Digital Media
Music Labels Finally Cash In On Videos
Peter Kafka, 09.27.05, 6:00 AM ET
NEW YORK - Here's a lousy deal for you--give away your product, help a new business grow from zero to multiple billions and get nothing in return. That, in a nutshell, is what the music companies did with their promotional music videos more than two decades ago when they supplied then-upstart network MTV with free programming. They've been regretting it ever since.
But new media is giving the music labels a chance to learn from their mistakes. The music video format, which no longer figures heavily on MTV's flagship network, has found new life online, where fans download or stream the mini-movies to their computers. The model is beginning to find traction on mobile phones and now the labels are beginning to cash in--or at least are trying to do so.
The most recent example is a pact announced today between Warner Music Group (nyse: WMG - news - people ) and Viacom's (nyse: VIA - news - people ) MTV in which the cable network will have access to the music company's video library to create new clips it will serve up over wireless phone networks. Terms of the deal haven't been announced and likely haven't been completely ironed out, in part because MTV has yet to decide how or how much to bill consumers for mini-videos beamed to their phones.
The real news here is that both companies have agreed that whatever revenue is generated will be shared by both sides. That's different than MTV's traditional model, where labels pay to create the videos and the network shows them for little, if any, payment to the labels.
"Unlike the economic relationship that we share in cable, in the mobile space this is a business that we will hopefully be building together," said Warner Chief Executive Edgar Bronfman Jr.
The deal itself is fairly limited: MTV is talking not about reselling Warner's videos but creating mini-television programs that feature Warner artists. A pint-sized version of VH1's documentary-lite Driven program, for instance, could feature rock band Green Day. MTV doesn't have exclusive access to Warner's catalog, and Warner can sell its product through other avenues. It already provides content to Verizon Communications' (nyse: VZ - news - people ) VCast mobile-video service, for instance. And MTV said it hopes to strike similar deals with other music labels and content providers in general.
Still, it's a potential new revenue stream for both Warner and the music business, which very much needs one. Although digital music sales through Apple Computer's (nasdaq: AAPL - news - people ) iTunes and other services are beginning to accelerate, traditional album sales are still foundering. After what appears to be a temporary uptick last year, CD sales are trending downward again this year, as they have since 2000.
The fact that the music labels haven't received much to date from MTV is a legacy of its birth in 1981, when the music companies essentially gave their videos to the network for free because they didn't know what else to do with them. By the time they realized the three-minute movies had more value than simply promotional films for their acts, it was too late. MTV had established a powerful brand and a near monopoly.
It has since kept the terms of its deals more or less the same, and by the late '90s, as the network began moving away from music videos to focus on reality fare like The Real World and The Osbournes, the labels had even less bargaining power.
But videos have recently found a new audience online, where viewers generally pay nothing to watch them in exchange for sitting through an ad or two, just like the original MTV format. Yahoo! (nasdaq: YHOO - news - people ) streamed 2.9 billion videos last year, up from 1.3 billion in 2003. Time Warner's (nyse: TWX - news - people ) America Online says it serves up to 3 million to 4 million per day.
Online advertising is proving more and more lucrative. Viacom Co-President Tom Freston said last week that MTV's Overdrive broadband service, which serves up videos on demand, gets ad rates that are up to four times what it commands for an equal-size audience on cable. MTV's online ads, he says, are generating between $75 million and $100 million a year.
After some jawboning, arm-twisting and legal threats, the labels are participating in some of those dollars. Though some of the terms have yet to be ironed out, Warner and other music companies, like EMI Group and Vivendi's (nyse: V - news - people ) Universal Music Group, have extracted advances from online operators like Yahoo! and AOL, and receive a payment for each video streamed.
Now, the labels hope that consumers will want to watch videos on their mobile phones as well. They already have proved eager, at least in Europe and Asia, to buy audioclips that serve as ringtones, providing a windfall for mobile operators, music companies and third-party aggregators like Infospace (nasdaq: INSP - news - people ) that sell and maintain the ringtone libraries.
Labels and carriers have recently begun to squeeze out the aggregators, either by cutting deals directly with each other or reducing their payouts to the aggregators. But MTV has obviously convinced Warner that when it comes to videoclips, it's still a worthwhile business partner--especially since this time it will share the wealth.
