Google’s YouTube and Vivendi’s Universal Music Group will be launching a new site, dubbed VEVO, that will highlight UMG’s videos. The site will launch in “coming months” according to a press release (below). And YouTube users will still be able to watch UMG clips from the likes of Lil Wayne via a “new VEVO channel through a special VEVO branded embedded player.”

This is essentially what I’ve been calling “YouTube Music,” and it’s been in the works since last fall. In March, I reported that the two sides had basically hammered out a deal.

I’ll be tracking down whatever details I can throughout the day, but at first glance, this is a pretty big deal for YouTube, the music business, and the rest of the media world.

• YouTube, which dominates the market for Web video but can only sell ads against a small portion of the clips it shows, gets to hang on to valuable, advertiser-friendly inventory.
• Universal gets its best shot at making money from something other than music sales, which it desperately needs to do. I’m also assuming that it gets a large chunk of cash upfront: The press release says the two companies will share ad revenue, but I’d be shocked if UMG CEO Doug Morris wasn’t able to wrangle a significant advance from Google (GOOG). UPDATE: No word on an advance, but I’m told that the two sides have scrapped their earlier arrangement, in which Google paid Universal a fraction of a penny every time someone played on of its videos. That’s a big deal: YouTube has complained that the previous deal was a money-loser, while the labels have complained that they weren’t getting adequately comped for their content.
• Obvious question: Will Universal’s fellow labels–Warner Music Group (WMG), EMI and Sony (SNE)–come on board? Sony has already re-upped its deal with YouTube, and Warner is currently at loggerheads with the video site. I assume that all of them will want access to the dollars and eyeballs that Universal is now getting, but a person familiar with the deal tells me that it’s not a foregone conclusion–in part, because neither YouTube nor the labels understand how VEVO will do. It’s possible, for instance, that both Sony and YouTube will be happy to keep the label’s videos on the larger site. “This is their big toe in the water,” an insider tells me, speaking of YouTube. “I’m not sure they want their whole body in the water.”
• The deal is also an important signal to other content providers YouTube would like to do business with: Give us your best stuff, and we’ll cut you a special deal. Now that YouTube is creating a new site for music videos and directing some its traffic there, who’s to say it couldn’t do the same thing for movies or TV shows? The company would desperately like to sell ads against some of Hollywood’s premium content–whether it’s Sony’s movies, or Disney’s (DIS) shows on ABC. So VEVO may be a template for future deals.

More later. For now, here’s a Lil Wayne video, followed by the press release:

UNIVERSAL MUSIC GROUP (UMG) AND YOUTUBE TO LAUNCH REVOLUTIONARY PREMIUM MUSIC & VIDEO SERVICE

VEVO – UMG’s Premium Music Service Powered By YouTube
To Launch In Coming Months

NEW YORK, NY and SAN BRUNO, CA, Thursday, April 9, 2009 – Doug Morris, Chairman & Chief Executive Officer of Universal Music Group (UMG), the world’s leading music company and Eric Schmidt, Chairman of the Board & Chief Executive Officer of Google Inc., today announced that UMG and YouTube, a Google subsidiary, are working together to launch VEVO, a music and video entertainment service that will feature UMG’s premium video content.

In addition to VEVO, YouTube has renewed and extended its successful partnership with UMG that allows users to continue creating and watching user-generated videos containing UMG sound recordings and Universal Music Publishing Group’s compositions on YouTube through various territories around the world. The two companies will also share advertising revenue on YouTube and VEVO.

Launching later this year, VEVO will be a premium online music video hub built for consumers, advertisers and content owners that will blend UMG’s broad catalog of top artists and content with YouTube’s leading edge video technology and user community. YouTube will provide the technology infrastructure that will power VEVO and host UMG’s extensive library of professionally-created music videos on the new site.  On YouTube, this content will be exclusively available through VEVO.com and a new VEVO channel through a special VEVO branded embedded player.

“VEVO will bring the most compelling premium music video content and services to the world’s single largest online video audience,” stated Mr. Morris. “We believe that at launch, VEVO will already have more traffic than any other music video site in the United States and in the world. And this traffic represents the most sought after demographic for advertisers, especially as advertising dollars continue their shift from old media to new. VEVO will be uniquely positioned to monetize this opportunity and a host of others as we grow it to become “the” destination for premium music video content online. For music lovers who want the best in music videos, the VEVO experience will be second to none.  At the same time, VEVO will expand the premium video marketplace, generate new revenue streams for content creators, and provide brand advertisers an unprecedented opportunity to get in front of a highly engaged audience. We couldn’t be more excited about the huge potential we see in the VEVO service.”

“Technology has allowed fans to discover music in endless ways while creating new business opportunities for artists and labels alike,” said Mr. Schmidt.  ”At Google, we are committed to promoting greater innovation and choice and are thrilled to be working with UMG in what will surely be an exciting new service for consumers, advertisers, content creators and the music industry at large.”

At launch, people will be able to access UMG’s entire catalog of premium music video content, including professionally-created and full-length videos on VEVO, as well as artist-generated content and user-generated content hosted on YouTube.  VEVO will also serve as a syndication platform, expanding the reach of the VEVO brand. This innovative platform is aimed at providing consumers the very best in digital music content while further extending UMG’s lead in the direct-to-consumer market.

Presently, UMG’s YouTube video channel has more than 3.5 billion views, making the UMG channel the most watched on YouTube.

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.