Key players in the independent label community are preparing for a legal skirmish with YouTube over content being used on the video-sharing site.

Sources tell that the independents are aggrieved with terms proposed by the giant social networking service for the use online of their copyright-protected works. And legal actions have not been ruled out.

"People are getting very pissed off about YouTube's attitude," says a well-placed source at one of Britain's most influential indies. "It's either sign [the contract] or suck it, and we know its not the same deal that the majors have been offered. There's definitely a ground swell that we need to take action."

Online search giant Google agreed to buy YouTube on Oct. 9, 2006 for $1.65 billion in stock. On the same day, YouTube announced new deals with music majors Universal Music Group and Sony BMG that were modeled after its two-week-old pact Warner Music Group.

However, executives tell that royalty negotiations between YouTube and the indies have proved disappointing thus far.

"Anyone who is not a major is not happy with the terms," says one well-placed insider at one of Britain's biggest indies.

"We fully expect to be compensated fairly and on par with the larger companies, we will not accept second rate terms because we are smaller companies. If we have to take legal measures to protect our rights we will do so," comments Simon Wheeler, head of digital at Beggars Group, home to such acts as Thom Yorke and Basement Jaxx.

Wheeler adds, "If anyone uses our copyrights without a license, we as Beggars, and the independent sector as a whole, take it extremely seriously."

Independent record sector licensing agency Merlin was ratified and announced recently at the MIDEM trade fair in Cannes with a remit to negotiate terms with the likes of YouTube and the advertising-funded service SpiralFrog. A first-up deal with Snocap has already been struck, while others are "in process," explains Alison Wenham, CEO of U.K. trade group the Assn. of Independent Music (AIM) and president of Worldwide Independent Network (WIN), of which Merlin is a sister operation.

Merlin, however, is some months away from truly wielding its collective clout, and, despite a report on industry blog site Hypebot, has not sent cease and desist letters. Sources familiar with the situation confirm that YouTube has not yet received any cease and desist letters from the independent community.

"Merlin is not at the stage where talks could break down," explains Wenham. "The reality is that it won't start to be properly operational until about June."

Charles Caldas, former CEO of Shock Entertainment Group, is expected to relocate from Melbourne to London this Easter to take the reins as Merlin CEO.

"The indies represent 30% of the worldwide marketplace," says Peter Gordon, Thirsty Ear founder and VP of WIN. "The disconnect is that people do not realize our depth and strength and they have not seen that we've been unified. It may be a rude awakening, but here we are."

A spokesperson for YouTube says, "YouTube enjoys working with all content creators, including record labels small and large. Partnerships with content creators and the community are crucial to our success, and in the coming months, we look forward to continuing to help our partners monetize the content they create."