Music streaming continues to grow in popularity. In the United States, the number of songs listeners streamed nearly doubled in the first half of the year. So when Facebook (NASDAQ:FB) is reportedly in talks with record labels, it is easy to jump to the conclusion that it too wants in on the expanding market. That is what The Verge thinks might be going on at the social network.
But there is a simpler and more likely explanation. As Facebook continues to increase the amount of video content on its platform, it needs to clear the rights to display videos using copyrighted music. It is something YouTube had to do in its infancy, starting with Warner Music Group in 2006. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) shares ad revenue with record labels for any video containing copyrighted music. Facebook is likely looking to do the same in order to avoid taking down or muting videos.
Clearing the way for popular content and its creators
Facebook's video feature has quickly expanded from one billion video views per day to four billion in just six months. But the company still has a way to go before it attracts top content producers and clearing the way for them to use copyrighted songs in their videos is key. That is especially true for creators who use music in YouTube videos.
Those creators do not receive any revenue from advertisements placed against their videos. Instead, that ad revenue goes to the music copyright holder. Nonetheless, they might use YouTube as a promotional tool to increase the awareness of their brand or product. That is an area where Facebook has shown an ability to outperform YouTube.
Facebook has the advantage of having a feed that its 1.44 billion users visit regularly, enabling videos on the platform to go viral more easily than those uploaded to YouTube. In that way, Facebook is a much better promotional tool than YouTube. The lack of licensing deals between Facebook and record labels, however, still makes YouTube the first spot for users posting videos containing music in the background.
Music streaming may be well down the road
YouTube has leveraged its music licensing deals to become the No. 1 music streamer in the United States, if not the world. Vevo -- the joint venture between two of the three major labels and Google -- posts its music videos to YouTube and accounts for 19 of the top 100 channels on YouTube.
While artists have complained about the minuscule royalties from streaming services like Spotify and Rdio, YouTube often pays much less than standalone streaming services. Yet, Taylor Swift pulled her music from Spotify and not YouTube. One explanation for that behavior may be because YouTube is seen as an essential promotional tool, while standalone streaming services are seen as a replacement for album sales.
Music is a big market Facebook could fill, and it would dramatically increase its use as a video platform. At the same time, it would put a significant dent in YouTube's business if it makes it easy to search for videos or creates a standalone video app.
A key difference
Facebook, unlike YouTube, currently does not place advertisements next to other video content. It experimented with placing post-roll advertisements after NFL highlights last winter, and it will reportedly share revenue with certain content creators starting this fall. But right now, there is not necessarily ad revenue for Facebook to share with labels. Therefore, it might be negotiating a flat rate versus a cut of advertising.
Considering the nature of Facebook's ad platform -- which allows Pages to promote any video, photo, or link they post -- Facebook may simply be looking to strike a deal that allows it to share ad revenue from promoted videos containing copyrighted music. Those videos are arguably more important to Facebook than others it does not earn direct revenue from, so it might not mind taking down or muting non-promoted videos.
Striking a deal that works for both Facebook and the labels -- who are more on their guard now than when they negotiated with YouTube -- may be tricky. But Facebook needs the rights to play music in user-generated videos if it wants to overtake YouTube.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.