IP Democracy: Record Companies Hold Stake in YouTube

No wonder that Universal Music filed suit against Grouper and Bolt and not YouTube. Aside from the fact that Universal cut a deal with YouTube that allows its music videos to be distributed over the site, Universal also bought a small stake in the company immediately prior to its acquisition deal with Google. The New York Times’ Andrew Ross Sorkin and Jeff Leeds have this piece today on how Universal Music, Sony BMG Music and Warner Music all bought stakes in YouTube just before the Google deal was announced.

It’s an easy $50 million profit for the three combined, according to the piece, and Google now has the added assurance that it won’t be sued by the litigious pack of record companies for YouTube-related infringement. What a brilliant piece of deal-making and it shows signs of a heretofore absent sense of business smarts on the part of the record companies.

As Sorkin and Leeds point out, the music industry’s legal battles against Napster and other P2P services ended up in pyrrhic victories that left record companies with favorable court decisions but dwindling coffers. Even though Universal has lodged suits against other video sharing sites, its decision to cut a deal with YouTube is a ray of hope that record companies might try to adapt rather than fight change.

The decision to take a stake in YouTube is a sharp departure from the tack that record companies took regarding Napster, the pioneering file-swapping service that transformed the industry in 1999. Back then, after the major companies filed suits against Napster, the two sides discussed various settlements that involved the music companies receiving a big equity stake.

The Napster talks, which were led on the industry side by Edgar Bronfman Jr., then the chief of Universal’s then-parent Seagram — eventually broke down.

The record companies went on to win a series of legal victories that ultimately forced Napster to shut its site, but the labels have been fighting an uphill battle against free peer-to-peer services ever since. The music industry has also filed thousands of lawsuits against individuals, hoping the threat of civil fines will reduce unauthorized sharing of songs.

But the failure to end digital piracy and the continuing slump in CD sales has slowly pressured record executives to rethink their approach to Internet distribution.

Posted by Cynthia Brumfield on October 19, 2006 10:00 AM to IP Democracy