Is the band breaking up?

There's been a falling-out between Warner Music Group (NYSE:WMG) and Google's (NASDAQ:GOOG) YouTube. The major music label pulled its artists' videos from the popular video-sharing site over the weekend, presumably over a licensing dispute.

Warner is wrong. Way wrong. It is doing itself, and more importantly its diminishing musical roster, a major disservice by pulling its clips from YouTube.

Let's go over a few facts.

  • CD sales peaked in 2000, and have fallen nearly every year since then.
  • Remember when Viacom's (NYSE:VIA) MTV played mostly videos? If you do, then you're an old fogey like me. Music videos need ways to get out there these days, and selling them through Apple's (NASDAQ:AAPL) iTunes Music Store or through wireless service providers is a limited niche.
  • YouTube not only provides free hosting for videos, it also pays its partners a chunk of the ad revenue. Warner rival Universal Music Group is one of YouTube's most popular channels.
  • YouTube itself is the undisputed champ of Web clips, with 10 times the traffic of its nearest competitor.

"Warner executives have privately expressed frustration with the amount of money they receive from YouTube," explains this morning's Wall Street Journal. It goes on to claim that the payment levels through Google's partner program are lower than those offered by competitors like Time Warner's (NYSE:TWX) AOL or News Corp.'s (NYSE:NWS) MySpace.

Gee, what part of "incremental" and "zero overhead" does Warner not understand? As long as its presence on YouTube is not cannibalizing its efforts elsewhere, why look a gift horse in the mouth?

This also sends a troubling message to any of the label's artists. Warner would rather make more money per stream on a site like MySpace that generates less than a tenth of the traffic as YouTube, when the ideal scenario is to be on both?

Has a major label ever told an artist to go on a tour of 1,000-seat venues over 10,000-seat arenas? Of course not. Hitting the road translates into CD sales. Online exposure also translates into sales. Isn't that why labels began bankrolling music videos in the first place?

Isn't that why bands sign with major labels in the first place?

Warner's in a tough spot. It is losing established artists on its roster like Madonna to Live Nation (NYSE:LYV), with its all-encompassing deals. It is missing out on the smaller acts that can promote themselves effectively on their own through sites like YouTube and MySpace Music. How dare it shut off the spigot of exposure? This will prove detrimental to its artists. It's hard enough for a record label to grow in this dicey environment. Warner just blew out the shiniest star, and we all know how hard it is to grow without sunlight.

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Longtime Fool contributor Rick Munarriz once had his band signed to Sony's Columbia Records label. It didn't exactly pan out. He does not own shares in any of the stocks in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.