Mark Cuban shares a Pho List post from a media industry insider about details of the YouTube / Google acquisition negotiations. The author says some of it is based on discussions with insiders and some is based on speculation, but doesn't identify which assertions are pure speculation.
There are some fascinating explanations of specific deal terms that make sense..but that doesn't mean they are true. I seriously doubt some of the explanations. Here are some of the major statements/speculations of the post;
- Around $500M of the $1.65B was held in escrow to pay off potential copyright infringement suits
- YouTube negotiated deals with the major record and movie companies that paid about $50M to each in the form of YouTube stock
- Stock was used rather than cash because; 1) YouTube didn't have the cash, 2) YouTube stock was about to be worth a fortune due to the Google acquisition.
- Media companies structured the deal as a small financial settlement, plus an equity stake in YouTube. Most labels pay 50% of licensing royalties to artists. The equity stake was not considered a licensing royalty, therefore no need to share the bounty with artists.
- Google negotiated a 6 month "stand still" agreement with the labels, meaning no lawsuits would be filed while they built tools to identify copyrighted materials, and built royalty tracking systems.
- YouTube agreed to aggressively remove copyrighted content and shut down accounts of repeat offenders.
- YouTube requested that the labels sue other smaller competitors like Bolt and Grouper.
As Nick Carr says "It's a fascinating read, though given that it's completely uncorroborated one has no choice but to assume it's a fantasy. As far as fantasies of acquisition negotiations go, though, it's very well done. As Cuban says, "it rings true." (Good fiction rings true, too.)"
My take? Good stories always weave facts with fiction with supposition while the reader is left uncertain which is which. I certainly don't know the facts, but here are my guesses based on my experience at Napster.
- Hold backs and escrows are fairly common in deals like this and it seems likely there was a significant escrow in this deal.
- The deals with the labels were announced the day before a deal with Google. This was NOT a coincidence. The labels had inside information and knew that YouTube was about to be worth a lot of money and wanted their "share" of it.
- Lawyers and accountants for the major labels and studios are known to craft clever deals and allocate costs in unique ways in order to minimize payments to artists. But this "equity stake" deal as a way to cut out the artists is really unethical...even for them. I hope it is not true...but I wouldn't be surprised.
- The six month "stand still" agreement is also a fairly common contract term and makes sense in this case.
- The request to sue other smaller video companies is pure fantasy in my opinion. I can't imagine the labels and studios agreeing to this, or even YouTube suggesting it. That would be the height of hypocrisy and the depth of ethical transgression. My guess is that the labels decided to sue Bolt and Grouper for their own reasons. First, it is easier to sue a small company with no money to defend themselves. Unfortunately this happens all the time. Second, the labels wanted some easy wins to scare the rest of the industry into compliance. Third, the easy wins translate into case law precedents that can be used in future suits.
This story is far from over. There are still some tough negotiations ahead. For example, I believe there are vast differences of opinion on the "value" of a movie clip or music recording in each video. YouTube believes they are worth a fraction of a cent, because they collect about a penny per stream in advertising revenue. The record labels believe their music is worth $.99 per download regardless of how it is used. The movie studios think their movies are worth $20 per download, and can sue for $250K per instance for any copyright infringement.
Hopefully the labels learned some lessons in the six years after Napster. Hopefully they see the Internet as a new source of revenue that makes the market bigger, and not one that kills their existing revenue streams.
YouTube is the first of many changes in the entertainment business. Internet TV is coming. New forms of advertising will emerge. New business models will create new revenue streams. The technology will always move faster than the legal and business models can adapt. The winners will adapt quickly while the losers will fade away slowly.
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Wow, you really put it together in a way that makes it feel less fanciful. Thank you.
Posted by: Lloyd Budd | November 07, 2006 at 04:53 PM