The licensing agreement, announced Tuesday, sets a potentially lucrative precedent for the music industry in the evolution of online and video-on-demand business. Thehave been trying to avoid a repeat of what they think was a costly error in the early 1980s, when they agreed to provide videos free to a fledgling MTV.
The deal comes more than two months after Universal Music, the world's biggest record company and a unit of Vivendi Universal, demanded that online services and cable companies agree to new financial terms for the use of music videos or remove the clips from their on-demand services. AOL andhave both had to remove Universal's videos from their offerings.
Universal is close to a similar arrangement with Yahoo, which runs the most popular online video service. AOL, a unit of Time Warner, was trying Monday night to complete a deal with the privately owned Warner Music Group, and may announce it Tuesday.
As part of the two-year deal with Universal, AOL has agreed to pay either a fee for each viewing of a video or a share of the advertising and other revenue it receives on the videos, whichever is greater.
The per-view fee will reach its top rate in early 2006, at slightly less than a penny, people involved with the negotiations said. That is less than the penny or more Universal sought originally, but it also represents a major break from past practices, in which record labels provided new videos free under the theory that they served as promotion.
"This is a landmark agreement," said Doug Morris, the chairman of Universal. "With all these new services expanding so quickly, it was important that we got this agreement in place before everyone's business model was based on free."
For AOL, the deal provides access to thousands of videos at a time when it is trying to expand its offerings in advance of a major shift, expected this summer, when more of AOL's service will be available free.
"We're glad with the outcome," said Bill Wilson, senior vice president of programming for AOL. "We felt like it was a deficiency not to have all the videos."