Bringing Multichannel Networks in From the Cold: Universal’s Deal with Fullscreen and Maker Studios

We’ve all heard the various canards from the freehadis–you can’t compete with free (meaning you can’t compete with advertising-supported piracy), and as recently as yesterday in the Guardian, the explanation for piracy is that music and movie companies haven’t “updated their business model” (whatever in the world that means), so they deserve to be stolen from.

But we rarely hear about the successes–for example, Napster (the elder) had a deal with the Harry Fox Agency and AIM, major labels licensed p2ps through SNOCAP, etc.  So here’s the latest success you won’t hear about (much)–Universal Music Publishing (home of one big-ass catalog) has licensed not one but two of the heretofore shadowy YouTube “multichannel networks” (or “MCNs”): Fullscreen and Maker Studios.

The deal is a huge feather in the cap for Universal.  The main reason?  Fullscreen and Maker have their own channels on YouTube for which they (a) produce most of the programming and (b) get a better split of advertising revenue than your average bear posting a video on YouTube (which can involve a direct sales team that sells ads on the channel).

Part of coming in from the cold is that we don’t look too much at the fact that these channels were around before they did their deal with Universal….others may not look so kindly on them.

For producers at an MCN, they know that if they use music licensed by Universal Music Publishing in accordance with the deal, they don’t have to worry about getting a claim later.  For executives and board members at an MCN, they know that they don’t have to worry about embarrassing their investors (especially investors from the movie business…not mentioning any names) with a lawsuit.  A particularly pointless lawsuit when a license is available.

And here’s the real lesson:  most of these licenses start with a claim for the infringing use of the works concerned.  The artists and songwriters would almost always prefer a license and license terms are frequently offered although often rejected.  History is strewn with the remains of those who tried to place themselves above the law, often against the advice of their own counsel.

Who are the real winners in Universal’s license of these MCNs?  First and foremost are Universal’s songwriters.  They will now be getting a share of the better advertising revenues that MCNs can negotiate with YouTube instead of zero.  Video producers at the MCNs also benefit from what is essentially an umbrella deal allowing them to use Universal’s songs.  (Umbrella deals is a technique long used in the music business with repeat users of music.)  Advertisers on MCNs benefit because they cannot be accused of supporting piracy.

And of course the MCNs themselves benefit because they can tell investors that the MCN is operating within the law and do not have to waste money on pointless litigation.

We assume that the MCNs are busily trying to do comparable deals with other music publishers so that their songwriters will also benefit.  Once again, Universal has demonstrated its “tough but fair” side and shown leadership.  Certainly, Universal is not the only big publisher who could have done this.  But they were the first and we have to assume there will be others.

Of course, the deal doesn’t take care of the inherent claiming problems within the YouTube CMS system or the endless screwups at YouTube–all of which increase the transaction costs of doing business with sloppy partners.  (And transaction costs ultimately reduce the royalties.)  It also doesn’t cover what must be a rather large pot of money due to YouTube’s policy of “monetizing” songs without having a license from all of the songwriters or their publishers on particular songs.  (Meaning that if a song is co-written–and there are tons of those–and if YouTube has a license from one of the writers, YouTube will “monetize” that song and accrue the songwriter royalties until the other songwriters come forward…which may be…never?  Do you think “catch me if you can” Google would actually reach out to find a co-writer? Can you say “red flag knowledge”?)

Extracting this unallocated revenue from YouTube will no doubt be an even bigger fight than songwriters had over the recent “pending and unmatched” settlement.  At least when you are dealing with record companies, they will pay up.  By comparison to Google, record companies pay up without a struggle.  Google is more than happy to pay songwriters–when you get a final, nonappealable judgement in every country in the world.  Or when you fight your way through a defective content management system that would give Mrs. Palzgraf the heebie jeebies.

It appears that Universal’s direct deal with the MCNs may well sidestep the unallocated problem with the larger YouTube because Universal likely can fix the YouTube matching problem at the source since MCNs license the music directly and report the revenue directly, too, which hopefully will translate into more control over the reporting for MCN revenue shares.

But Universal has shown one of the most important principles in the digital economy–make sure that all the people who want to play nice have a license, but more importantly make sure they pay you and that you are getting a straight count.

For more detail, see the Billboard coverage.