Why Digital Music Companies And The Labels Have So Much Trouble Getting Along

imageYouTube and Sony (NYSE: SNE) Music Entertainment reached an agreement last week on a music-sharing deal, providing a welcome break from the nasty back and forth between Warner Music and the video behemoth over their collapsed deal. The Sony/YouTube agreement will provide music videos for all to see and presumably will make money for both parties. So why aren’t the labels and digital startups (not just YouTube, but others as well) inking more deals? The answer lies in how the deals are usually structured and the way that the two sides approach the negotiating table. (I know a little bit about this subject, having founded a music company and been involved in negotiating sessions over the same types of rights.)

First, the details of the deals, which for the past few years have consisted of the following terms:

–The digital company makes large upfront payments to the label (aka advances) — millions of dollars in the case of a company the size of YouTube — that are recouped as revenue from ads sold on the streams.

–The record label receives a penny for every stream whether or not advertising is sold on the content. Recently I