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Vevo, the Giant Music Video Site, Tries to Fix Itself Before It Sells Itself

The music video site loses money, but the music labels that own it make money. Are they willing to change that to find a buyer?

Peter Kafka covers media and technology, and their intersection, at Vox. Many of his stories can be found in his Kafka on Media newsletter, and he also hosts the Recode Media podcast.

Music videos are huge on the Web, and Vevo is huge in music videos. It generates six billion views a month, and is crucial to both the music industry and YouTube.

Now Vevo’s owners want to find a new investor to take control of the company, and are floating valuations of more than $1 billion. But before they can get that, they are trying to figure out how to rework the money-losing business so a new owner has a chance of turning a profit.

The big question: How much near-term revenue will Vevo’s music label owners be willing to part with in order to build a long-term asset?

Vevo is a joint venture, controlled primarily by Universal Music, the world’s largest music label, and Sony Music. Abu Dhabi Media is also an investor, as is Google, whose YouTube site is Vevo’s primary distribution network.

After multiple starts and stops, its owners are looking to find a new investor to take control of the company. As The Information has reported, the company is working with Goldman Sachs and The Raine Group to find new money; marketing materials are expected to go out in the next few days or weeks.

But while Vevo has always generated interest from potential buyers — last spring DreamWorks Animation made an unsolicited bid for the company; last year Guggenheim Partners discussed a deal — investors argue that they can’t buy a controlling stake in the company until Vevo’s current owners rework its P&L.

Vevo generates real money from the ads it shows before its clips — last year it pulled in $250 million — but the music labels, music publishers and Google carve up more than 90 percent of that gross, leaving the company little money to work with. Vevo operates at a loss and the company’s current owners have had to plow in additional capital to keep the business running.

That’s worked out fine for Universal and Sony so far, said a person familiar with the company’s finances, because they’ve taken out more in ad revenue than they’ve had to put in. But it has scared off would-be bidders.

“The thing is worth less than zero today. You’d have to pay someone to take it,” said someone who has looked at the company’s books.

Yet music videos are huge on the Web, especially on YouTube — by one count, music accounts for as much as 40 percent of the site’s views. And both Vevo’s owners and potential buyers think the company could be very valuable in the long run.

So sources say that Goldman’s bankers, led by partner Michael Ronen, are trying to convince Universal and Sony to cut their revenue share down from roughly 55 percent, in order to give a new owner the chance of earning a profit.

The basic idea: The more revenue the labels are willing to give up, the higher valuation they could get for the company. Depending on who you talk to, a cut of a few percentage points could give Vevo a potential value of anywhere from $700 million to $1 billion, or even more.

If Sony and Universal agree to new terms, the list of potential buyers could get very long. DreamWorks, which bid last spring, will likely want another look. So would The Chernin Group and Liberty Media, which have also looked.

Then there are a host of usual suspects whose names get brought up whenever a big Web video asset goes on the block: Yahoo, Amazon, etc. People familiar with Vevo say the company would prefer a strategic investor, who could help with things like distribution and sales, over a financial buyer.

One wild card in the sales process is Google, which provides the bulk of Vevo’s distribution via YouTube, and which became a minority investor last year. Vevo and YouTube have a symbiotic but fraught relationship: Both sides need each other, and neither is comfortable with the power the other side has.

Some industry executives speculate that Google may want to simply purchase Vevo for itself, and essentially cut out the middleman between YouTube and the labels that supply it with clips; others suggest that the labels would never give Google full control of a crucial revenue stream.

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