2016: The Year in Charts

'It's a System That Is Rigged Against the Artists': The War Against YouTube

As labels, artists and managers go public with their outrage at the video platform's meager payouts, their best -- perhaps only -- hope for change rests in government corridors a continent away.

This February, a few days after criticizing YouTube in a New York Times interview, super-manager Irving Azoff went after Google's video-streaming ­service again when he accepted The Recording Academy President's Merit Award at Clive Davis' pre-Grammy Awards gala. "The industry can't be ­pacified by lip service about efforts to ­create paid ­subscription services," Azoff said in an atypically ­serious speech. It's hard to ­negotiate fairly with services like YouTube, Azoff implied, because the "safe harbor" ­provision of the Digital Millennium Copyright Act (DMCA) allows them to stream any content that users upload until a copyright owner requests it to be taken down. That means YouTube can use music to attract an audience without licensing it -- which lets it acquire rights to music for less than it otherwise would.

"It's a system that is rigged against the ­artists," Azoff tells Billboard. "In my years as a manager I haven't seen such a serious threat to artists."

Azoff chose his moment well. YouTube's contracts with the major labels are ending -- Universal Music Group's already has expired, although the two companies continue to do ­business on an ongoing basis -- and the U.S. Copyright Office is conducting a study on the DMCA safe harbors. And the cause is ­becoming urgent: A service that once seemed mainly promotional is now competing directly with ­subscription-driven companies like Spotify, which are rapidly becoming the industry's most ­important source of revenue. Labels need ­subscription income to grow as fast as sales revenue declines, and the free and unrestricted ­availability of music on YouTube doesn't exactly give consumers an inducement to pay for Spotify.

YouTube Changes Content ID Rules to Allow for Money Collection During Rights Investigations

In March, when the RIAA released the music industry's annual revenue numbers, ­chairman/CEO Cary Sherman pointed out that in 2015, free on-demand streaming generated just $385 million in the United States -- out of a $7 billion business. (That $385 million includes free streams from YouTube and Spotify but not Apple or Pandora.) Last fall, Apple Music's Jimmy Iovine ­suggested YouTube may account for about 40 percent of music listening but only 4 ­percent of revenue. And while it's hard to find exact numbers, the ­imbalance seems to be ­getting worse: In 2015 free on-demand ­streaming grew 101 percent while the resulting ­revenue rose just 31 percent. Sherman blamed this on laws that allowed a "value grab."

On April 1, 18 music business ­organizations that usually fight among themselves submitted comments to the Copyright Office about how the DMCA ­distorts the online market for music. Almost 50 managers signed one ­petition, while another came from artists and songwriters, from Katy Perry to Billy Joel.

"Everyone on the artist side of the business, especially the artists, needs to understand that music consumption is growing and revenues have ­drastically declined," says Azoff, who has publicly challenged YouTube on behalf of Global Music Rights, his performance rights ­organization. "Legitimate digital music services can't make money to pay artists if they have to compete with services that are shielded by out-of-date safe-harbor ­protections."

On April 12, the IFPI, the ­international ­equivalent of the RIAA, released a global ­revenue report that addressed a "value gap" -- the polite, European way of saying "value grab." During the week of April 25, Debbie Harry and Motley Crue co-founder Nikki Sixx spoke out on the issue. "Is YouTube hiding behind the DMCA?" asked Sixx, who knows more about copyright than you would assume.

Suddenly, almost everyone in the famously contentious music business seemed to agree on something -- even if they signed the deals with YouTube that now bother them so much.

Or maybe not so suddenly. "The ­feelings about YouTube are organic," says Sherman. "People have been bitching about this for a very long time."

Most Internet companies need to get ­permission from labels in order to use their music -- a negotiating dynamic that results in high fees. With services that operate under the DMCA -- like YouTube and, until recently, SoundCloud -- the dynamic is very different. These services also stream music uploaded by users, and ­copyright holders who don't want their content online need to file takedown notices -- one for each copy of each song. Instead of ­selling the rights to music that a service needs, label ­executives say they're stuck selling the rights to music that a service essentially already has.

Well, that's the theory. In practice, it's more complicated. For years labels have had deals with YouTube that in most cases give them about 55 percent of net revenue from ads sold against their content. The service identifies uploaded material with its Content ID system -- which it has no legal obligation to do -- then offers rights holders a chance to block or monetize it. YouTube chief business officer Robert Kyncl has pointed out that Google as a whole has paid out more than $3 billion to the music business, and the company says that labels monetize more than 95 percent of the content they claim -- and that 99.5 percent of music claims involve Content ID as opposed to manual ­takedowns. (YouTube declined comment for this story.)

The major labels are exaggerating their ­objections to YouTube for effect -- ­remember when Sony and Universal partnered with the service to start Vevo? But the $3 billion figure isn't as impressive as it sounds -- Spotify has paid out more than that, for far fewer ­listeners, and in a much shorter time. Labels have ­complained about Content ID in their comments to the Copyright Office, and no one knows how ­effective the ­system really is because there's no ­measure of how much music it doesn't identify. Besides, the sheer scale of YouTube means that even 0.5 ­percent could involve thousands of ­videos -- each of which could be streamed ­millions of times.

YouTube goes to great lengths to point out how much it has done to help the music business, from the data it gives artists to the Foundry initiative it recently announced to help developing acts. But its interests simply don't align with those of labels and most creators. At a time when music ­executives are optimistic about the growth of ­subscription services, Kyncl seems more excited about the ­increasing amount of free listening. In meetings with industry ­executives, he has said that the music ­business risks missing out on its chance to grab a slice of the $200 billion global advertising business, plus monetize the 80 percent of consumers who don't pay for music. Maybe. But YouTube needs music -- which may account for as much as a third of its streams, according to some estimates -- and the 80 ­percent of people who don't buy music may simply not be all that interested in listening to it.

Nelly Furtado to YouTube: 'Put a Little More in the Collection Basket'

In an opinion piece for The Guardian, YouTube head of international music ­partnerships Christophe Muller argued that comparing YouTube to paid ­subscription services was "like ­comparing what a cab driver earns from fares to what they earn showing ads in their taxi." Except that an ad can't offer a cheaper ride, the way YouTube can serve as a substitute for Spotify. He suggested a better ­comparison is terrestrial radio, which doesn't pay labels or ­performers in the United States. Except that radio doesn't let ­consumers program which song they want to listen to.

In its own comments on the Copyright Office's DMCA study, YouTube says the law doesn't give it a negotiating ­advantage, because labels usually identify their music with Content ID. But if that's the case, why does YouTube seem to pay less for music than its competitors? Spotify's free tier pays a minimum of $0.0025 per stream, ­according to label executives, while YouTube's free streams pay an average of less than $0.002. Over the course of ­billions of streams, that adds up.

So how do you solve a problem like YouTube? "We need to challenge them," says Big Machine Label Group CEO Scott Borchetta. "If we have the same conversation that we had with Apple" -- Big Machine's roster includes Taylor Swift -- "they can become one of our best partners, because they can afford to be."

Most label executives aren't ­expecting YouTube to have a change of heart -- they're trying to change the law under which it operates. The ­arguments on both sides will inevitably invoke Big Ideas -- ­creators' rights! innovation! free speech! -- but the results will come down to ­realpolitik. And right now, Google has far more influence in Washington, D.C.

But that may not be the case in Brussels, where the European Union also is ­considering copyright reform. In mid-April, EU digital chief Andrus Ansip criticized YouTube's low payouts as unfair to both creators and rival Internet companies. "This is not only about rights owners and ­creators and their remuneration," said Ansip, "it is also about a level playing field between different ­service providers."

If the EU does make any changes to its safe-harbor policy, they likely will be minor. But even a small shift could allow labels to withhold music from YouTube in certain territories -- and use that power to get ­better deals worldwide. "If this proposal goes through in Europe," says IFPI CEO Frances Moore, "it will bring about a ­seismic shift."

If that doesn't happen, the industry will ­continue to see what Muller called a "value shift." He's right -- that is exactly what's ­happening. And the reason labels and artists are upset is that the value is shifting away from them.

This article was originally published in the latest issue of Billboard.