Can Vevo Monetize Music Videos and Help Save the Major Labels?

Universal, Sony-Backed Venture Will Use YouTube to Generate Ad Revenue

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NEW YORK ( -- The plot to save digital music -- or one of them anyway -- is being hatched in midtown Manhattan, where Vevo, a digital joint venture between two labels representing nearly 60% of the U.S. recorded music market -- Universal Music Group and Sony Music Entertainment -- is gearing up for a planned December launch.

Announced earlier this year, Vevo is the label's latest attempt to mine a vein of revenue from digital music. Initially backed by Universal Music Group and Sony Music Entertainment, Vevo was dubbed the "Hulu for music," and while there are many similarities, there's one key difference: Vevo will be built on YouTube's infrastructure, but it will control the distribution of videos from participating labels on YouTube and sites around the web, from Yahoo to MTV.

The venture has quite a bit riding on it. The sale of physical CDs is in decline, and the sale of digital music through stores such as Apple's iTunes is flattening out. There are those who believe music itself is moving from the sale of a product -- such as a CD or digital file -- to a service -- such as Pandora, or Imeem -- but subscription services remain a niche phenomenon.

So if the future of the music business is brand advertising, then that means video, and Vevo is the labels' biggest attempt to make the music videos on the web a premium experience, worthy of ad rates of $20 or even $40 per thousand.

"Advertising will ultimately be a percentage of the music business," said Rio Caraeff, former digital chief of UMG appointed CEO of Vevo in May. "To have a healthy business you need a diversity of revenue sources."

But advertising, like the sale of music itself, has never been the role of the labels. Can they learn? They must, said Ted Cohen, longtime EMI exec and now strategic adviser to startups and the music business. "There are 150 million people coming into contact with music on a daily basis that we are not monetizing."

The good news is that music videos -- once considered a promotional expense for artists -- are very popular on the web, and the labels have lots of them. Music videos and music-related content are easily YouTube's most-popular single genre. Together, UMG and Sony are disproportionately popular on YouTube, accounting for about 72% of music videos. Indeed, UMG artists account for 24 million views on YouTube on average per day and Sony artists account for another 13 million, or nearly 3% of YouTube's 1.3 billion total views a day, according to TubeMogul.

What Vevo launch will mean
When Vevo launches -- and it's scheduled to roll out in December -- all of those views will be subtracted from YouTube and credited to Vevo, meaning it's possible YouTube could take a dip in the ComScore ratings. Not a big deal for YouTube: The hedge is that the Google-owned site will get far more revenue from videos sold through Vevo than they could get on their own because Vevo is likely to command a higher CPM by wrapping the video in a more-premium environment.

But it's likely Vevo will launch even bigger: Warner Music Group, the third-largest U.S. label, is in active talks to join. It's probable WMG will join on a nonexclusive basis as part of a larger digital strategy. But it still adds another 20% of the U.S. music business to the venture, including artists such as Green Day, REM and Madonna.

The startup now has 45 employees, including 20 engineers, a sales staff of six, and as of last week, a sales chief, former MTV and Nokia executive David Kohl. Mr. Caraeff, a former mobile executive at UMG and Sony Pictures, has a long list of engineering challenges to meet in the next two months. Bandwidth, streaming and core technology is handled by YouTube, but what will make Vevo succeed or fail will be its user experience. Mr. Caraeff not only wants Vevo videos to go wherever fans want them to be on the web, he wants to empower fans to do the things they're doing today, only legally, like make playlists, mashups, download lyrics and make their own videos synched to the music.

Of course each of those experiences will have a sponsor, in addition to the traditional video advertising seen widely on the web. Mr. Caraeff said the company is lining up launch sponsors, and already has seven.

While Vevo is often likened to Hulu, the joint venture will actually have a lot more flexibility in how it distributes video. Hulu, for example, is really a computer-only service, with blocked technology that optimizes it for TV (Boxee) and studiously stays off the phone. It has little cable TV, which would threaten the models of TV network distributors.

Vevo will have much more freedom to go where music fans are. "We don't want to change people's behavior," Mr. Caraeff said. "It's not about what's best for the record company and maintaining an old business model; it's about how do you create a model that flows with the physics of the web?"

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