YouTube Music Service Riles Artists

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Google Inc.’s (NASDAQ: GOOG) YouTube is by far the world’s leading online video site. It is also the world’s leading site for streaming music, either as videos or audio. That is why it’s a little difficult to see the logic behind a decision by independent recording labels to refuse to sign a new licensing agreement with YouTube’s yet-to-be launched music subscription service.

YouTube’s music subscription service will join a crowded field that includes Apple Inc. (NASDAQ: AAPL) with its $3 billion Beats music investment to make up, Pandora Media Inc. (NYSE: P) and privately held Spotify. YouTube’s dispute with the indie labels boils down to the royalty payment that YouTube is offering and that a group representing the musicians and label characterize as “highly unfavorable.”

YouTube has said it will block videos from independents that have not signed the non-negotiable contract. A report in the Financial Times Tuesday morning said the company will begin to block videos by end of this week from popular artists like Arctic Monkeys and Adele. The indie labels are asking the European Commission to stop YouTube from blocking the videos and to take regulatory action to prevent YouTube from abusing its considerable market power over indie musicians and labels.

Once YouTube launches its music service, users will pay a monthly fee to watch videos or listen to music without any advertising on any device, even when the device is not connected to the Internet. The program is expected to be rolled out to the public later this summer. YouTube already pays a royalty to music rights holders, and Google claims it has paid out more than $1 billion since acquiring YouTube in 2006.

By itself, streaming music is not a huge revenue opportunity. But Google and Apple, and now even Inc. (NASDAQ: AMZN), see music as a must-have in order to keep consumers tied to the company’s ecosystem. For Apple that means selling more iPhones and iPads. For Google it means more devices using its Android operating system and viewing ads served by Google. For Amazon, a free music service combined with its Amazon Prime two-day shipping service keeps users just one-click away from buying something.

Google and YouTube hold the high cards in the current dispute because none of the other music streaming firms is offering a substantially better deal to the indies. Musicians are truly stuck between a rock and a hard place.

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