Inside YouTube's Controversial Contract with Indies

Illustration by Sebastien Tibault

Billboard has obtained a typical contract being offered by YouTube to its indie label partners for its new subscription service. The devil is in the numbers, but also in the overall strategy.

Even though YouTube is said to be offering lower rates than those paid by services like Spotify and Rdio for its new subscription service, that isn't even the part of its licensing contract drawing the most anger from independent labels.

According to early versions of the YouTube licensing contracts for indie labels and indie publishers, copies of which were obtained by Billboard, YouTube will pay either a percentage of revenue or a minimum per subscriber to its service, whichever is greater.

 The YouTube contract says its premium service rate for audio-only music adds up to payments of 65.5% of the service’s revenue — 55% to labels  and 10% to publishers and performance rights organizations. For music videos the rate breaks down to 55% of revenue, with 45% going to labels and 10% to publishers.

As for the minimum subscriber rate, YouTube is providing an alternative revenue bucket of $5.50 per subscriber per month to labels and 50 cents to 80 cents per subscriber per month, depending on the music product, to music publishers.

Although the contract that Billboard has obtained appears to be an early version, indie label and publishing sources confirm that the rates are still the same.

Those company payment percentages are lower than the combined 70% in revenue (approximately) that the interactive, premium component of services like Spotify or Rdio pay to labels and publisher rights owners, according to label and digital service sources.

But, it turns out, indies’ unhappiness with YouTube has more to do with contract terms other than the rates they would be paying.

The main beef with YouTube is the company's take-it-or-leave-it approach, which they say includes an onerous and negative most-favored-nation clause. If any major label or major music publisher agrees to any rates for the YouTube service that are lower than the rates set forth in the YouTube contract, Google will have the right to reduce the indie labels' analogous rate accordingly.

Indie executives are furious about this clause because they say that the majors can likely negotiate a three-prong payment scheme that will either include a non-recoupable advance, or a per-stream minimum rate that will negate the percentage rate from kicking in. And since indies don't have the ability to negotiate a third prong to the YouTube payment scheme, they are the ones who would get stuck with a reduced payment, not the major labels.

But some kind of most-favored-nation clause is a standard term across all other music services, a Google source says. This clause is to ensure that all labels -- majors and indies alike -- would get the same deal for future partners integrating with the service. To claim that the impact of this clause disproportionately affects indies would be inaccurate, they claim.

So, if YouTube was was to launch a promotion for the service or bundle the service with another player -- for instance a mobile carrier which had different terms with labels -- then the bundle would offer the same rates to all labels -- the lower rate, not the higher one.

But one service provider points out that Google is acting similar to how iTunes and Amazon operate. "When iTunes introduced its matching-cloud service, the labels were not given any choices. They were told 'this is the service, you will be in it and here is what we will pay,'" that executive recalls. "There wasn't any outcry from indies then. Google sees itself on the same level as iTunes and acts accordingly."

The other major issue that indies have with YouTube's premium service centers on the ad-supported service. By moving to compete against services like Spotify and Rdio, indie labels argue that YouTube needs to bring the ad-supported component of its service to parity with payments for all music streamed in the ad-supported services of its competitors.

Currently, in its ad-supported component, YouTube only pays on those music videos that have advertising connected to it. If a song or music video has all the rights owners assigned to it, but there isn't enough advertising inventory to put an ad against a play(whether an ad buy against a host of videos has been exhausted or that particular crop had none bought against it), then that play is not monetized. But YouTube's competitors have a formula to pay labels for every single play in their services.

In the ad-supported version, "they are saying they may monetize our music, but there is no guarantee that they will," says one executive in the indie label camp. "We know that in the other interactive services every piece of our content will be monetized. But YouTube is moving the goalposts on us, and may only monetize 90% of our content. If you already have lower rates and then [they] may not monetize all our content, that further reduces the revenue bucket."

However, a YouTube source says that if every video had ads against it, it would drive away users and reduce plays. By mixing up videos with commercials and ones without them, YouTube is trying to keep its user base high and drive up overall advertising revenue. "In the long run, this will bring more revenue and be a good experience for everyone involved, the artist, [rights owners], viewer and the advertiser," that source says. "Now that we are adding the premium component, we have also improved payment terms from what they were initially for some of the music categories in the ad-supported component."

Still, indie labels are worried that the other subscription services will complain about all the free plays on YouTube's service, and will go on to make similar demands. Moreover, indie labels say that they are bothered that YouTube has no stake in growing the premium business, because they do not provide indie labels with a minimum-guarantee requirement, such as a minimum per-stream rate for plays.

The majors wanted to insure that YouTube had skin in the game, so they pushed for and got some type of minimum-guarantee requirement, according to major label sources.

Although the indies may not like that they didn't get the third revenue bucket, it sounds like YouTube does in fact have skin in the game due to those agreements with the majors, which could prove costly if it doesn't aggressively promote its premium service.

Finally, indie labels worry that the YouTube subscription service will not grow the overall pie, but rather cannibalize users from other services -- or even its own ad-supported service. And, since it is paying that lower rate of 65.5% in the premium service, it could actually reduce the overall pie.