Warner Announces Deal With YouTube

SAN JOSE, Calif. - A revenue-sharing deal between video startup YouTube Inc. and Warner Music Group Corp. is likely to be the first of a spate of content distribution partnerships between Web sites and music companies, industry officials say.

Warner Music Group Corp., the country's third-largest recording company with annual revenue of $3.5 billion, announced Monday a deal to distribute and license its copyrighted songs and other material through YouTube. The agreement means that millions of YouTube users can legally watch music videos or include popular songs in their own homemade videos that they post on YouTube.

Universal Music Group spokesman Peter LoFrumento confirmed Monday that Universal - the top record label in the world, representing artists such as Eminem, Melissa Etheridge, Snoop Dogg, Shania Twain, Stevie Wonder and Sting - is also negotiating with YouTube to strike a distribution deal.

Last week, Universal Music Group CEO Doug Morris said that the company had to figure out some way to stop "copyright infringers" such as YouTube and News Corp.'s social networking site MySpace.com. Morris implied that, if YouTube negotiations fell through, Universal might resort to lawsuits or other measures.

Sony BMG Music Entertainment is also negotiating with YouTube, but a representative for New York-based Sony BMG said Monday that the company wouldn't comment on ongoing negotiations. Sony BMG labels include Arista Records, Columbia Records, Epic Records, Sony BMG Nashville and Sony Urban Music.

Negotiations between the 19-month-old startup YouTube and the biggest players in the recording industry mark a major change in the previously chilly relationship between Hollywood and Silicon Valley.

For years, music and movie companies were reluctant to use the Internet to disseminate content because of the threat of piracy and copyright infringement. But business experts say the phenomenon of YouTube and MySpace - particularly among young consumers - have forced the labels to venture online.

Simultaneously, startups seem increasingly willing to come up with revenue-sharing business models that compensate recording executives and their artists, said Phil Leigh, president of market reseach group Inside Digital Media.

"The Warner deal is one more piece of evidence that the record labels are comprehending the value of free music distribution," Leigh said. "Instead of insisting on being paid every time, they're realizing they can use the Internet to popularize music and stimulate demand for both CD and digital downloads."

The Warner-YouTube deal, announced Monday, means that Warner will transfer thousands of its music videos, artist interviews and other digital content to San Mateo, Calif.-based YouTube, a Web site launched 19 months ago by two 20-something buddies.

Industry analysts praised the deal. Instead of protesting free digital distribution by sending cease and desist orders or lawsuits, as record labels did several years ago with Napster and other emerging sites, Warner and YouTube can work together.

Consumers will likely have access to Warner music videos and songs by the end of the year, when YouTube rolls out an advanced content identification and royalty reporting system to help minimize copyright infringement.

"Warner has been the most aggressive in all things digital, whether downloads or ring tones and now video," said American Technology Research Senior Analyst P.J. McNealy. "This is a natural progression and a pre-emptive strike to help eliminate potential copyright concerns."

Besides the namesake label, Warner is releasing titles from the Atlantic, Asylum, Elektra and Rhino labels, which feature artists Led Zeppelin, the Doors and Ray Charles, as well recent hit makers Linkin Park, Green Day and Faith Hill.

YouTube and Warner will share revenue from advertising on both Warner videos and videos that YouTube users upload that include content from Warner's music video library. YouTube users view more than 100 million videos per day.

Pacific Crest Securities analyst Steve Lidberg expects the Warner deal to be the first of many in upcoming months.

"The labels still want to be paid each time. What's changed is that they've found new monetization models where they can get paid," Lidberg said. "It's a new revenue source for Warner that they weren't getting paid from before. ... I'd expect this to be the foundation by which YouTube could have other discussions with the major labels in the marketplace."

Warner stock closed at $24.40 Monday, down 10 cents from Friday on the Nasdaq Stock Exchange.