Facebook Inc. (FB) is finally getting with the music.

For years, Facebook chose not to pay licensing fees to music labels or songwriters despite the site's billions of hours of uploaded music. The world's most popular social media platform argued that because the site didn't make it possible for users to search for a particular song, in the manner of Alphabet Inc.'s (GOOGL) YouTube, it wasn't using music to drive sales.

Furthermore, courts had ruled that rights holders, not operators of a platform for user-generated content, were responsible to police the use of their music.

Yet as Facebook's priorities have evolved, so has its view on music. As CEO Mark Zuckerberg has repeatedly said of late, Facebook is focused on becoming a hub for premium video content, both from advertisers and users as well as original content for its Watch and other platforms.

As a result, Facebook has begun to negotiate licensing deals with the industry's three major music labels as well as Merlin BV, which represents hundreds of independent distributors, according to a person familiar with the talks. A deal is likely to take place within months rather than years, the source said. News that Facebook had offered the labels hundreds of millions of dollars so that its users might legally upload music to the site was initially reported by Bloomberg on Tuesday, Sept. 5.

"It's a major win for songwriters in that Facebook is actually admitting they need licenses," said David Lowery, a lecturer in the music business program at the University of Georgia and frontman for the bands Cracker and Camper Van Beethoven. "If you expect to get major brands to spend big money on video advertising that's professionally produced, you absolutely need licenses. That's what's driving this."

Rather than getting into a spitting match with the music industry, in the manner of YouTube, Pandora Media Inc. (P) or even Spotify Ltd., Facebook has made a series of key hires and important acquisitions over the past eight months in hopes of securing licensing deals with artists, represented by Universal Music Group, Sony Music Entertainment (SNE) and Warner Music Group, and with songwriters, represented by a variety of publisher groups.

The talks mark a significant departure from past policy and a stark contrast with YouTube, which has balked at signing licensing contracts with the labels and songwriter groups.  

"This is about Facebook proactively looking at the landscape and seeing that there's an opportunity for them," said James Sammataro, a Miami entertainment lawyer at Stroock & Stroock & Lavan LLP. "Facebook has been progressing from being just a platform for user-generated content into being a content provider."

Just last month, Facebook won the right to stream 15 college football games this fall after losing to Amazon.com Inc. (AMZN) in a bid to stream National Football League games. Facebook has also has streamed games from the National Basketball Association and Major League Baseball. Earlier this summer, Facebook rolled out a video-centric button on its website, Watch, which the company said would feature its own original content.

Representatives of Universal Music, Warner Music and Facebook declined to comment. A spokesman for Sony Music couldn't be immediately reached for comment.

Part of Facebook's decision to enter into licensing talks stems from having to respond to repeated requests from labels and artists to take down user-generated videos, or in some cases, to shutdown individual pages. YouTube received 1 billion so-called take-down notices in 2016, Sammataro said.

To remedy the situation, Facebook in January hired Tamara Hrivnak from YouTube, where she worked alongside former Warner chief Lyor Cohen. Hrivnak, who previously headed digital strategy for Warner/Chappell Music Publishing, had directed music partnerships for Google Play and YouTube. That Hrivnak is well liked in the industry was also a plus, given Facebook's uneven relationship with the labels. 

In recent talks with the major labels, Facebook has stressed that it has no plans to become an on-demand music service in the manner of YouTube or Spotify or more recently, Pandora. By not choosing to create an on-demand platform, Facebook's licensing fees will likely be lower than those paid by services like Apple Music and Spotify. Nonetheless, Sammataro said, Facebook will want to have clearance to be able to post music videos from labels and artists.

"Facebook wants to get to a place where people start to think of Facebook as aplace for music videos," he said. "Maybe over time it becomes the new Vimeo or even YouTube."

The labels, meanwhile, are anxious not to give away too much flexibility before they have a sense of what Facebook is trying to build in premium video. It's one thing to want to shield its users from video take-downs and quite another to aggressively expand into professionally produced video for both users and advertiser. 

"Facebook clearly knows the value of music in that they already use it to sell advertising," Lowery said. "And by the looks of it, they're clearly planning something with video, and it's clearly going to be big."

Facebook and Alphabet are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer and the AAP team buy or sell FB and GOOGL? Learn more now.

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