Does YouTube make Google a target for lawsuits?

The Wall Street Journal asks "Does YouTube Make Google a Big Target for Copyright Lawsuits?"  Mark Cuban certainly thinks so...and I agree. It is just a matter of time. It didn't make any sense to sue prior to the Google acquisition because even if copyright holders won...they wouldn't collect a dime. YouTube had almost no cash. Now they have Google's big pile of cash to go after.

Lawyers typically get one third of the settlement as fees when they win, so they make sure there are deep pockets available before they invest their time in a suit. Copyright holders think the same way.  My guess is there will be lots of suits and many of them will be quietly settled out of court.

YouTube has agreements with some of the major record labels, but there are hundreds of TV and movie producers who all want a piece of the pie. Remember, it doesn't matter how lame your content is...the penalties are the same.

Listen to this quote from Steve Ballmer in a recent BusinessWeek interview "The truth is what Google is doing now is transferring the wealth out of the hands of rights holders into Google. So media companies around the world are all threatened by Google. Why? Because basically Google is telling you how much of your ad revenue you get to keep."

Sour grapes? Perhaps, but how do you think the copyright holders feel now? Billions of dollars for Chad Hurley and Steve Chen...and nothing for them? They see the big record labels making deals for splits of the revenue...they will want their piece too.

Steve Ballmer thought about buying YouTube but in the end the price was just too high. The financial analysis says YouTube would need to make profits of $150M a year forever (with a reasonable discount rate) for Google to just break even on their $1.6 Billion investment.  That is $150M in profits, not revenues...and that is after splitting revenues with all the copyright holders. My guess is that YouTube will pay out more than half their revenues to copyright holders...maybe more. Steve asks "Is YouTube really something permanent, long term, or is it just a passing fad?" That is the $1.6 Billion dollar question.

I have often heard Steve say "I would rather acquire 20 companies for $50M, than acquire one for $1 Billion" and "I would rather spend 5 years and $50M building a product than pay $1B for something that may not last".

Here is my response when people whine about why don't we do that " Big acquisitions make headlines but they rarely produce bottom lines". This is a business, not a fan club.

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Comments

[alan shimel]

Don- i have been following your comments on the Google-You Tube deal and I have to say that I realize your MS bias, but you are coming off as an MS shill here. Lets not rush out and call the X-box the Sony/Nintendo killer, especially when I read how much MS has dumped into it. Saying that Zune or whatever it is, is also going to kill i-pod is widely optimistic to be generous to you and we all know what the courts had to say about the netscape-IE thing. You can find plenty of examples where big deals made big business as well

[kid mercury]

you dont think synergies could be > 150 mil? i agree the copyright costs are potentially huge, but they are a decreasing risk; i.e. next generation's publishers will be monetizing via syndication, advertising, and remixing, all of which video should be a major part of.

i agree the acquisition is questionable, not only because of its size but because google is buying this more for the audience and the content and less so for the technology. but i could see how with the right strategy this ends up being quite profitable for G, YT, and media publishers as a whole.

[Chris Dodge]

I still think the copyright problem is a solveable one. Although it is highly unappealing from a operations point of view, but content will have to be screened eventually.

Ideally, this would be done through autonomous processes, e.g. video "fingerprinting". However, as a MIT grad with a bit of background in DSP and Image Processing, I know this is an impossible problem to solve in the general case. There may be some non-robust solutions for specific cases, however.

So, there will likely have to be some manual spot checking, which is quite expensive to implement. Maybe if enough spot checking elimintates copyrighted content, people will gradually be disinclined to even try.

In the end, I think there's now enough standalone content on YouTube for it to be self-sustaining. However, they still have expenses/revenue mismatches, but I think the Google deal will help out on the expense side.

Regardless of all of our chatter on this matter, I'm sure Chad and Chen will be enjoying their Ferrari's soon. They always had that "the cat that ate the canary" grin on their faces. This exit outcome was their plan all along and they executed this strategy perfectly.

[Don Dodge]

Alan, Sorry about the shill thing...just trying to have fun with this. At Napster I was on the wrong side of this and believe me it was no fun.

Kid, generating $150M in PROFIT will require about $500M in revenues per year. Remember the copyright holders will take most of the reveune. I don't see that happening for YouTube anytime soon.

Chris, at Napster we had a system that could catch probably 95% of the copyrighted material. But, the judge said that was not good enough. It had to be 100% effective or we had to shut down the service. I will never forget the judge's words "You created this monster, now you have to control it".

Copyright laws are very strict and unforgiving.

[Greg Linden]

Nice post, Don.

On large acquisitions and the bottom line, here is a great quote from Wharton Professor Robert Holthausen: "Various studies have shown that mergers have failure rates of more than 50 percent. One recent study found that 83 percent of all mergers fail to create value and half actually destroy value."

[Mark Z.]

Steve Ballmer is right on the spot with his comments on Google. While Microsoft has (IMO) always respected IP rights -mainly because they were making a living from IP rights- Google has always ignored IP rights. It all started with their search engine - spider the whole Web and display ads on snippets (from other pages), it continued with the Google library project where they just grabbed every book they could get hold of, and now YouTube. Frankly, they just don't care about IP rights, and this is scary. While one can argue about the value of some of the content out there, but it still takes talent and experience, time and money to produce QUALITY content. And I still think that users on YouTube (and everywhere else FWIW) are looking for quality content. How many shaky and remarkably unfunny selfmade videos can one endure? Not many, that much is clear.

[TanNg]

I aggree with Chris Dodge that "the copyright problem is a solveable one." Because

* If you show money the copyright holder they wont sue you. The challenge is find-out good sharing schemes. Google is who can do this best.
* Copyright holder learned some lessons. They killed Napters but now they have to kiss the ring of Apple iTunes. So I think now they may more flexible and negotiable.

[Lloyd D Budd]

Hi Don, I take it you have read http://www.blogmaverick.com/2006/10/30/some-intimate-details-on-the-google-youtube-deal/

Food for thought whether or not it went down like that.

[Don Dodge]

Lloyd, yes I read Mark Cuban's post on "details" of the YouTube acquisition, and I wrote a response to it here. http://dondodge.typepad.com/the_next_big_thing/2006/10/details_of_the_.html

There have been several news reports about lawsuits being filed. The latest one today, unrelated to copyrights, is from Utube.com seeking damages from YouTube.

A big pot of money always attracts sue happy lawyers...regardless of the facts involved.

[Lloyd Budd]

Don, I had missed your response post because I use a desktop feed reader, how come only the most recent two items in your RSS feed? :(