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How Much Does YouTube Cost the Music Industry?

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A recent study found that YouTube costs Warner Music Group upwards of $40 million per year in lost album sales. The same conclusion could be made about Sony (NYSE: SNE  ) and Universal Music Group -- the other members of the big three major labels.

But the Google (NASDAQ: GOOG  ) subsidiary isn't necessarily to blame for the declining revenue throughout the music industry. In fact, it would seem as though YouTube is a net positive for music revenue.

Source: Wikimedia Commons

How much does YouTube cost the music industry?
In 2009, Warner Music Group (WMG) decided to pull all of its music from YouTube over a licensing dispute. The blackout lasted from January to October, providing researchers with a large enough window to study the effect of YouTube on album sales. A couple researchers from Fairfield University and the University of Colorado Boulder recently published their findings.

The study found that removing content from YouTube boosted sales by as much as 10,000 albums per week. The researchers are keen to point out the effect is much stronger on the most popular albums (i.e., top 10, top 25) than it is on less popular Billboard Top 200 albums. In fact, the effect is negligible on albums outside the top 50. This finding seemingly negates the notion that YouTube has a promotional effect.

In their conclusion, the researchers assert that an average top album could lose about $1 million in sales due to YouTube. They use an average effect of 4,000 displaced album sales per week and 40 top albums for WMG.

If we consider YouTube only has an impact on top 50 albums, as the study implies, we can estimate the music industry as a whole loses about $130 million per year from YouTube. This is in line with the study's estimates for the impact on WMG's revenue and the U.S. music industry's revenue as a whole.

How much does YouTube generate?
Nearly 40% of all YouTube views are music-related, making it the No. 1 music streaming service. Vevo, the music video site founded by Universal Music Group, is the most popular channel on YouTube with over 4 billion streams per month. 

YouTube reportedly pays out between $0.60 and $2 for every 1,000 music streams. On the low end, Vevo alone takes in an estimated $30 million per year in royalties from Google. Note, Vevo only hosts music videos from Sony and Universal and represents just a small portion of the music streams on YouTube. Psy isn't even on there!

Psy Source: Wikimedia Commons.

Overall, YouTube VP of content Tom Pickett claims the company has paid out more than $1 billion to music rights holders "over the last several years." $1 billion more than covers the estimated losses in album sales from YouTube since Google purchased the platform in 2006.

The music industry needs to learn how to use YouTube
Instead of harping on studies that point to YouTube as one of the reasons for diminishing revenue, the music industry needs to milk YouTube for all it offers. Whereas music videos used to be promotional tools, they're now the product. They need to promote these products differently than they're used to.

Baauer. Source: Wikimedia Commons.

Brandon Martinez of MCN INDMusic, who helped the Mad Decent label capitalize on the viral success of Baauer's Harlem Shake last year, said, "for every piece of content you release, there should be 6-8 other pieces of content to support that." (Or, in Harlem Shake's case, 1.7 million pieces of content.)

Adopting Martinez's strategy will allow the music industry to multiply its revenue from YouTube without demanding higher royalty rates. Meanwhile, the cost to make such content -- like a "making the video" clip -- is relatively small.

Again, the music industry is slow to adapt to technology, and continues to resist it at every step. While that might work for a select few artistsit won't work for the industry as a whole.

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Adam Levy

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinal mania

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