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YouTube's New Deep Pockets

October 2006

The online video star has found a rich parent, but can it ensure that it won’t leave Google vulnerable to copyright lawsuits?

YouTube is swiftly adopting Google’s informal corporate motto on not doing evil. Google has a lot riding on it—$1.65 billion in stock, to be exact. That’s how much the Web search giant is forking over to buy You Tube, the popular online video and social networking service that in just a year and a half has become one of the most visited sites on the Web.

Google (GOOG ) executives said the deal would help transform their company into a global media powerhouse and provide new audiences for the targeted advertising that’s the lifeblood of Google earnings. Executives plan to keep the company as a standalone service, while continuing to nurture Google’s existing video service. "Video is a great medium for advertising and from that point of view we are really excited about YouTube," Google co–founder and chief technology officer Sergey Brin said on a conference call announcing the Oct. 9 deal. "It is hard for me to imagine a better fit for a company."

But if YouTube is to remain a good fit, it will have to keep its new parent free of costly copyright infringement lawsuits, filed by media companies and other content providers concerned their material is being used illegally on the site. YouTube has a history of tangling with music labels and television studios over users’ uploading copyrighted music and video clips to its service.

NEW RULES. YouTube’s policy is to remove copyrighted clips once alerted to their existence. Content providers say the company needs to be even more proactive. YouTube was sued on July 14 by Robert Tur, an independent photographer, for distributing his work without permission (see BusinessWeek, 8/7/06, "Whose Video Is It Anyway?"). Universal Music Group weighed whether to sue YouTube over copyright infringement as well (see, 9/18/06, "Sour Musical Notes on YouTube, MySpace").

Todd Dagres, general partner at Boston’s Spark Capital, says that Google’s large market cap of $130 billion makes it much more vulnerable to lawsuits than a private company such as YouTube. "Once Google starts to apply its monetization machine, there is going to be more money at stake and people are going to go after it," says Dagres. "You cannot monetize other people’s content without their approval."

That’s just what YouTube is trying to get. Hours before announcing the sale, YouTube executives said they had struck content deals with CBS (CBS ), Universal Music Group, and Sony BMG, the partnership between Sony (SNE ) and Bertelsmann. Each lets YouTube distribute approved copyrighted content from its partners in exchange for a share of advertising revenue. YouTube has similar agreements with General Electric’s (GE ) NBC and Warner Music Group (WMG ).

YouTube is going further to allay copyright concerns. The company is adopting technology that lets it "fingerprint" and block copyrighted videos. Then copyright owners can determine whether to allow the video to circulate and take a share of the advertising revenue or to continue to block the video. YouTube already limits videos to 10 minutes in an effort to keep users from uploading television episodes and movies (see, 4/3/06, "YouTube CTO Outlines Copy Protection Tools").

INITIAL REACTIONS. Thomas Hesse, president of Sony BMG’s Global Digital Business, says the deal satisfies any copyright issues his company had with YouTube. "I think what this deal does for us is it allows us to actively embrace this phenomenon of viral video communities. It helps us use that medium to connect our artists with their fans, and it also helps us do this in a way that respects our copyright and develops added revenue for the company overall."

During the conference call, YouTube founder Chad Hurley said the Google deal will help the company better police its content to ensure copyright laws are respected. "We have always respected copyright holders’ rights. What this deal allows us to do is to focus on that more than before," says Hurley. "It allows us to have the resources to focus on this." Google and YouTube executives also said they will be working to forge more content–sharing alliances with major media companies.

While such deals may decrease Google’s ultimate liability for copyrighted content that will inevitably make it onto YouTube, they do not completely shield the enlarged company from expensive lawsuits, says Jason Schultz, a staff attorney with the Electronic Frontier Foundation. "It eliminates the threat of these particular copyright owners," says Schultz. "But it is not an absolute get–out–of–jail–free card." Forrester Research’s Josh Bernoff agrees. "The problem of copyrighted video remains and is going to be a problem," says Bernoff. "If 80% of the content companies make deals and the other 20% have a problem, that is quite sufficient by itself to cause the end of YouTube."

INEVITABLE LAWSUITS? To properly protect itself from lawsuits, YouTube will have to ensure that the majority of copyrighted content never makes it onto the service, says Bernoff. That could mean hiring a staff to scan video content in addition to using an automated system. Smaller video–sharing sites such as Revver use this technique. Implementing such a system at YouTube, however, would be significantly more challenging because of the volume of videos. YouTube streams more than 100 million videos a day. Revver has far fewer videos in its database.

David Hornik, a partner with August Capital and a former intellectual property attorney, says lawsuits are a matter of when, not if. "There will be lawsuits," Hornik says. "The question is, Will it be big groups of media companies or small groups of media companies?" Hornik, who’s on the board of VideoEgg, another video site that’s backed by August Capital, says media companies are getting more savvy about doing partnerships rather than filing lawsuits, and he thinks ultimately such issues will be worked out. But for now, "The law is not evolving quickly enough."

And shunning all evil when it comes to copyrights could have a price too. Part of the site’s cool factor, after all, is the hope of seeing at least a little copyrighted material. Others visit YouTube because it allows users to upload videos that are enhanced by copyrighted music or clips.

POSSIBLE LOSSES. If YouTube’s content partners are too aggressive in deciding which videos cannot use their content, or YouTube delays uploading videos until content owners can be briefed, it could lose part of its audience. Spark’s Dagres says too aggressive policing could kill the video star. "YouTube is where it is because it was a little bit naughty," says Dagres. "Now they are going to have to remove the naughty. And if they become nice, will people still be as attracted to them?"

To be successful, Google will have to not only attract advertisers to YouTube but also help the company strike a delicate balance between reducing its liability and empowering users. That’s a difficult task for a big public company that has to be continually focused on its bottom line and not necessarily on remaining hip, says Dagres. Avoiding that responsibility may be one reason Google did not bid more aggressively for MySpace when it was still a private company. It bought the right to sell advertising for $900 million and left the coolness question to MySpace’s parent, News Corp. (NWS ). Partnership in this case was riskier because Google didn’t want Yahoo! (YHOO ) or AOL (TWX ) to get the property and both were rumored to have been interested.

If anyone can rise to the challenge of making YouTube both nice and likeable, it’s Google. Analysts say YouTube could bring Google between $200 million and $300 million in advertising revenue next year alone. "Google is the master of monetizing content that others didn’t see how they would monetize," says Ken Marlin, a managing partner at Marlin & Associates, a New York investment bank that specializes in media and technology. "There are all kinds of new products that can come out of this deal?there is a potentially huge market."

Viewers who want a little copyright evil in their video may just have to look elsewhere.

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