YouTube Revenues Explainer

I had the good fortune to participate in a SXSW panel about the mechanics of YouTube revenues.  If I say so myself, it was a wonderful panel with some deep expertise (“Stop Complaining and Start Monetizing“).  There was a real interest in the audience about the mechanics of the rights involved and the revenues paid.

If you have that same interest and you weren’t able to go to SXSW, here’s a basic chart of revenue splits that may help you:

YouTube Chart

Source: Billboard

YTP, YTPC= “YouTube Partner“, “YouTube Partner Channel”
SR= Sound Recording
WW= “Wild West” meaning no particular rule.

Notice that the basic categories are song, sound recording and video which track the main three copyright categories of musical work, sound recording and audiovisual work.

The percentages refer to shares of “Net Ad Revenue” often defined as:

“Net Ad Revenues” means all gross revenues recognized by YouTube attributable to any sponsorship of or advertising displayed on, incorporated in, streamed from and/or otherwise presented in or in conjunction with any User Video displayed on a Covered Service including, without limitation, banner advertisements, synchronized banner advertisements, co-ads, in-stream advertising, pre-roll advertising, post-roll advertising, video player branding, and companion ads, less ten percent (10%) of such gross revenues for operating costs, including bandwidth and third-party (affiliated or unaffiliated) advertising fees. Net Ad Revenues excludes any e-commerce referral fees received by YouTube from “buy buttons” or “buy links” on the Covered Services that facilitate recorded music “upsells” when a Publisher separately receives payment from a third party in connection with such an upsell (e.g., royalties for a CD or sheet music sale); provided, however, for the avoidance of doubt, that such exclusion does not extend to (a) advertising of the type described in the first sentence of this Section for recorded music products, the revenues from which shall be included in Net Ad Revenues; and (b) all other types of e-commerce referral fees and revenues, which shall be included in Net Ad Revenues.

One key component of your YouTube earnings is the “CPM” paid by advertisers to Google.  Even if you have the right to audit YouTube (which few do), it is highly unlikely that you will ever be able to determine what the CPM is that Google uses to pay you on YouTube.  Multichannel networks (“MCNs”) like Machinima have reportedly tied creators to CPMs that were well below market, particularly considering that the highest CPMs on YouTube are often associated with exactly the kind of talent most frequently signed to an MCN.

“Official” or “Premium” Videos

When a label uploads an “official” music video on YouTube or Vevo, the video has higher production values than UGC and is usually supported by a sustained marketing effort outside of YouTube that drives traffic to the site.  If the premium video appears on Vevo, then 100% of the royalty is paid to the label, which in turn has licenses from the publishers for the song.  If the video is on YouTube proper, then the label’s share is reduced by the publisher royalty, often around 15% of net ad revenue.

Claiming and YouTube’s Content Management System (“CMS”)

Because of a combination of YouTube’s monopoly position in the market, Google’s controversial reliance on the notice and takedown provisions of the Copyright Act and its sheer litigation muscle, YouTube will let anyone upload anything also known as “user generated content” or “UGC”.  If you have access to YouTube’s “Content Management System” or “CMS” you have the chance to block UGC through YouTube’s “Content ID” fingerprinting tool.

Compared to the massive volume of videos uploaded to YouTube, a very, very small percentage of copyright owners have direct access to Content ID.  According to YouTube:

YouTube only grants Content ID to copyright owners who meet specific criteria. To be approved, they must own exclusive rights to a substantial body of original material that is frequently uploaded by the YouTube user community.

Participating in Content ID allows you to help YouTube create a vast and valuable library of reference versions of  your works.  (YouTube does not compensate you for participating in Content ID.)  Rightsholders usually participate in Content ID for two reasons which are not mutually exclusive:  Blocking or “monetizing”.  Monetizing means that you give YouTube permission to sell advertising against your works.  Naturally, YouTube hopes you will choose to monetize because over 90% of Google’s revenue comes from selling advertising online.

YouTube creates a reference version of your work in the form of a “fingerprint” (a psychoacoustic technique that has long been in use by the U.S. Navy among others to distinguish sound patterns–see Jonesy in The Hunt for Red October). A fingerprint is a mathematical rendering of the waveform of an audio file that essentially reduces a sound recording to a kind of hash that makes comparing fingerprints quicker and more accurate.

YouTube maps the reference fingerprint to other identifiers such as the International Standard Recording Code for sound recordings, song title, artist name and copyright owners for all of the above including song splits in many cases.  When a work is in the Content ID system, YouTube will compare an uploaded video to the Content ID database reference fingerprint and most of the time will follow the rules established by the copyright owner to block or monetize (often called “match policies“).  If the match is done before the UGC video is uploaded, then it won’t go live, and if the match is done after it is live, then the users will see one of YouTube’s controversial messages saying the file is blocked due to a claim by copyright owner X.

What this boils down to is that if you don’t have a label or publisher, you will need to go to a claiming service like Adshare, The Collective or Onramp in order to get access to CMS and Content ID in order to monetize your works outside of a YouTube Partner Channel (which is done through an Adsense account associated with your YouTube Partner account).  If you have a label, publisher or claiming service, then all of these entities should have access to CMS and Content ID and will be able to claim your songs, sound recordings or videos and monetize them if you wish.

Deciding if Monetization is Right For You

If you’re familiar with term recording artist agreements or publishing agreements (or what is normally called a “record deal” or “publishing deal”), you’ll probably remember negotiating “marketing restrictions” involving the use of your recording or song in advertising.  Those clauses usually restrict the use of your works in political ads, certain kinds of products (firearms, tobacco for example), or more artist-specific restrictions.  There are also restrictions on the kinds of movies or television programs (even videogames) in which your works can be used.

If you allow your work to be used in UGC and you elect to monetize, you can just forget all that on YouTube.  “UGC” includes just about anything you can imagine short of explicit pornography, but would include, for example, sex tourist home movies, jihadi recruiting videos (although “songs” are unlikely to appear there), hate speech and the like.  All of those are on YouTube and frequently are not behind any kind of age restriction wall.

The ads that get served as preroll for these videos are themselves often unsavory.  For example, Google serves ads for “dating” sites that are in categories frequently identified as thinly disguised human trafficking operations.  There are ways to block these particular uses if you have access to CMS but due to YouTube’s “catch me if you can” business practices, you may have to spend the time to track down each use which otherwise can stay on YouTube for months or years.

Winning the Lottery

We often hear about “YouTube stars” with elite channels (1 million plus subscribers) who are very well compensated.  The source of this high level of compensation is rarely limited to advertising revenue.  Most of the time, their ad revenue is salted with a high number of payments for what are essentially sponsorships, endorsements or product placements, often called “brand integrations“.

In the music and movie businesses, the term “star” is usually reserved for a relatively small group of performers who have demonstrated ability over time to reach a large audience, often a global audience.  YouTube “stars” may have large YouTube communities and may be able to introduce products to fans on YouTube, but whether that will hold up on YouTube over time or translate to other platforms remains to be seen in most cases.

It is also important to realize that advertising is a highly regulated business, particularly when it comes to false or deceptive advertising that is regulated by the Federal Trade Commission.  Machinima has just entered a 20 year consent decree with the FTC to settle claims that it misled consumers by passing off paid endorsers as independent reviewers.  Given that Machinima and other MCNs are supposed to protect their talent from such missteps suggests that YouTube stars may well have more to watch out for on YouTube than do recording artists or songwriters on record labels or music publishers.

Online Advertising in Decline

Whether it is ubiquitous ad blocking software, “do not track” settings on browsers, or distrust of advertisers, online advertising is in decline.  Like a ship that is sinking very slowly, it is sometimes difficult to tell if you’re really lower in the water, or if that was just a wave.  And remember, over 90% of Google’s revenues come from online advertising, moonshots notwithstanding.

If the online advertising ship really does sink, all the driverless cars, military robots and Google Glass will not save Google or YouTube.  That’s something to keep in mind when you agree to participate in the YouTube monetization game.


Investor Alert: Multichannel Networks Have Exposure to Deceptive Advertising Prosecution

We’ve all seen “brand integration” videos on YouTube promoted or produced by multichannel networks such as Maker, Machnima and others.  I’ve been convinced that if these videos were on television, they would violate the “sponsorship identification” or payola rules that require disclosure of consideration paid or exchanged for placement.  (As an aside, David Lowery has raised this issue in the context of “steering agreements” by Clear Channel and Pandora.)

Even so, there’s a straight up false advertising claim that could apply in these cases and the Federal Trade Commission has now prosecuted a claim against Machinima, one of the biggest.  (Read the FTC endorsement guidelines for social media here.)  All MCNs and YouTube itself should take note.  (Good thing for YouTube that they have extraordinary political influence at the FTC, but that’s another story.)

The FTC first published the case on September 2, 2015:

A California-based online entertainment network has agreed to settle Federal Trade Commission charges that it engaged in deceptive advertising by paying “influencers” to post YouTube videos endorsing Microsoft’s Xbox One system and several games. The influencers paid by Machinima, Inc., failed to adequately disclose that they were being paid for their seemingly objective opinions, the FTC charged.

Under the proposed settlement, Machinima is prohibited from similar deceptive conduct in the future, and the company is required to ensure its influencers clearly disclose when they have been compensated in exchange for their endorsements.

“When people see a product touted online, they have a right to know whether they’re looking at an authentic opinion or a paid marketing pitch,” said Jessica Rich, Director of the Bureau of Consumer Protection. “That’s true whether the endorsement appears in a video or any other media.”

Seems pretty simple, right?

According to the FTC’s complaint, Machinima and its influencers were part of an Xbox One marketing campaign managed by Microsoft’s advertising agency, Starcom MediaVest Group. Machinima guaranteed Starcom that the influencer videos would be viewed at least 19 million times.

In the first phase of the marketing campaign, a small group of influencers were given access to pre-release versions of the Xbox One console and video games in order to produce and upload two endorsement videos each. According to the FTC, Machinima paid two of these endorsers $15,000 and $30,000 for producing You Tube videos that garnered 250,000 and 730,000 views, respectively. In a separate phase of the marketing program, Machinima promised to pay a larger group of influencers $1 for every 1,000 video views, up to a total of $25,000. Machinima did not require any of the influencers to disclose they were being paid for their endorsement.

While it’s good that the FTC brought this case, the dollars are truly small potatoes in the world of YouTube stars with elite channels boasting over 1 million subscribers.

YouTube star Nikki Phillippi told Frontline:

“[W]hat is happening with YouTube is there is this weird line where I won’t rep a product I do not like, but, that being said, I don’t work with brands that don’t understand the value of YouTube either. I would rather not make as much and do stuff by myself, for free, with stuff I have picked up from the drugstore, than work with a company who either doesn’t understand the value of it, or does understand the value of it, but they think that we don’t, and are like here is $100, and I realize that that sounds really strange to people […] but it’s really what is going on in the industry and a matter of trying to elevate and help the entertainment industry kind of segue and understand the value of digital marketing.”

The FTC announced the consent decree today (songwriters take note–it’s not just you).

Following a public comment period, the Federal Trade Commission has approved a final consent order with Machinima, Inc., requiring the company to disclose when it has compensated “influencers” to post YouTube videos or other online product endorsements as part of “influencer campaigns.”

According to the FTC’s complaint, announced in September 2015, the California-based online entertainment network engaged in deceptive advertising by paying influencers to post YouTube videos endorsing Microsoft’s Xbox One system and several games. The influencers paid by Machinima failed to adequately disclose that they were being paid for their seemingly objective opinions, the complaint alleges.

The final order settling the complaint prohibits Machinima from misrepresenting in any influencer campaign that the endorser is an independent user of the product or service being promoted. Among other things, it also requires Machinima to ensure that all of its influencers are aware of their responsibility to make required disclosures, requires Machinima to monitor its influencers’ representations and disclosures, and prohibits Machinima from compensating influencers who make misrepresentations or fail to make the required disclosures.

On PBS’s Frontline, YouTube star Tyler Oakley says:

“If you want to get involved, then you have to play by our rules. This is our platform. We have built this up in our own capacity, in our own way without you. So if you want to come on and if you want to get involved, you can’t just come in like a bully and kind of get your way. You may have to like, play by our rules a little bit. Which is FUN!”

Actually, we all have to play by the same rules.  MCNs take note: You could be next.

As Ben Popper in The Verge summed it up:

As consumers increasingly turn to ad blockers, brands and the media companies are blurring the boundaries of advertising and independent content. Add in teenagers with little business experience and millions of passionate followers on platforms like YouTube, Instagram, and Snapchat, and you have a recipe for unscrupulous advertising that the FTC is clearly working hard to bring under control.

Is It Possible for Songwriter Metadata to Be Delivered to Retailers?

Metadata delivery is a hot topic at SXSW this year.  On a panel about data featuring representatives from two large digital aggregators, a question from the audience raised a salient issue:  If retailers are being sued because they are not licensing songs properly, is it even possible for labels or aggregators to deliver song share information to retailers directly?

If aggregators were able to collect the split data on songs, particularly the long tail, at the time the tracks were “ingested” into the aggregators systems, would that do any good if the retailers aren’t set up to take delivery.

One aggregator said that they didn’t collect publisher information “because publishers change all the time.”  That’s really not entirely true.  Another said that they don’t require the information, and that they don’t collect splits.  That suggests that the information is being collected for credits purposes.

In a separate conversation with a songwriter, it turns out that she had been told by a third aggregator that they don’t collect the data because the retailers don’t accept delivery of it. Between those three aggregators, I would guess that they cover over 50% of the market, and probably closer to 2/3.

This is pretty good anecdotal evidence that even if the “global rights database” existed, retailers would be unable to take full advantage of it without retooling their systems.  At the moment, it seems that the consensus thinking at aggregators is that since the retailers don’t collect the information, why bother requiring it as delivery item?

Aside from the fact that the market is failing to produce the information from an accurate source (the sound recording owner) at a key moment when transaction costs would be lowest (before the track and song go live).

Save the Date April 18th in DC: Chris Castle on Copyright Office Moral Rights Symposium

CO Program

I am honored to have been asked to participate in this symposium on moral rights co-sponsored by the U.S. Copyright Office and the Center for the Protection of Intellectual Property at the George Mason University School of Law.

Moral rights is a key area of the law of copyright that is sadly lacking in the United States and an important legal tool to protect the rights of artists.  You can find more about the symposium on the Copyright Office page.

Investors and Music Licensing

by Chris Castle

Music licensing for online music services is a pay me now or pay me later kind of thing.  From an investor’s point of view, the paying is going to be done with your money and if you pay later, you’ll probably–almost certainly–pay a lot more.  This illustrates the rule of thumb–if you don’t have a license, don’t use the song or recording.

To better understand music licensing, let’s take the example of a single song and recording.  That’s right–the song and the recording are separate property rights, or copyrights in this case.  The song and recording may be owned by the same person or by different people.  A bit of nomenclature: Songs are created by songwriters and are frequently owned or administered by music publishers.  The symbol for a song is often a “©”.  Recordings are created by artists and are frequently owned or distributed by record companies or “labels”.  The symbol for sound recordings is often a “℗”.  Labels ≠ publishers and © ≠ ℗.

In the easy case, let’s take a single song written and recorded by one person who acts as her own publisher and label.  In this case, your portfolio company can get one license from one person for all the rights (except the right to publicly perform that song, which almost invariably comes from either ASCAP, BMI or SESAC under a blanket license.  Those entities are are called performing rights organizations).

If the same artist records “Yesterday” written by John Lennon and Paul McCartney, then the company will license the artist’s recording directly.  Your portfolio company will also need to get a license (probably a “mechanical license”) from Lennon and McCartney’s music publisher Northern Songs, Ltd.

A mechanical license can either be “direct” or “compulsory.”  If the license is direct, then your portfolio company will contract directly with Northern Songs for the use.  If the license is compulsory, then your portfolio company may be able to take advantage of the government-mandated mechanical license depending on the intended use.

The government-mandated mechanical license covers certain types of functionality only.  This license, sometimes called a “compulsory license”, is found in Section 115 of the Copyright Act (17 USC 115) and the corresponding regulations in the Code of Federal Regulations (especially 37 CFR § 201.18, § 201.19 and §385.10-§385.17).  (The Copyright Office has an excellent plain English summary in its Circular 73.)  Taken together, Section 115 and the regulations are a kind of uniform mechanical license that applies to all “mechanical reproductions” of songs, including streams.  (Not dissimilar conceptually from the way the Uniform Partnership Act covers partnerships.)

The thing to remember about compulsory licenses is that if your portfolio company qualifies for one, it’s entirely likely that all of its competitors do, too.  If your company’s services are truly innovative, then you’re probably in the direct licensing bucket as the compulsory license is for more standard types of functionality.

Direct Statutory or
Blanket License
Song © Contract (interactive) Sec 115 Mechanical (permanent download, limited download, streaming, a few others)

Non interactive usually does not require a mechanical license

Sound Recording ℗ Contract (interactive) Sec 114(g) SoundExchange (noninteractive) N/A for interactive
SoundExchange for non interactive

In order to take advantage of the compulsory license, the Copyright Act requires that your company comply with certain formalities.  Assuming that the song is subject to a compulsory license (many but not all are), the threshold formality is that your company send a notice informing the owner that your company intends to rely on the compulsory license.  That notice is sent either to (1) the copyright owner of the song, or (2) the U.S. Copyright Office if the copyright owner cannot be found.  The notice has to be sent before or within 30 days of making, and before distrib­uting, any reproductions of the song.  The reference to “making” is more of an analog concept, but the the import of “before distributing” is pretty clear.

In addition to sending the notice, your portfolio company’s other threshold obligation is to account and pay royalties to the copyright owner or authorized agent of the owner on or before the 20th day of each month for every copy “made and distributed“.  Notice that phrase “made and distributed”–not sold.  That means that unless you have an agreement to the contrary with the copyright owner, the compulsory license requires a payment for every reproduction of the song whether or not your portfolio company was paid.  This is one reason to get a free license for the iTunes “download of the week” for example.

The compulsory license establishes a royalty rate and a method of calculation of that rate. The Copyright Office publishes a list of those rates.   The method of calculation is especially relevant for revenue share rates.  Remember–if you don’t have a direct license and you don’t qualify for the compulsory license, the royalty rate is entirely at the discretion of the copyright owner.

If your portfolio company tells you that they are “escrowing” royalties without a license, the alarm bell that should immediately go off is how can they know what the rate is if they don’t have a license.  And if they don’t know what the rate is, how can they “escrow” a royalty?  (Setting aside the fact that no such “escrow” is permitted for unlicensed songs.)  And if they don’t know who is entitled to the money, how can that copyright owner have ever agreed to the escrow.

The closest that the Copyright Act comes to establishing an “escrow” concept is for users who want a compulsory license but can’t find the copyright owner’s name or contact in the Copyright Office records.  (Most users look beyond the Copyright Office records.)  For unfindable copyright owners, the user files the notice with the Copyright Office licensing division, but accrues the royalties in anticipation of the copyright owner being found or coming forward.  (This raises a question of what happens to any accrued royalties if the user goes out of business for whatever reason.)

The important thing to remember about filing these notices and complying with the license is that doing so can stop an infringement claim, assuming no other problems.  While there is a filing fee for each song that averages about $25 per song, that’s pretty cheap insurance to avoid a copyright infringement lawsuit or the other statutory rate–statutory damages.

If your portfolio company plans to use a large number of songs, say in the millions, you can see that filing fee adds up.  The first question for investors is whether the company really does need to use that many songs.  If there is reliable consumer research that supports the idea that a successful consumer offering requires tens of millions of songs, I haven’t seen it.  If you don’t have a good reason to get into licensing tens of millions of songs in order to launch then you probably should take a more leisurely and prudent pace. Because you’ll either pay now or pay later.

As I will address in a future post, there is a way to get direct licenses and avoid the entire process of statutory licensing.




Are ISRCs Driving You Crazy? Check the ISRC Search Site Solution

Are you in that happy category of folks that don’t know what an “ISRC” is?  Or do you know what it is and it’s driving you crazy?  If you’re in the latter group, there is good news for you.  SoundExchange and the IFPI have partnered to bring you a searchable database of ISRCs, and here’s why you care.

Starting in the early 1990s, the music industry created a unique track-level identifier called the International Standard Recording Code or “ISRC”.  It took a little while for the code to propagate but by the time digital distribution started to get serious around 2000, ISRCs were in wide use mostly embedded in the PQ data of compact discs, although a master list of some kind usually lived in the files of record companies.

The ISRC is the one common identifier that allows the recording to be tracked and associated with other fields such as track name, artist name, repertoire owner (e.g., record company), tax ID or payee information, and of course the corresponding song information.  It would have been nice if the mp3 ripping software that became ubiquitous in the late 90s had captured the ISRC from the PQ subcode data in the CD being ripped, but the software was designed to ignore ISRCs so none of the billions of mp3 copies out there can be tracked very easily.

SoundExchange is bringing together the ISRCs from many IFPI member record companies and making that list into a public facing searchable database at the SoundExchange ISRC Search Site.  This will make positive identification of sound recordings much easier.

ISRC Search