In my last post, I explained how the abominable performance of Taylor Swift was not handled well by traditional music industry people. In the second part of this two episode series, I will talk about the viral video sensation OK Go.

The band became famous in 2006 because of the video for Here it Goes Again. They shot the video on a shoestring budget with the band members dancing on treadmills. They published the video without permission of their record company EMI. The video was a big hit: it was viewed millions, then tens of millions of times. It brought big crowds to the band’s concerts all over the world, and by the time the band returned to the studio, 700 shows, one Grammy and nearly three years later, EMI had made a substantial amount of money. To the band, ‘Here It Goes Again’ was a successful creative project. To the record company, it was a successful, completely free advertisement.

The band released a new album recently, but the record label put severe limits on the spreading opportunities of the always very original videoclips of OK Go. As lead singer Damian Kulash states in his opinion piece in the New York Times:

Now we’ve released a new album and a couple of new videos. But the fans and bloggers who helped spread “Here It Goes Again” across the Internet can no longer do what they did before, because our record company has blocked them from embedding our video on their sites. Believe it or not, in the four years since our treadmill dance got such attention, YouTube and EMI have actually made it harder to share our videos.

A few years ago, reeling from plummeting record sales, record companies went after YouTube, demanding payment for streams of their material. They saw videos, suddenly, as potential sources of revenue. YouTube agreed to pay the record companies a tiny amount for each stream, but — here’s the crux of the problem — they pay only when the videos are viewed on YouTube’s own site.

Embedded videos — those hosted by YouTube but streamed on blogs and other Web sites — don’t generate any revenue for record companies, so EMI disabled the embedding feature. Now we can’t post the YouTube versions of our videos on our own site, nor can our fans post them on theirs. If you want to watch them, you have to do so on YouTube.

But this isn’t how the Internet works. Viral content doesn’t spread just from primary sources like YouTube or Flickr. Blogs, web sites and video aggregators serve as cultural curators, daily collecting the items that will interest their audiences the most. By ignoring the power of these tastemakers, our record company is cutting off its nose to spite its face.

The numbers are shocking: When EMI disabled the embedding feature, views of our treadmill video dropped 90 percent, from about 10,000 per day to just over 1,000. Our last royalty statement from the label, which covered six months of streams, shows a whopping $27.77 credit to our account.

Clearly the embedding restriction is bad news for our band, but is it worth it for EMI? The terms of YouTube’s deals with record companies aren’t public, but news reports say that the labels receive $.004 to $.008 per stream, so the most EMI could have grossed for the streams in question is a little over $5,400.

It’s decisions like these that have earned record companies a reputation for being greedy and short-sighted. And by and large they deserve it. But before we cheer for the demise of the big bad machine, it’s important to remember that record companies provide the music industry with a vital service: they’re risk aggregators. Or at least, they used to be.

To go from playing at a local club once a month to actually supporting yourself with music requires big investments in touring, recording and promotion — investments young musicians can’t afford. My band didn’t sign a contract with EMI because we believed labels magically created stars. We signed because no banker in his right mind would give a band the startup capital it needs.

To sum up, based on a crippled understanding of how internet and viral video promotion works, EMI made a decision which made the artist and, probably even to a bigger extent, also the record company loose a significant amount of money. This proves that the traditional companies lack the competences to adapt their business models to the new environment. As Damian notes, this is particularly dangerous, because record labels are traditionally ‘the banks’ that finance new, upcoming talent. But if your bank is not run well, do you want to keep your accounts there?

Ironically, since a couple of days OK Go is back with a new embeddable video thanks to a sponsorship deal with State Farm Insurance who get a little bit of logo exposure early in the clip. Here is the new video: