LOS ANGELES, CA - FEBRUARY 12: Singer Adele performs onstage at the 54th Annual GRAMMY Awards held at Staples Center on February 12, 2012 in Los Angeles, California. (Photo by Kevin Winter/Getty Images)
Independent labels, which represent artists such as Adele, were holding out for a better deal from YouTube

YouTube has struck a deal to license music from the thousands of independent record labels represented by the rights agency Merlin, setting the stage for the launch of its long-awaited subscription service.

People familiar with the matter said the deal was signed in recent days following months of acrimonious negotiations, in which YouTube threatened to take down music videos by artists such as Adele and the Arctic Monkeys if its demands were not met.

The agreement paves the way for the Google-owned company to finally launch a paid-for music service, which will compete with Spotify, the Swedish streaming service, Deezer of France and Apple’s Beats Music.

“One of the last significant obstacles to getting to market has been removed,” said Mark Mulligan, music analyst at Midia Research.

The news came as Spotify announced that its total number of monthly active users had jumped 25 per cent to 50m in the last six months.

YouTube, the world’s biggest online video service, plans to start rolling out its paid tier within weeks, according to people familiar with the matter. The new service will allow users who pay a monthly fee to listen to music and watch videos without the interruption of advertising. Other features include the ability to save music for offline listening.

The launch of a subscription service is likely to transform the relationship between YouTube and the music industry. The free video platform had been seen mainly as a way to promote artists online, rather than a moneymaking proposition in and of itself.

If YouTube manages to convert a large number of its 1bn monthly users into paying subscribers, it would generate big revenues for the music industry. Midia Research forecasts that the service will make $500m in subscription revenue within a year – a meaningful amount for the $15bn global recorded music market.

YouTube had already signed deals with the three major record labels: Universal, Sony and Warner. But to launch a service with a full catalogue of popular songs it needed to license music from Merlin, which represents 20,000 independent labels and is often called the “fourth major”.

Merlin’s members include XL Recordings, whose artists include Adele and The xx, and Domino, the label behind the Arctic Monkeys.

YouTube has been locked in negotiations with Merlin for months, as the agency held out for better terms. In June, the talks became so aggressive that YouTube said it would start taking down videos from independent record labels that had refused to sign its new contract. But after an outcry from the creative community, the company did not execute its threat.

Since then, YouTube and Merlin have found a way to compromise. The final terms of their deal were substantially more favourable for Merlin than those in a contract leaked in June, according to a person familiar with the matter. But they declined to discuss specific details of the agreement.

YouTube and Merlin both declined to comment on the deal.

Since it was acquired by Google in 2006, YouTube has paid out more than $1bn to the music industry through licensing deals that allow rights holders to take a share of its advertising revenues.

That figure is small relative to revenues the music industry makes from downloads and subscriptions. Spotify said that it has paid out more than $2bn to rights holders in the music industry to date, off the back of just 12.5m paying subscribers.

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