YouTube's new business model

YouTube’s Video ID technology points to an important new business model.   Video ID finds copyrighted content that has been uploaded to YouTube.  It then gives the copyright holder the choice to block, promote, or monetize that content.  Copyright holders benefit from being able to exploit free, decentralized distribution and promotion of their work.  Google/YouTube benefits from leveraging the value of its search expertise and advertising platform.   Most importantly,  much value is created by allowing licensing decisions for content to be made for small units of value quickly, at low cost, at high frequency, and with directly relevant economic data.[1]

Content pricing and licensing systems are extraordinarily inefficient.  Consider, for example, that the U.S. Copyright Act of 1909 included a provision establishing a two-cents per song royalty for mechanical recordings of musical compositions.  This provision was designed to give player-piano companies equal access to music for their machines.  The two-cents royalty subsequently applied to musical phonorecords.  Because the companies making the records paid the royalties, radio stations could play recorded music without having to negotiate or pay any royalties to music copyright holders.   The two-cent royalty remained law until Dec. 31, 1977.[2]  Thus this government-established price was in effect for sixty-eight years through large changes in music recording and playing technology.  This situation reminds me of iron pot that a fellow graduate student from the former Soviet Union showed me in the early 1990s.  Cast into the metal of the pot was the pot’s price.  This Soviet approach to pricing kitchen pots was probably less inefficient than the two-cents royalty established by the Copyright Act of 1909.

YouTube’s new search-choose model is a much more efficient business model for licensing content.  Copyright holders make licensing decisions for specific copies with knowledge about circumstances and amount of attention the copy is attracting.  Policy rules can easily be established and changed for these informed licensing decisions.  Compared to traditional licensing approaches, the search-choose model provides much more relevant information for licensing decisions and much lower transactions cost for those decisions.   This is a major, under-appreciated value of the search-choose model.

Free, decentralized distribution and promotion of content potentially has great value for copyright holders.  Attracting attention to content is expensive.  Movie producers, for example, often spend more promoting a movie than they do in making it.  Peer-to-peer diffusion of information and actions among social networks has always strongly affected aggregate patterns of behavior.  Online social networking tools make social networks even more powerful. Attempting to suppress persons’ natural propensity to share, discuss, and promote content mainly pushes such behavior underground and alienates potential customers.  The search-choose model transforms a unsolvable problem into a significant business benefit.

The search-choose model better suits web video than web text.  ISPs might attempt to insert text ads into copies of copyrighted textual content found on webpages.  Web mail providers could insert (additional) advertisements in copies of copyrighted textual content found in emails.  However, ISPs don’t have businesses structured to serve ads, and inserting ads into webpages problably would anger ISPs users.  Web mail providers, on the other hand, have little incentive to insert additional advertising with shared revenue.   In contrast, web video providers have an incentive to address the licensing problem, and they can do so in a way that’s not likely to anger their users.

Having a lot of video on a common platform makes finding instances of copyrighted work easier.  It also makes inserting ads easier.   YouTube thus already has big advantages in offering a search-choose model to copyright holders.

Note:

[1] Google recently stated that 90% of its 300+ Video ID partners have chosen to monetize found content rather than block it.  Companies choosing to monetize found copyrighted video include major media companies such as CBS, Universal Music, Lionsgate Entertainment, and Electronic Arts.

[2] Historical versions of U.S. copyright acts are helpfully available at copyrightdata.com.  The U.S. Copyright Act of 1976 raised the royalty to  2.75 cents.  Broadcast radio stations in the U.S. have retained to the present the right to play recorded music without the need for negotiating a license or paying a royalty.  The situation is much different for Internet radio.  Copyright royalty rates in the U.S. are now typically established through the Copyright Royalty Board (CRB) for periods of four to ten years.  That CRB’s price-setting process is far from simulating that of an well-functioning, decentralized decision mechanism.

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