A New Way to Make Money on YouTube

  in Investing Updates / Analysis

Jun 02, 2016

Music industry eyes changes to royalty agreements, copyright monitoring on world's largest video site.

Ordinary people have found innovative ways to make money on YouTube since its founding just eleven years ago.

Traditionally, web entrepreneurs make money on YouTube by posting their activities on the site or to their custom channel. But these payouts are relatively small unless they have a wide audience. The typical content provider receives about $0.80 per 1,000 views.

It takes a lot of views to make that work. One college-aged YouTube host earned found a way to earn $12 million in 2015 just talking about... video games.

What people really go to YouTube for these days is to stream music for free. In fact, 28 of the top 30 videos on YouTube are songs. These don't cost viewers a cent to view.

That has created a constant source of frustration for many creative people. Musicians, producers, film developers, and writers argue they haven’t received fair compensation for the digital streaming of their intellectual property.

But change is on the horizon.

Today, a high-profile battle is underway between some of music’s biggest stars and Google – the owner of YouTube.

And it's creating a unique opportunity for savvy investors to get out in front of what could be one of the most dynamic changes to the internet in its short history.

The (Free) Party Is Almost Over

If you’re a customer of Amazon Prime, Apple Music, or Spotify, you’re used to listening to music from any device, anywhere, anytime. What you might not know is that your music selection is earning a handful of people money with each song that you play.

You see, musicians make money off their songs each time it is purchased, played, downloaded, or streamed.

But there’s a slight difference if you listen to music on YouTube. Right now, YouTube is not legally responsible if its site hosts unlicensed content due to a federal law called the Digital Millenium Copyright Act. That makes it hard for musicians and songwriter to make money on YouTube.

That means that if a user posts their favorite song – without the musician’s permission – Google does not have to pay royalties to the musician. Consumers are streaming this music for practically nothing, and each time YouTube blocks an unauthorized upload, another version pops up in its place not long afterward.

Streaming service Spotify paid out roughly $1.8 billion in licensing and additional costs in 2015.

But according to data from IFPI and other sources, online video sites such as YouTube and Daily Motion only paid $641 million in royalty fees in 2014. That’s a very low figure when put into other terms. According to Jimmy Iovine – the head of Apple Music – YouTube generates 40% of all music consumption today, but it accounts for just 4% of all revenues for the industry.

In situations where their songs are streamed legally through music video platforms, royalty holders receive smaller payments in the form of advertising revenue. That has a dramatic impact on the bottom line of the music industry.

That's why musicians like Katy Perry, Roger Daltrey, and Barry Manilow are demanding changes to the Digital Millennium Copyright Act. They’re raising their voices – rightfully – to make money on YouTube and receive fair consumption of their artistic work. Experts have also proposed innovative ways to prevent copyright infringement on YouTube that would radically change the way music is delivered online.

Here's the thing: Just the slightest change in copyright laws or how artists release and monitor their material online will benefit not just musician and song writers, but also the owners of royalty streams generated by the music.

When the free party ends... royalty owners are going to receive their long-deserved compensation.

A Better Way to Make Money on YouTube

The good news is that streaming is still in its childhood years. It’s only been about 10 years since streaming became a mainstream activity. But the music industry has slowly been adapting to immense shift in how music is consumed.

In its newest effort, the music industry has asked the government to change the Digital Millennium Copyright Act, saying the law — which was passed in 1998 and protects sites like YouTube that host copyrighted material posted by users — is outdated and makes removing unauthorized content too difficult.

Large production houses like Universal, Sony and Warner don’t expect immediate changes to the DMCA.

That’s why these firms – and musicians whom they represent and produce – are demanding better terms and changes to how they make money on YouTube. They're now exploring ways to drive traffic away from the video site.

One idea that has been floated is to use a strategy called “windowing,” a common strategy of film production companies. This consists of preventing new songs from going onto YouTube for a period of up to six weeks.

This could compel music fans to either purchase the new songs via download or to purchase a streaming subscription that pays better royalty terms to musicians.

And that’s just one tactic considered that could have a profound impact on boosting the industry's bottom line.

Given YouTube’s immense reliance on music to drive traffic -- investors should expect better terms for musicians in the future. In just a few short years, the music industry has challenged the business models of streaming giants Pandora Media and Spotify. In both cases, they’ve walked away with stronger streaming revenues.

YouTube is far and away the largest streaming site out there. The site has more than one billion users.

With the biggest game in their crosshairs now, they’re aiming to unlock massive new revenue stream and take measures to increase digital sales.

In the future, those who own royalties will be able to make money on YouTube -- a lot more money -- and they won’t even have to pick up a camera.