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Wednesday, 18 June 2014

YouTube and the downside of almost absolute market dominance: YouTube forces bands and independent music labels to endorse their new subscription music distribution service ‘at gunpoint’.

YouTube – especially after the takeover by Google –  has been the world’s most successful video hosting service by far, when it came to coverage and numbers of viewers. What you cannot find on YouTube virtually does not exist.

Competitors, like DailyMotion and Vimeo or even YouTube’s Chinese counterparts Baidu and Youku, always trailed the company by lightyears. There are no signals that this will change soon.

Nevertheless, the advertising-based earnings model, with freely available music and videos for every viewer, has traditionally been the weak spot of YouTube. On top of that, also the limited number of paid subscription channels did very little to lift the yields of YouTube over the years.

This discloses the main problem of these globally successful and virtually free services: the expenses to cover the ever larger hosting space and the increasing numbers of computer warehouses, will always bite a very large cut out of the advertising yields, leaving little or no profit in the end. At the same time, the number of clicks on adverts has only been declining during the last few years and soon these will not be sufficient to cover all expenses.

This already massive and soaring hosting space is necessary to store and host the hundreds of millions of YouTube videos; at acceptable speeds and without serious disturbances and delays. If YouTube can't deliver this to the spoilt viewers, they will be out of business very soon. In order to do so, the investments have been and will always be enormous.

Today, most hosting takes place in Standard and High Definition quality (SD/HD), but 'tomorrow' this must be done in UltraHD quality, which requires much more storage space and hosting capacity per video. And at the very moment that YouTube would leave this arms race for the best, largest and fastest hosting and storage facilities, the service would be doomed, in favour of other faster and better services.

Thus the problem is that the expenses of hosting and storage will be soaring, while the advert yields per unique viewer will probably decline (strongly) at the same time. And to make things worse, most YouTube users probably never want to pay for the YouTube services, which they received for free earlier.

For this very reason, the company saw with growing envy and disgust that new contenders on the music streaming market, like Spotify and Beats Music, were actually quite successful with their paid subscription services (albeit not profitable yet). 

Spotify has, for instance, one paying customer for every four users of its service. This must be a huge difference with YouTube, which has only very limited numbers of paying visitors. 

This was probably the reason that YouTube is currently starting a “me too” subscribed music streaming service, for which it is signing contracts with the vast majority of the artists and record labels that are now registered and hosted at the open channel of YouTube. 

Unfortunately,however, it seems that the Google-owned service  in Godfather-style  has made the music industry an offer they can’t refuse”: at gunpoint!

Independent record labels, which do not want to sign the offered contract for streaming services with ‘PaidTube’ yet, are now running the risk of being banned from YouTube. Artists and bands involved in this quarrel are a.o. Adele, Radiohead and the Arctic Monkeys.

Here are the pertinent snips from a BBC analysis:

YouTube will remove music videos by artists such as Adele, Arctic Monkeys and Radiohead, because the independent labels to which they belong have refused to agree terms with the site. Google, which owns YouTube, has been renegotiating contracts as it prepares to launch a music subscription service.

A spokesperson for the indie labels said YouTube was making a "grave error of commercial judgment". YouTube said it was bringing "new revenue streams" to the music industry.

Speaking to the Financial Times, Robert Kyncl, YouTube's head of content and business operations, said videos from independents could be blocked "in a matter of days," if new licenses are not negotiated. The three major record labels - Universal, Sony and Warner - have all agreed terms with the site, but smaller independents are holding out.

Some independents say they are being offered "highly unfavourable terms". Radiohead guitarist Ed O'Brien accused Google of trying to "strong-arm" labels into accepting low fees.

Alison Wenham, who runs the Worldwide Independent Network , which represents the independent music community said YouTube is "making a grave error of commercial judgment in misreading the market". "We have tried and will continue to try to help YouTube understand just how important independent music is to any streaming service and why it should be valued accordingly," she added.

A YouTube spokesman told the BBC: "Our goal is to continue making YouTube an amazing music experience, both as a global platform for fans and artists to connect, and as a revenue source for the music industry."We're adding subscription-based features for music on YouTube with this in mind - to bring our music partners new revenue streams in addition to the hundreds of millions of dollars YouTube already generates for them each year.
"We are excited that hundreds of major and independent labels are already partnering with us."

I understand the motivations of YouTube behind this new streaming service. 
YouTube is the first, the best and the largest supplier in online storage and hosting of videos and music. When it sees that new contenders are luring its customers and eating its very narrow margin away, then the company has to act upon that.

I also understand that YouTube wants to make a deal with as many record labels as possible, within the shortest amount of time. The company is just too big and bulky for bilateral negotiations with all artists, record labels and distributors. Instead, it chooses to make them the proverbial 'offer they can’t refuse’, hoping that most parties will sign their contract. It would cost too much money and consume too much valuable time to do it otherwise.

At the other hand, the reluctance of the independent record labels to sign the first deal that they are offered by YouTube, is very logical and comprehensible. In this century, in which royalties and sales revenues for artists and record companies have disappeared like a mirage in the desert, these 'indies' try to protect what they have.

When in such a case the ‘class bully’ (i.e. YouTube) comes around and tries to force the independent artists and record labels into an – allegedly unfavourable – contract or else threatens to kick them out of its hosting service, these independent artists and record labels are not exactly amused. 

Especially, as this hosting service generates masses of airplay and millions of potential fans for live concerts, which are an important source of income for bands and record labels.

Personally, I presume that both sides (YouTube vs. the indie labels) will continue their stiffheaded battle for a few weeks or months and that YouTube will indeed block the independent artists within a few days. 

However, this will be a lose-lose situation for both parties: the ‘indies’ will lose their valuable airplay and YouTube will lose a substantial fanbase for its open and subscription channels. Within two or three months, this will lead to new negotiations and an (only slightly) improved contract, which will be signed by all parties involved, in my humble opinion.

Still, there is no denying that this story is one of the downsides of the utter market dominance of YouTube and especially its ubiquitous parent company Google.

Google, as a commercial party on the internet, threatens to become so powerful that it can make or break dozens of other large and leading companies in the world, with only the twist of a thumb. 

However, by abusing this power at will, the company runs a large risk of being forced to split up, in the not so distant future. 

I am certain that the European Commission and its US counterparts are already looking at the current market dominance of Google. 

Especially the European Commission has proven in the past that it does not scare away from fierce measures against parties, which are too dominant on the market. Microsoft can probably tell Google everything about that.

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