Universal gets Web-savvy with Vevo

NEW YORK (Fortune) -- Not so long ago, music companies were doing all they could to keep their music away from online video sites. Now Vivendi-owned Universal Music Group is partnering with Google's YouTube to do for music videos what Hulu.com has done for TV. After much speculation, the companies Thursday afternoon announced plans for Vevo.com, a premium music site that will feature all of UMG's artists.

Just as Hulu has taken advantage of its partners' professional content to charge high advertising premiums, Vevo will package professional music content - music videos, artist interviews, etc - to command higher ad prices than the companies are able to get on YouTube alone. Expected to go live within the next six months, Vevo will also exist as a channel on YouTube, and users will be able to embed Vevo-branded videos on other sites.

It's a marked change in strategy for the music industry, which has spent the better part of the fall quibbling over the licensing fees the companies draw from YouTube when users upload videos with their music.

Most of the music companies have expressed disappointment publicly about the small revenue streams they've gotten after signing licensing deals with the company in 2006 and 2007. In these deals, they've allowed their videos and songs to appear on YouTube in exchange for a cut of the ad revenues from ads sold adjacent to the videos. Many of those deals have come up for renegotiation this year, and with increasing pressure on all sides to raise the revenue, they have reportedly been tense. Warner Music Group (WMG) pulled its music videos from the site altogether in January. Viewers in the United Kingdom and Germany can't watch major label videos on YouTube at all.

YouTube Founder Chad Hurley says that the Vevo partnership shows that Universal finally understands that web-savvy companies should try to get their videos in front of anyone willing to watch them anywhere on the web.

"Video is basically a commodity. It's going to be syndicated broadly and consumed widely," Hurley said at the YouTube offices in San Bruno earlier this week. With a veiled nod to Hulu and the TV networks, he explained:

"Other premium services out there are starting to pull back from that mentality...they feel people need to consume video on their site or services." In recent months, Hulu partners have enforced added restrictions about what sites and services can host their shows.

But good is it for media companies to distribute their content so widely anyhow? No revenue model has emerged to make good on this strategy.

Certainly Hulu is able to charge higher ad premiums, but it's dependent on its content partners - starting with founding partners News Corp (NWS, Fortune 500) and NBC (GE, Fortune 500) - to share their shows and it's too early to say whether these networks will renew their deals and whether they are seeing significant financial benefits.

More importantly, none of the other major music companies have yet announced support for the site. For Vevo to be the premier music video destination, the site will need to amass most of the music videos online.

Meanwhile, two years after Google (GOOG, Fortune 500) paid $1.65 billion for YouTube, executives at the Mountain View-based search giant are still puzzling over how to squeeze more revenue out of it.

No question, YouTube has the largest video-watching audience on the Web - YouTube along with its cousin, the lesser-watched Google Video, accounted for 99% of the videos watched in February, the latest month for which ComScore makes figures available. But most of YouTube's inventory continue to be user-generated content, and Google CEO Eric Schmidt has said publicly that the company still struggles to figure out how to best make money from it.