YouTube and Universal Music Group Teamed Up to Manage the Music Industry's AI Challenge Together -- Here's What Investors Should Know

Artificial intelligence (AI) is shaking up many industries these days. The music business is no exception -- AI tools can already write melodies and song lyrics. They are also bringing back the singing voices of long-deceased artists such as Frank Sinatra and John Lennon in new songs.

Facing the AI challenge head-on, Alphabet (GOOG 0.56%) (GOOGL 0.66%) subsidiary YouTube has partnered up with music publishing giant Universal Music Group (UMGN.F 0.75%). Together, the companies have set up policies for publishing AI-generated music on YouTube's music streaming platform.

Here's what investors need to know about this partnership.

How AI is shaking up the music business

Artificial intelligence has been around for decades, but the recent rise of generative AI has suddenly shifted a long-term trend into overdrive. Generative AI tools such as ChatGPT and Jukebox (both by OpenAI) can create new material based on their deep learning analysis of many original works.

An artist or producer could make a whole song out of nothing but AI-generated lyrics, melodies, and backing tracks. And to top it off, other AI systems can analyze the voice in many samples from the same person and then apply that vocal style to another singer's performance.

With the help of generative AI, musicians and producers can do a whole bunch of formerly unheard-of things. While it's fantastic to have new tools for expressing human creativity, the machine-powered aspect of the AI toolkit raises uncomfortable questions. Above all, who should own the rights to a machine-generated tune?

What YouTube and Universal Music are doing about it

These abilities are opening up several cans of worms, both legal and ethical. That's why Universal Music and YouTube are in the news together right now.

As a leading music publisher, Universal wants to make sure the company and its artists get compensated for their creative works. YouTube Music is one of the largest music streaming platforms on the market today, and many of the most popular videos in the core YouTube service are music videos, so the company has incentive to keep the music market flowing and lucrative.

The collaboration consists of three principles, as stated on YouTube's official blog:

• "AI is here, and we will embrace it responsibly together with our music partners."
• "AI is ushering in a new age of creative expression, but it must include appropriate protections and unlock opportunities for music partners who decide to participate."
• "We've built an industry-leading trust and safety organization and content policies. We will scale those to meet the challenges of AI."

In other words, this partnership was launched in the spirit of accepting and adopting the good things AI can bring to the proverbial mixing table. At the same time, the companies will develop ways to steer the resulting revenue streams into the right pockets. This must be done even if it becomes difficult and expensive to monitor and enforce the upcoming AI-related policies.

How the partners will pursue those goals

This is not an exclusive deal, but more of a starting point for an industrywide sea change. YouTube simply noted that Universal Music is the first major record label in this project, strongly implying that others are waiting in the wings.

That initial partner is really getting into it, though. Universal Music is putting its roster of international superstars to work in the Music AI Incubator -- a group of high-powered producers and songwriters putting their talented heads together to develop solutions for the AI concerns. I'm sure you'll recognize some of these names:

Data sources: Rolling Stone, Digital Music News, the official ABBA site, Anitta's YouTube channel. The "associated acts" above are merely a sample of much longer collaborative CVs.

As you can see, the list involves some heavy hitters, and nearly every artist listed in the announcement is a successful songwriter, producer, or both. Sinatra's estate is presumably more interested in how people use Ol' Blue Eyes' voice in AI-driven productions than in the influence his short list of songwriting credits might have on machine-made works in the future.

Still, the common denominator here is a tight connection with the publishing side of the music industry. That makes sense since the project aims to give human creators their fair share of the artistic and royalty-earning credit when AI systems cook up new hits inspired by existing tunes.

The investor impact: Good for the music industry, perhaps great for YouTube and Alphabet

The music industry is a big business, and streaming is the name of the game nowadays. Global music streaming revenue added up to $23.3 billion last year, according to Statista Insights. YouTube Music is a true leader in this space, in a four-way tie for second place behind sector king Spotify. So there are billions of dollars on the line here, and YouTube can't afford to let the rise of generative AI turn into a problem.

So the company wants to make an opportunity out of generative AI instead. Whatever content publishing, copyright protection, and revenue management the Music AI Incubator may come up with, it should serve as a useful blueprint for other music-streaming services and publishing houses. Of course, some will seek their own fortunes with tweaked versions of the same basic framework in order to carve out a unique market niche. For the most part, however, I expect the major players to align their AI policies in a similar direction.

The partners want to "provide a strong foundation for YouTube and the music industry to better navigate the world ahead." With that goal in mind, this meeting of the music-biz minds should result in a more robust AI-management foundation for the whole music sector than a handcrafted business advantage just for YouTube.

Locking down an effective set of de facto industry standards around AI-based content should be useful for YouTube and for Alphabet's investors. Given this video service's paramount position in the streaming market, it should protect those sweet revenue and profit streams against up-and-comers. Any additional benefits that arise from having an all-star stable of creative geniuses developing better systems and policies, well, that's just a cherry on top.