Business news source Bloomberg reports that, according to sources “with knowledge of the discussions,” streaming video powerhouse Hulu.com, is in talks with record labels to offer music videos on the site. Major music companies Universal Music Group, Warner Music Group, Sony Music Entertainment and EMI Group are rumored to be in discussion with the video site.

Hulu, currently best known as a host for offering full episode television shows, could provide fierce competition with Google Inc.’s YouTube for audience attention to music video. YouTube and Universal Music Group are in the process of jointly developing and launching a new music service called Vevo.com, and are asking the other “big three” record companies to join them.

None of the companies involved in either the Hulu/record company or YouTube/Vevo/record company ventures are commenting on the rumored discussions. Sticking points that are (supposedly) bogging down discussions at Hulu include music co ownership stakes in the site (reportedly not gonna happen) and how to divvy up any advertising revenue generated by music video hosted by the site.

As with other traditional media, the music industry is struggling to redefine itself and its business model to take greater advantage of the shift of attention (and advertising and revenue) to online media. Internet advertising revenues reached a record $23 billion last year, as consumers’ music consumption moves from terrestrial radio and television toward online venues. It makes sense for the big record labels to partner with leading video sites to bring their library of music videos to the attention of the music-buying Internet audience.

We’ll certainly keep you posted as the music video story develops.

Google got some more bad news today about YouTube. 

Not only is Warner Music Group pulling all its videos off YouTube – it’s in talks to create an alternate to YouTube for music videos. 

According to a report at Silicon Alley Insider:

A source familiar with the negotiations tells us that Warner and the three other majors  — Sony BMG, EMI, and Universal Music Group — all think they could do better creating their own music video Web destinations and are in early talks about forming a joint venture similar in concept to Hulu, the increasingly popular TV-on-the-Web joint venture from News Corp and NBC Unviersal.

A joint venture is just one possiblity each label is considering. Our source said there have been many brain-storming sessions. If we were to contribute to those, we’d say that if the labels do create a joint venture, we think it’ll probably be popular like Hulu, but frought with similar problems. Namely, it’ll be stuck with hosting bills and not allowed to keep most its ad revenue, which we’re not sure there will be that much of, if YouTube’s $25,000 checks are any indication.

This is bad news for YouTube, because it’s likely to have another competitor, like Hulu, offering professionally produced content that’s advertiser friendly. 

It’s also bad news for YouTube users, because it increases the likelihood that videos will get yanked from the site because of the music they contain. 

If this trend continues, the pressure will only increase for Google to find a way to either move towards mainstream content or find a way to make money on user-generated videos.

The Wall Street Journal reports that Warner Music Group losses increased in the fiscal second quarter as the company continues to struggle with a drop-off in sales of compact discs as consumers shift toward digital music.

The company remains “excited about the long-term prospects for our business”, according to Chairman and Chief Executive Edgar Bronfman Jr. said, despite the fact that “an uncertain economic backdrop and evolving recorded music industry make a conservative approach to our balance sheet a prudent strategy.”

For the quarter ended March 31, the recording company reported a net loss of $37 million, or 25 cents a share, compared with a net loss of $27 million, or 19 cents a share, a year earlier. The latest results include a two-cent loss from discontinued operations.

Revenue rose 2% to $800 million, although in constant currency it fell 3.6%. The mean estimates of analysts polled by Thomson Reuters were for a loss of 12 cents a share on revenue of $780 million. Gross profit margin climbed to 48.4% from 45.5%.