of Sex", "Groundhog Day," "El Mariachi," "Go," "Tommy," and "The Professional."

The studio has also been very willing to license content to such outlets as Hulu, Gaia, Sprint and AOL. Hulu has a deal to showcase nine films, including "In the Line of Fire" and "Single White Female."

Here's the catch: judging from the other distribution deals Sony Pictures has struck, it probably wouldn't give YouTube access to more than 15 movies. The studio has also asked some partners to display films using the Crackle video player, a request that undoubtedly is designed to give Sony Pictures control of advertising and to direct people back to Crackle. The studio also doesn't allow partners to syndicate its content, which means YouTube users won't be able to embed Sony films on their blogs or personal Web sites.

If you're YouTube, you shouldn't care. If you want to become the place for all things video--user-generated as well as films and TV shows--and if you believe your audience is too big for Hollywood to ignore and that eventually advertisers will pay a premium to get in front of that audience, then at this point you jump through hoops to get the best content.

YouTube and Google can't be too choosy. The truth is that two years ago they miscalculated how much they needed Hollywood. YouTube frustrated some studio and TV executives by saying "we're not responsible for the actions of our users."

Since then, YouTube managers have changed their attitude and have focused on making the site more appealing to big entertainment companies, such as offering better-quality streams, and filtering for pirated content. Still, what was true two years ago is true now: none of the big entertainment companies is going to allow Google to build YouTube's business on their content without getting something in return.

There's also the question of what the studios intend to do with the traditional distribution model. Hollywood has long had agreements in place to release films through a complex assortment of channels, including theatrical release, DVD sales, and cable, premium, and broadcast outlets. For example, film-industry sources say the money Hollywood earns from the Web is a trickle compared with the ocean of cash it receives each year from cable providers.

Nonetheless, more and more people are canceling their cable subscriptions and turning to the Web for entertainment. Even execs from the cable companies have acknowledged this. Last week, after Disney announced the agreement with YouTube, I asked Jordan Hoffner, YouTube's chief of content partnerships, whether YouTube, Hulu, and the other Web video services can convince Hollywood to wean itself off these other distribution channels.

"I think that what we're doing is we're dealing with a fragmented world," Hoffner said. "You can't just say you're going to count out any distribution channel and focus on one because audiences are moving to other places. We're one of the places they're moving to."

If YouTube only gets a handful of Sony movies and if they aren't the best and if there's lots of strings attached, YouTube should still go ahead. Sony and Disney are worth twisting yourself in knots for.

YouTube's decision makers should remember that Crackle currently hosts 60 movies but that is a drop in the bucket compared to what's available in Sony Pictures' vast film library, one of Hollywood's biggest treasure troves of film content.

Corey Vidal is no pirate, but he's been branded one as a result of the licensing spat between Warner Music Group and YouTube.

On YouTube, Vidal posted a humorous video tribute to John Williams, the man who scored the soundtracks for such blockbuster films as Indiana Jones, and Star Wars. In his clip he included some of Williams' music. By now, everybody knows that YouTube removes videos that violate copyright law. What's different about Vidal's work getting pulled is that when he posted it in October, he was permitted to use Warner's music.

Until last month, YouTube had an agreement with Warner Music--one of the four largest recording companies--that allowed video creators to include the label's content in their clips. Last month, talks to renew the deal broke down and that means YouTube and its users no longer have access to Warner's library. For this reason, the case is much different than YouTube's high-profile fight with Viacom or run-of-the-mill piracy that once flourished on the site.

In 2007, Viacom and YouTube failed to come to terms on a licensing deal and Viacom requested that YouTube pull its content. In that case, there was no prior agreement. Most of the people who posted Viacom's films or TV shows to YouTube did so without authorization. In this situation, YouTube fans used Warner Music's songs for two years with the label's blessing. Now, through no fault of their own, the videos that YouTube users made in good faith are being yanked.

"I don't understand who I'm harming," said Frank Stallone, a 41-year-old former DJ who is quick to point out that he is not the less-famous brother of the box office draw. Stallone's video was removed for using 45 seconds from "Forget Me Nots," a 1982 song from Patrice Rushen. "If anything, people are hearing the 45-second tease they haven't heard in a while and they'll want to go out and buy the song," he said.

Warner Music declined to comment, but YouTube had this to say: "While we work with music labels and publishers to keep music on the site, sometimes our negotiations don't pan out," said a spokesman for the company. "In those cases, we try to give people options when they receive a copyright claim. Instead of automatically blocking videos, we give uploaders the choice to dispute the claim (in the case of Fair Use, for example), use our AudioSwap tool to replace the track with one from our library of pre-cleared music, or to replace the video with a new version with no sound."

If nothing else, the situation serves as a warning to those who think that because YouTube obtains rights to music or films one day, the agreements will last forever. That's just not how these deals work.

One of Corey Vidal's fans has reposted the video that was removed at Warner Music's request.

(Credit: YouTube)

That hasn't stopped some YouTube's fans from posting angry videos denouncing the situation at YouTube. Most of the protest videos take aim at Warner and the other three top recording companies. While all four of the big labels are in discussions about renewing licensing agreements, Warner is the only one scuffling publicly with YouTube.

In fact, sources close to the situation say YouTube is close to finalizing a new agreement with one of Warner's chief rivals: Sony Music.

The situation illustrates how Web services and entertainment companies are learning hard lessons as they cover uncharted ground. It's doubtful that Warner Music or YouTube intended to alienate their customers. Presumably Warner Music wants more concessions from YouTube and the Web's No. 1 video site wants to pay less. What they likely didn't consider when they penned their initial contract was what would happen to users if they failed to agree on a new deal.

Vidal, a 22-year-old from the Canadian province of Ontario, is more than happy to help them understand.

Vidal makes his living by creating YouTube videos. He's a member of the company's YouTube Partners program. This allows him to sell some of the advertisements that accompany his clips and pocket the money. He says that his videos see about 3.4 million to 4 million views per month and YouTube is his only source of income. As for how much he makes, Vidal only will say it's enough for him to live comfortably.

Vidal hit the jackpot with his tribute to Williams. YouTube featured it on the site's front door. He says for a time the clip was generating a million views each day and was nominated for a "People's Choice Award" at CBS, parent company of CNET News.

But on January 18, Vidal's cash cow went down.

YouTube sent him a notice that said Warner Music had claimed his video had infringed on the label's copyright. Vidal doesn't dispute that the label owns the rights to the music he used. "I'll share the money I made with them but I just want my video back up."

But he has so many questions about whether his video truly violates copyright law and if so, what part of the video infringes? That's the other problem raised by the quarrel between Warner Music and YouTube. When users are dragged into it, there's few places to get answers. Vidal said he called Warner Music and talked to about half a dozen people in the eight days since his video was removed. He has yet to hear back why exactly the video was pulled down or whether he and the record company can strike a separate deal.

To its credit, Viacom set up a support hot line to help answer questions and address disputes when it began pulling content from YouTube.

That's what Stallone, the former DJ, says he needs. He says he doesn't think using 45 seconds of a song is breaking any law, but he doesn't have anywhere to go to get legal help. Also, he said he was discouraged by some of the language in the takedown notice YouTube sent him. Specifically, this passage: "There are very few valid reasons for disputing a claim," YouTube wrote in the notice. "Submitting an invalid dispute can result in penalties against your account."

Stallone wants to know how he's supposed to determine what an invalid dispute is?

YouTube users should not assume copyright holders are always correct when they accuse someone of a violation, according to Fred von Lohmann, senior attorney for the Electronic Frontier Foundation, a watchdog group that advocates for the rights of Internet users. In the Viacom case, for instance, the company acknowledged erring in a small number of cases.

In another case, a Pennsylvania woman is suing rocker Prince and Universal Music for accusing her of copyright violation for including a brief snippet of Prince's music in a video of her baby. Universal and Prince dropped their copyright claims against the woman and her video has returned to YouTube.

I'm no lawyer, but Stallone's case sounds very similar.

Negotiations between Warner Music Group and YouTube over renewing the licensing agreement for the record label's music videos broke down Friday. Early Saturday, Warner, the third largest record label, removed videos from the Google-owned video site.

The impasse comes at a time when all four major labels, including Universal Music Group, Sony Music, and EMI, are renegotiating their licensing deals with YouTube.

"We are working actively to find a resolution with YouTube that would enable the return of our artists' content to the site," Warner said in a statement. "Until then, we simply cannot accept terms that fail to appropriately and fairly compensate recording artists, songwriters, labels and publishers for the value they provide."

YouTube has become an important revenue stream for at least one of the top labels. This week, Rio Caraeff, Universal Music's digital chief, told CNET News that YouTube has generated "tens of millions" of dollars for the recording company this year, up 80 percent from last year.

Caraeff said that Universal and YouTube enjoy a strong relationship and that the companies are trying to expand their relationship beyond music videos. A source close to Universal said that the label will likely book nearly $100 million in video-streaming revenue--most of it from YouTube.

The blog All Things Digital reported this week that while the labels are starting to make money from the deal with YouTube, the video site is not. YouTube has to pay the labels each time someone views a clip, regardless of whether it's generating any revenue, according to the blog.

By pulling out of the deal with YouTube, Warner loses access to the Web's No. 1 video site, which topped 100 million visitors in October. The site has increasingly become one of the Internet's favorite ad-supported jukeboxes. Of the top 10 YouTube channels, 7 are music related. Warner Bros. Records is the 11th largest channel.

"If we can't reach acceptable business terms, we must part ways with successful partners," Google said Friday on its blog. "For example, you may notice videos that contain music owned by Warner Music Group being blocked from the site.

But YouTube's growing prominence in music could change if the site were void of music.

Some of Warner's most popular artists, who will no longer be available on YouTube, include Led Zeppelin, Madonna, TI, Eric Clapton, REM, Red Hot Chili Peppers, and the Grateful Dead.

The Copyright Royalty Board on Thursday froze the rate that digital-music stores such as iTunes and RealNetworks' Rhapsody must pay music publishers.

The three-member board that sets statutory copyright licenses e-mailed the Digital Media Association (DiMA), the National Music Publishers' Association, Apple, and other download stores with its decision to keep the royalty rate at 9.1 cents a song. The board also set the same rate for CDs and established a 24-cent rate for ringtones. The decision is the first time the board has established royalty rates for digital downloads. The rates are set for the next five years.

What all this means of course is that Apple will not be shuttering iTunes--as if there was ever much of a chance of that--and appears to remain very much in control over the economics of digital music.

Alarm bells were set off on Tuesday when Fortune magazine reported that Apple had told the CRB that "it most likely" would shut down iTunes if forced to pay too high a royalty rate. Eddy Cue, Apple's iTunes manager, had told the royalty board in April 2007 that the company "would not continue to operate (iTunes), if it were no longer possible to do so profitably."

The group representing music publishers had sought a per-song rate boost from 9.1 cents to 15 cents, a 66 percent increase. The rate is paid to music publishers by the record companies, which deduct it from the 70 cents Apple pays them for every song it sells. Certainly, nobody can predict what Apple will do, but at this point, it looks as if the company got what it wanted. In short, Apple won.

"We're pleased with the CRB's decision to keep royalty rates stable," said an Apple spokesman.

A music industry source said that Cue's statement to the CRB may have gone a long way in persuading the CRB not to boost rates. "Sure it was posturing," said the source. "That's what you do in court. I don't think Apple would have gone out of business but a statement like that from the biggest music retailer is going to carry some weight."

Mark Litvack, an entertainment and copyright attorney and a former legal counsel for the Motion Picture Association of America, said rates have traditionally gone up during these kinds of negotiations. But Apple has "effectively set the economics of the music industry, which now appear to be frozen."

Music industry sings the blues
The group representing music publishers applauded the CRB's decision publicly but not everybody on that side of the debate was happy. One music industry source familiar with the negotiations said the publishers would probably have liked more money but should be happy that the CRB didn't attach the rate to a percentage of a music store's revenue.

That would have created huge accounting headaches, according to the source. The decision also prevents DiMA from going to Congress in the same way that the Webcasters did last week, according to the source.

Pandora, an online radio service was part of a movement to negotiate a new rate for streaming music (as opposed to downloads) with the music industry. That movement lobbied hard in Washington and won congressional OK to reach a settlement with the music industry on a compulsory license.

But in my dealings with music publishers, I've heard them complain for a long time about the 9-cent royalty rate. In some corners, the lack of any increase will not be received well. Nobody has been a more vocal proponent of raising rates than Rick Carnes, president of the Songwriters Guild of America. On Thursday, Carnes acknowledged he had hoped for an increase. Still, he insisted there was still plenty to be happy about.

"What DiMA had asked for was a reduction to 4.5 cents (or 55 percent)," said Carnes, who has written songs for Alabama, Reba McEntire, and Dean Martin. "When you look at 9.1 it's only a disaster, but 4.5 is Armageddon...If you look at record sales, they've just been a disaster. It's hard to go to the judges and ask for money at this point of time... Everybody is hurting, frankly, and until we get a solution to the massive looting on the Internet we're not going to be able to move this thing much."

Mike McGuire, a music industry analyst for Gartner, said that the royalty board made a wise decision for consumers, musicians, and download stores by not raising rates. The download stores are competing against piracy, and obtaining illegal downloads is simple and they're hard to compete with on price: they're free.

"This was a smart move by the CRB," McGuire said. "This is still a new and struggling industry and now isn't the time for a drastic rate increase that will have an effect on pricing."