Tuesday, October 31, 2006

Inside Scoop on the GooTube Deal

After Google's acquisition of YouTube was announced, word leaked out that Big Content companies like Universal were given ownership stakes in YouTube totaling $50 million. If that didn't sound sketchy enough, Mark Cuban has dug up an anonymous insider with some intimate details that makes the deal sound even worse. According to the source:
  • Nearly $500 million of the $1.65 billion purchase price is sitting in escrow for the purpose of dealing with impending lawsuits against YouTube for copyright infringement.
  • Google essentially gave YouTube a blank check to come to terms with the major record labels and even threw in a "most favored nation clause" to ensure no label got screwed and to avoid anti-trust issues.
  • The record companies were offered equity rather than licensing deals because, as the anonymous source puts it, "if monies were received as part of a license to Youtube then [the labels] would contractually obligated to share a substantial portion of the proceeds with [the artists]." Since it's equity, the labels can keep the lot of it and not share a dime with the artists they're protecting.
  • The deal with the record labels was a quid pro quo in two respects. The labels agreed not to sue YouTube for 6 months and agreed to sue YouTube's competitors in the mean time, thus cementing YouTube's (and Google Video's) dominance in this space. This already played out when Universal sued Grouper and Bolt in the days after the YouTube deal was announced.
Techdirt calls this a bribe by Google to have the labels go after video competitors and a sleazy deal overall. To be fair, the source is anonymous and admits that some of its conclusions are just speculation. But the whole thing does seem to make sense and, if you trust Mark Cuban (who happens to have an agenda in backing up his claim that YouTube will be sued out of existence), the source is of the reliable sort.

Taking the source at full value then, it appears that YouTube has only months before it faces a category 5 legal storm from the major labels. Tim Wu argued in Slate that YouTube's copyright problems isn't that bad, as compared to Napster, because of DMCA 512, which provides websites with a series of "safe harbors" for sites that host potentially infringing material. However, the difference between YouTube having to pay the major labels millions of dollars for infringement and YouTube having to remove the offending content lead to the same result: no more YouTube. The company relies on the belief that any video clip can be found there, and once that belief is lost, YouTube will lose its relevance and also its traffic.

Outside of fronting some serious cash for a legal defense, some clever lawyering, and a sympathetic judge, it does seem that YouTube's only chance for survival is someone finding a good enough way to flag infringing content and prevent it being uploaded onto the site. If that happens though, it might not save YouTube anyway since it relies heavily on that content to begin with. Even with the $500 million legal war chest (though that covers a lot of billable hours) and Google's cash surplus, it appears as if the whole affair of saving the YouTube we've grown to love is an uphill battle.
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