Will YouTube Music Become a Reality? Here’s Hoping.

YouTube, the world’s biggest video site, and Universal Music Group, the world’s biggest music label, are talking about creating a YouTube Music site.

The proposed deal, first reported in The Wall Street Journal and CNET, is in advanced stages. A person familiar with the negotiations say it’s “highly probable” that a pact can be hammered out, but says it could still take a month or more to finalize.

The gist: Google’s (GOOG) video site would help Vivendi’s music unit distribute videos on sites outside of YouTube. And YouTube would create a specialized portion of its existing site where Universal could hopefully sell more lucrative ads against its clips.

As of now, the discussions about the new site only involve UMG and YouTube, and the plan isn’t dependent on getting the other big labels to sign on, I’m told. But that doesn’t mean the other labels couldn’t be incorporated, and the site would obviously be more potent if the other guys were involved.

In December, Warner Music Group’s (WMG) videos started disappearing from the site after the company couldn’t reach a deal with YouTube; last month, Sony’s Sony Music Entertainment (SNE) renewed its existing deal to stay on the site.

The WSJ says talks about some kind of deal have been happening since last fall. But let me immodestly point out that I’ve been beating the drum for this deal–repeatedly–for a couple months.

Here’s my logic, which apparently sounds right to other folks: YouTube’s music videos are popular, and should be appealing to advertisers. But right now they’re money-losers for the site: It has to pay the labels about half-a-cent every time it plays a video, and it doesn’t generate enough revenue to cover those costs.

But if YouTube could somehow separate the music video traffic from the rest of the site–as MySpace has managed to do with its MySpace Music offering–that could change. As I’ve written before:

What would YouTube Music look like? It’s not that important. Maybe in addition to videos, it would offer downloads via Amazon’s (AMZN) digital media store, as MySpace does. Maybe it would have detailed biographies and a spartan design, like that MTV video site that MTV pretends doesn’t really exist yet. Doesn’t matter.

What is important: Like its MySpace predecessor, YouTube Music would take the large audience that already consumes music content throughout the site and assemble it one place. That might have some benefits for the site’s users. But it’s undeniably useful for the site’s ad sales team: Advertisers like clean, well-lit spaces with lots and lots of bodies, and partitioning off music creates just that.

That’s why MySpace Music was able to launch with an array of blue-chip advertisers last fall. And there’s no reason why those same advertisers wouldn’t pony up for YouTube music too.”

Want to see a video from one of the acts signed to the world’s biggest music label? You can’t see one embedded in this site from YouTube–at least not an official one. That’s because UMG has disabled the embedding feature from its YouTube clips, which, unfortunately, is standard practice for the big labels.

So here’s David Letterman talking about one of the label’s acts.