YouTube Is Ready to Invest in Vevo, but the Deal Isn’t Done

YouTube is set to make another big investment in a content partner. This time around it’s Vevo, the music video site.

YouTube and its owner Google have agreed to buy a minority stake in Vevo, according to people familiar with the deal, which hasn’t been finalized.

If it happens, it will be the second time in the last year that Google has invested directly in a video company that relies on YouTube for distribution. In May, Google put money into Machinima, the Web video network aimed at gamers.

If the deal does get done, it will allow the two sides to continue with a symbiotic — and at times contentious — relationship that has gone on for three years: Vevo gets to distribute its clips on the world’s largest video site, and YouTube gets to keep showing music videos from the big labels, which account for many of its most popular clips.

I don’t know the size of the planned transaction, but I’m told it will be bigger than the $35 million funding round Google and YouTube led in Machinima last year. Like Hulu, the TV site, Vevo is a complicated joint venture between content owners — in this case Universal Music and Sony Music — and an outside investor — in this case Abu Dhabi Media.

But while both YouTube and Vevo have signed off on the investment and a renewed distribution deal that includes long-term licenses for the videos, the deal hasn’t closed and could still be derailed.

For starters, the deal is supposed to get done at the same time that YouTube signs separate agreements with Sony and Universal, which cover subjects like user-uploaded videos that incorporate music the labels own. And relationships between the two labels — and between the labels and YouTube — have been rocky at times.

That’s one of the reasons Vevo had previously explored alternate distribution deals with Facebook and Viacom’s MTV over the past year.

But it makes the most sense for YouTube and the labels to work together. The labels would like to see more money than they currently get from YouTube, but it would be hard for them to walk away from the revenue they’re already getting.

And while YouTube has worked hard to attract more “professional” content on the site — which is why it has been writing advances to video makers to create “channels” on the site — the labels’ videos remain enormously popular with its young audience.

Meanwhile, both the distribution and the investment will be crucial for Vevo, which operates a very thin-margin business.

Under both the old deal and the new one the company is set to strike, Vevo hands over about a third of its revenue to YouTube, and more than 50 percent of its revenue to the labels, which doesn’t leave it much in the way of an operating budget. Last year, Vevo CEO Rio Caraeff said his company was doing more than $150 million a year.