Google raises the stakes on its YouTube gamble

Google and YouTube are reportedly offering over $100M in up front payments to each of the major film/TV studios to make peace. BusinessWeek reporter Jon Fine says “Such a sum far exceeds what any single broadcast network can extract from the online world--and drops straight to the bottom line. But taking the dough fortifies an already threatening rival.”

The studio people are also thinking about working together to create their own video site to compete with YouTube. One studio exec told Fine "The theory is that if you were to aggregate enough exclusive content in one place, you could actually change viewing patterns”.

Six years ago at Napster we heard the same theories and arguments from the record labels. They thought they could easily replicate the Napster technology, make alliances with the other record labels, and become the exclusive music destination on the Internet. It didn't work for the record labels and it will not work for the TV/Movie guys either. Forget about it.

The video guys should take the $100M+ now, sign the three year agreement, and keep their options open for the future. $100M is a ton of money for film companies. Remember, this is pure profit. TV/Movie studios  is a glamorous business but the profit margins are low.

For Google the stakes are high. Google has already agreed to acquire YouTube for $1.65B. Paying another $500M to $1B for three year "licensing" rights puts their total cost at well over $2 Billion. As I wrote earlier, just to break even requires $200M in PROFIT every year, forever, starting right now. They would need about $1B in revenue to earn $200M in profit. They are starting out in a very big hole.

Paying these huge up front fees to the big studios sets a precedent for the hundreds of smaller producers. They will want their commensurate share, perhaps tens of millions each. Others will just file lawsuits and use the big studio payments as benchmarks for their "damages".

Are deals with the major studios really necessary? What makes YouTube special? Is it just "time shifting" and "space shifting" of video? Of course not. There are much easier ways to do this with VCRs and DVRs. YouTube is special for all the funny, unusual, bizarre video clips...most of which are 2 minutes or less. YouTubers are not craving half hour episodes of Desperate Housewives or any other network show. They want short compilations of the funniest moments. They want out-takes, bloopers, candid outbursts, people behaving badly, girls gone wild, etc. Having all this crazy stuff categorized, searchable, in bite sized chunks, and available on demand is what makes YouTube special. Does YouTube really need the TV/Movie deals? Rather than spend $Billions on licensing this stuff, why not spend a few million on a lawsuit and establish legal precedents?

These are Billion dollar decisions...actually more like billion dollar gambles. It is a high stakes poker game where neither side is sure of their standing, and making guesses about the other sides strategy.

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Comments

[TG]

Don - Agree with one of your assumptions - paying out the millions is not the way to go for GoogTube. But it is their money to loose. Having first hand experience dealing with those in Mountain View - not surprised they just don't get it - Google spent the first part of the video effort calling the "Content Owner" the competition. Now they want to "buy" the Content Owner. I am sure they have a few more these "Google stratgies" up their sleeve.

There is a better way to have a "proxy" platform for distributing content. Sure, the early efforts have failed. But that is not to say is cannot be done. What is needed is an independent party who is not in the "content business" to be the proxy. The real life implemenations are out there - the NYSE, NASDAQ are just two expamples of the same. Fedex is another example of someone who helps get the goods to the consumer, and tracks it for the seller. It should be no different for digital goods.

There are platform which will make it to market very soon. But in the euphoria of the billion dollar acquistions of "glue sniffing User Generated Videos", the real solutions don't get the press attention or for that matter the VC (not fashionable enough for them yet!). As you already know - markets have a way of sorting out the real solutions. You will see a few of these come to market in 2007. I can say that with confidence. I have been building one such platform for over 4 1/2 years. Will make sure you are on the short list for notifications.

[Chris D]

Hi Don,

In general I agree, however, I just want to differ with you in regards to your statement: "Remember, this is pure profit."

There's a brewing conclict that will be arising soon with respect to unions and other guilds (e.g. SAG, etc). I do not believe that it has been established how actors and other production people will be compensated for any such Google pay-off. Normally royalties would be paid for any broadcast of the content.

I think once the hurdles of compensation to the content owners have been cleared, there still remain the open issue on how royalties will be made for content that has been "licensed" but outside of traditional broadcast and the accounting that happens for royalty payments.

Another legal mess brewing?!?