No matter how you spun it, a lawsuit was waiting to pounce on YouTube. And when the lawsuit came, it would be from multi-billion dollar media conglomerates. Worst of all, people feared it would trigger a landslide of more lawsuits. Even still, Google bought YouTube. And now the billion dollar war has begun.
I wondered: Maybe Google actually wanted to be sued.
Backroom Discussions
First of all, in a perfect world, no, Google wouldn’t want this. And Google, hoping that the world is close enough to perfect, did buy YouTube. But somewhere during discussions, someone must have asked, “How is this different from Morpheus and Kazaa? Won’t we be sued into oblivion?”
The smart lawyers at Google probably mentioned something about the DMCA, but honestly, would you want to buy a company that would be hated, constantly, by the very people who own the content that keeps you afloat? Or better, how will such a site remain #1 if there is a (Edit: added link) unified effort by content owners to either displace or destroy you? Most of all, media companies, who have significant clout and money, wouldn’t let YouTube host their content for free without a fight. There was more to this purchase than meets the eye.
No matter how you look at it, the purchase came with a lot of legal risk. I believe nobody at Google is surprised that Viacom is suing and wants $1 billion, A.K.A. most of the sum Google paid for YouTube. This is all part of the expected road map in owning YouTube.
So plan A was to hope people would be nice and look the other way. That worked for a year so far, and Google hoped it would continue. Plan B was to get sued.
This isn’t any ordinary “get sued and win” plan. Waiting to get sued so you can win in court is a defensive move for most companies. But for Google, this is preemptive. This is about Google defending YouTube, instead of YouTube defending YouTube.
Why Getting Sued is a Preemptive Strategy
Let’s pretend that YouTube was not bought out because talks got delayed. Then realize that it would have probably been sued a lot sooner by a lot more people. Investors would flee and nobody would want the company now. If YouTube goes broke, that would have likely pushed Myspace Video to #1, giving News Corp a huge edge since it happens to own Fox Entertainment. Myspace Video would become whatever was in the best interest of Big Media. Probably a DRM infested piece of crap that sued its users for uploading copyrighted material.
(Edit:) If you don’t think Myspace would have hopped into the throne, you may want to see this recent report that shows how Myspace video is #2 in the video market. And as the trend goes, Myspace is actually losing share in the video market (3% between December 2006 and January 2007). Seeing as how 16% of all YouTube traffic comes from Myspace, you can’t say YouTube isn’t causing serious harm to Myspace videos, keeping it from becoming #1.
On the other hand, if YouTube didn’t go broke and fought the lawsuits, imagine if they had lost. Myspace Video gets to keep whatever edge it has, but virtually every other video site on the Internet becomes illegal overnight. Thousands of user records and IP addresses would get subpoenaed, and video sharing dies in one fell swoop.
Why Does Video Sharing Matter to Google?
What’s the next big thing on the net? Video. Google cares what happens in video sharing because it wants a slice of the video ad market. It doesn’t want to just be in the market, it wants to own it like it owns text ads. But that’s not the whole answer.
Google bought YouTube because it wanted to make sure of three things:
- Google has first dibs for video ads on the biggest video site on the Internet
- YouTube remains legal
- Expand and protect current fair use related provisions involving copying intellectual property
The first point is obvious, and the second point feeds into point #1.
But the third point is the most important for Google. If YouTube were to lose a lawsuit for hosting intellectual property, it would severely weaken Google’s position in a variety of current and future endeavors. Any aspirations Google has of someday crawling and indexing video content (nope, they don’t have this technology yet) would now be in legal limbo. It would also potentially re-introduce new arguments against their Google Image Search. And their book search program might suffer a similar fate once the YouTube precedent settles in. Google, being a company that spiders and indexes (stores) massive amounts of copyrighted information, would now be in serious legal jeopardy.
YouTube is Google’s Future
Thus, Google not only threw money at YouTube: it threw its lawyers at YouTube too. Google’s lawyers are some of the most well-versed copyright lawyers in the world since so many of their lawsuits deal with that issue.
The goal here is simple. Google wants to own the #1 video sharing site (completely legal), own 100% of the ads on that site, and clarify many currently-ambiguous copyright issues in their favor. If all of that goes as planned, the $1.5 billion paid to YouTube was a small price to pay. But if they had never gotten involved, the potential losses were far greater than a billion or two. Since Google has a market capitalization of over $130 billion, even a dip of 1% means losses of over $1 billion. But if entire sections of their business model became legally uncertain, you can bet they’d lose a lot more than 1%, especially with their insanely high P/E ratio (the ratio between what their stock is worth and how much they make).
By fighting a lawsuit, Google gets to prove the legitimacy of Internet video distribution – something that will probably never flourish under the “old media” regime. Unfortunately for them, the DMCA protects site owners from liability of what its users do — or at least that’s the general interpretation. Letting YouTube fight this battle alone with their own lawyers might have resulted in a very public and unnecessary loss that would have crippled Google’s video ambitions and possibly caused collateral damage to a bunch of related industries (especially search). This would have forced everybody to play by the conglomerates’ rules, and taken anyway any guarantee of Google getting any cut of the video ad pie. Video sharing needs this clarification before it can move forward. And if Google legitimizes it, they will have the biggest video site on the web for their video ads to play.
So let’s ask ourselves again: would Google pay $1.5 billion so it can fight the lawsuit on behalf of YouTube? Now that I think about it, it seems like a wise long term move.
Update
9:01AM 3/22/2007: I’m on Slashdot. I think I survived the Slashdot Effect!
Michi Kono's Blog 
Wow. That’s the only thing I have to say.
Everything you just said was discussed in great detail in the WSJ article on the Youtube purchase the day it happened.
That’s good to know… if I had access through their pay-wall, which I don’t. Thus, I can’t even confirm what you’re saying. Somebody may have concluded this before me (such as the people at Google), but I’m offering my opinion for free. 🙂
Sounds plausible. This reminds me of Sputnik 1. The United States had the capability to orbit a satellite since 1954. But, the Eisenhower Administration would never give its OK to let the Army do it. Then the Soviets launched Sputnik 1 on October 4, 1957 and we suddenly looked like we were technically behind them.
But were we? Turns out Ike wanted the Ruskies to orbit a satellite first so the question of satellites overflying other country’s territories would be a de facto standard – set by those same Russians. He wanted to orbit spy satellites in order to look behind the Iron Curtain, which is just what we did with Project Corona starting in 1960.
Has the US orbited the first satellite, Moscow would have howled about having our satellite over their heads. But letting the USSR do it first, they set the standard. And we took advantage of it.
Same thing.
Rediculous. You obviously have no idea how much time, effort and money goes into lawsuits. They are a horrible drain on company resources and tie up personnel so they can’t create additional wealth for the company.
What’s better becomming #1 without having to defend a lawsuit or #1 while having to defend one?? I’ll take the first anytime…and so would google.
Besides to be preemptive, google has to be able to control the filing of the lawsuit. They didn’t and can’t.
So your logic utterly fails. Next time…don’t ditch the business law classes to smoke dope…it’s seriously rotting your brain but you don’t realize it.
I would say this is a risky strategy, Youtube have removed a fair amount of vidoes already, the same videos they are being sued over or at least some of them. This may have bought them time but the fact remained they cannot police everything that gets uploaded. So if they lose they will have to remove many more than they have already. If they win will they not ever remove these types of videos?
It will become one giant pirates dream full of anything anyone wants to upload. Maybe some companies will be scared off but It doesn;t seem likely that this will continue!
lol interactive corp doesnt own fox interactive… news corp does. interactive corp is ticketmaster/match.com/askjeeves
JT, I respectfully disagree.
“What’s better becomming (sic) #1 without having to defend a lawsuit or #1 while having to defend one?? I’ll take the first anytime…and so would google.”
That is the problem. If YouTube got shut down, MySpace becomes #1 and Google loses whatever future it hoped to have as the #1 player in the video ad market. Myspace would hold ALL of the cards. And if the $900M agreement between Myspace and Google didn’t show, the traffic to these sites is worth a hell of a lot more than a billion. In short, if YouTube got crushed, Google isn’t #1 in video. Only a lawsuit could help them obtain that.
And then there’s the whole point I make about legal precedent which you seem to be completely ignoring. If they didn’t defend YouTube, and YouTube lost, Google is toast. Read my post for further analysis as to why.
Vista: Exactly. If YouTube lost, it would set a precedent that increases the liability of websites anywhere that allows users to upload content. It would put Google at risk too since anything they automatically spider (such as video) that is copyrighted could make them liable. Current legal precedent says they are not liable. This is why Google can’t afford to lose this (nor should they, since the DMCA protects them so long as they respond to complaints).
Joe: Thanks for the fix.
You’re delusional.
Idiotic…Google could have let YouTube user their lawyers to save them without buying hte company and tkaing on the liabilities.
Furthermore, Google is NOT protected under the safe harbor clause.
Google bought YouTube because they couldn’t stand being a teeny tiny bit player in yet ANOTHER market like they alreay were in IM, online mail, maps sites, every other thing they have done but ad sense and search, etc.
The only problem would be if the DMCA would be the next target because of unfairly protecting video sharing sites. The law can be changed if necessary. There are enough problems with p2p let alone yet another avenue for piracy.
are adsense and duggmirror friends?
Nice arguments. I think you might be on to something here. I was just talking with a lawyer friend of mine last night about this exact topic. I think your “preemptive strategy” term is very well thought out. The lawsuits are part of the overall strategy of solidifying themselves in the future of content spidering.
There’s more to this. Google wants in on the TV ad market as well. And google can very easily track user clicks and association using youtube to better understand user logic, selection and flow.
It’s about building a database built on creating a clear definition of user pyschographics.
The bread and butter to advertising.
A very insightful and thoughtout analysis of Google’s potential intentions. If turns out to be true, it would be one of the largest copyright/DMCA legal decisions of the decade
One should add to your response to JT. 1) (first, it’s not nice to call someone a dope-head, especially when you don’t know how to spell the word ridiculous). The ads on YouTube before the purchase were high-CTR, highly priced ads, generating thousands if not tens of thousands of dollars per day for YouTube; google got 100% after the purchase instead of Letting YouTube fight this battle alone would have been a terrible financial decision… potential losses were MUCH GREATER than the few small billion it will pay to fight the fight correctly. Atop that, we have the added bonus of DMCA clarification… all I want is to see that Michael Jackson / Lisa Marie Presley kiss from MTV years ago….. now I have to either a) wait for Viacom to come up w/ a good web application on on-demand channel that will re-display/sell old MTV content, b) sit in front of my t.v. and tivo every single crappy VH1 rewind show, or c) wait for this DMCA clarification that will allow someone to post this content somewhere! Thank you Google.
http://digg.com/tech_news/Infringing_videos_on_iFilm_could_cause_problems_for_Viacom
Even if Google loses, its better that the “YouTube” image loses, than to have the Google company lose.
YouTube is Google’s shield.
Far fetched. This is the plot for some crazy holywood production, not real life.
Even if this were true, and google wins and gets to keep Youtube, the media companies are gonna be really pissed when Google starts advertising on THEIR content. That’s a whole ‘nother ball game.
Why would you need 1GB of RAM to serve an HTML page to a bunch of people. That’s complete overkill.
How popular was your blog before you got dugg ? My blog (www.isql.org – shameless plug) is popular with spammers, but not real people. I wouldn’t know how to cope !
Michi, excellent analysis. There’s no way a company of Google’s size would take on a potential liability like YouTube without looking at the legal risks, and realistically, that’s why nobody else was in the running to buy YouTube – The legal wolves had been circling for months and investors were scared stiff. And you’re right as well about Google’s legal team – Copyright is their field, and this is not a suite they can lose. Google’s war chest is massive, and while I’m sure they’re not looking forward to a legal battle, the company has far too much riding on this to back down.
In the mean time, the $1Bn figure that Viacomm has brought to bear simply can’t be anything other than a scare tactic – They’re looking for a better deal than Google’s already offered (and I guarantee Google’s already offered a deal) and they’re looking to spook Google with a lawsuit. This is the same tactic that Cisco played with the iPhone – feign indignation and gun for a deal. What remains to be seen is if Google forces this all the way to verdict or if they do work a deal out with Viacomm, but I guarantee Viacomm isn’t honestly expecting a $1Bn windfall, nor do they want one.
The reason Viacomm doesn’t want a verdict is the same reason Google wanted YouTube. Google’s ambitions go farther than just video ads, as someone else alluded to. The future of TV is IPTV – TV over internet. This is a given, in the same way that VOIP is killing the landline. The when is a question, but this will happen. Currently, Google’s in a great place to take advantage of this, and having the best name on the internet to back their brand will only help. If Viacomm’s team has any vision, they’ve already seen this – whatever little revenue they’re getting from online video, the sheer number of people visiting YouTube and other internet video sites has got to have caught their attention, and the popularity is only growing. Viacomm doesn’t want to kill this, they want in, and they want to make sure they get a good deal from the start.
And I guarantee they don’t want to have to court News Corp to do it, either.
Hi Michi,
Brilliant theory. Would you authorize me to translate it in french for publishing on my blog?
Best regards,
Jean-Marie
Nice attempt at spin control. I don’t think it makes Google look good though… It’s possible they wanted this at some level. The mark of a good made up conspiracy theory is plausibility and a gullable audience. Time will tell. They sure are pulling more and more content from their site because of complaints. Is that part of their strategy also?
Brilliant!!!
Very possible indeed.
I see two possible outcomes for these lawsuits:
A: google can basicly hold out indefinetly, they’ve got practically unlimited financial resources and will probably use it to defend their future. Plus if they are going to be on the losing side, they can go for a nice settlement, cough up the revenue of a days work or so and remain legal.
B: google makes a deal with the mediacreators, they get exclusive rights to put their content on youtube, and let them be freely seen by viewers all around the world, quality can be made higher then regular youtube-users can provide and so on. People that like the shows will probably go out and get it on DVD. Also, smaller shows could gain huge momentum on youtube and thus be worth more when selling them to TV-stations… Youtube could also prove to be a great ‘testing grounds’, show a pilot on youtube, check how many hits it gets and check the reviews it gets in the comments… Youtube could be a great asset to mediacompanies, if only they would realise it 🙂
my 2 cents
Seduction: It’s not about image, it’s about securing future revenue streams.
Jeremy: 1GB of RAM is nothing for a web server these days, especially if it is going to handle Digg traffic.
Leigh: Not too popular. I like to think my blog caters to a narrow audience because I post about programming from time to time. But my business posts do get a decent amount of traffic, but still nothing compared to the pros. 🙂
Jean-Marie: Well, so long as you cite the source and you only re-post the French translation, fire away.
Ace: It’s not spin control. Google did not buy YouTube without taking the legal risks into account. While the potential income was important, it wasn’t hard to see that there were potentially multiple billions in liabilities there. Why would Google back that? Why would Google PAY for that liability? What’s the alternative explanation? That nobody saw this coming? Just wait until the next major studio sues for $1B — everybody knows it’s coming. Google may not have wanted the lawsuits, but they certainly knew they were coming. There must be a secondary motive that you are overlooking.
great theory, loved reading it
cheers
Hi there. you want to switch the wording in your ratio there for the people who don’t know. p/e ration between price and earnings.. not other way around..
thanks
well written and analyzed post.. Google definitely knew that by not getting involved in the YouTube’s legal mess, it stands to lose far more than what it paid for YouTube and its subsequent legal costs.. and YouTube would have never had the resources to fight back on its own.. it’s a win-win for both of them..
=)
Great post ! You raise many interesting ideas, but I believe the simplest explanation is usually the best, and I don’t think you need to include the legal side to explain why Google bought YouTube.
Google bought YouTube because it has a gazillion page views a day and is likely to grow enormously in years to come. This is the only thing that matters. Google’s business is all about page views. Double the page views, double the revenue. It’s that simple.
The legal threat from copyright holders doesn’t matter much. You could ban all the TV content from YouTube and it would still be hugely popular. As of today, clips from the mainstream media are in the minority on YouTube. The most popular videos are user-generated. Those non-mainstream-media vids are getting better and better, because users are getting better at producing them, but also because serious producers from independent labels and small studios are realizing that YouTube is a great advertising medium, and indie artists are recognizing it, and MySpace, as great ways to be discovered. YouTube is all about distributing those kinds of videos, not television shows. (That’s more iTunes’ or Joost’s business. In the long run, YouTube doesn’t even *need* the mainstream media.
As of today, Viacom wants a billion bucks. So what ? Google will negotiate a deal and this will never reach the courts. Why fight it out ? Google might win of course, even though Napster and Kazaa lost, and their business model was pretty close to YouTube’s, but why bother ? Even a “win” would surely involve a court decision constraining Google/YouTube to do something about piracy, and that would be expensive and technologically challenging. (Yes, even for Google.)
Of course, if what Viacom really wants is to kill YouTube plain and simple, then it will have to go to court. Maybe their faith in Joost goes so far that they’re willing to sacrifice all the free publicity they get on YouTube and all the goodwill in the world just to cripple a competitor. Maybe. But for Google, maintaining the status quo is much simpler and less expensive.
Are new distribution media and business models like YouTube’s showing the need for a serious rehaul of copyright laws ? Certainly. But this is not Google’s fight. The only thing they did was to buy a site with the potential for huge traffic, so that this traffic would be their own, not Yahoo’s or Microsoft’s. Of course they thought about the legal issues. But those are peripheral, not strategic.
…just my two cents…
Serge
PS: the latest TWiT discusses this subject at length.
PS: as this comment turned out long enough for a blog post… I posted it : http://sboucher.blogspot.com/2007/03/did-google-want-to-be-sued.html
Interesting idea.
While I acknowledge that every corporation is essentially selfish by default, I think the aims of Google and search related business models are far more aligned to that of the consumer than the content provider’s can ever be.
I don’t begrudge them the advertising revenue they get when the services they offer are some of the most subtle and sophisticated on the internet. Oh God I sound like a Google fanboy.
You had me at “Myspace Video”…and I think that you might be right. What’s just as amazing/quirky/ridiculous is that MySpace can produce the worst incarnations of anything and monetize the crap out of it. Just goes to show that having the best product doesn’t necessarily make you the most money.
—-
Shredder
Michi,
Brilliant analysis, sorta reminiscent of Freakanomics 🙂
Wouldn’t it have made more sense for Google to buy YouTube in the middle of a lawsuit, when the company’s wouldn’t really be that attractive a quarry to anyone else ? I guess, that’d imply that there was some serious competition to buy YouTube when Google bought it.
I don’t say wow. I say “get a day job.”
Geez… you have to admire this twisty thinking… This all makes far too much sense and is far too plausable.
*shudders*
—
http://www.madspace.co.uk
Plausible, but it seems to me that a much less risky strategy for Google would have been to lobby hard for legislation to change copyright law rather than battle this out in the courts.
A loss of a YouTube court case could be extremely costly for Google, billions of dollars, and the risk of a loss under current, unfavorable copyright law may be quite high.
Double Wow… Really great viewpoint on the issue. Go Google!
Possibility, great idea.
Ditto on the wow. Who wouldn’t spend a billion dollars to protect potential future earnings.
1) Youtube wasn’t worth suing before they were bought by Google. Big audience, teeny revenue stream, no tangible assets.
2) Viacom made no effort to protect their interest or enforce DMCA either before or immediately after Google bought Youtube, only after Google refused to pay what Viacom wanted.
3) Viacom’s claims of damages is spurious: prove the losses please.
4) Meanwhile, over at CBS Sports they are uploading NCAA clips to Youtube. Sumner Redstone is chairman of both companies. Prior to 2005 they were the same company.
5) Net conclusion? Poorly thought out negotiating tactic by Viacom, which I suspect they will sorely regret. Sure would like to jnow the T&C for those NCAA clips.
So what you’re essentially saying is that Google bought YouTube for $2 billion (plus legal fees).
I think the best case scenario is that 1000’s of people close their videos with a caption that says ‘Viacom Sucks’. That’d be great PR for Viacom should they be victorious.
that makes sense. Even thought we will only know the truth when then gShark-whit-lasers hit.
Anyway, care to mine how much of the other sites populariry is from pr0n? I bet that if they had youtube like policies, it would be much below the 0% line.
gabe, funny point.
Pornotube vs metacafe vs ifilm
YouTube vs the rest
As you can see, YouTube slaughters them. And you’ll also notice those sites aren’t doing much better than pornotube, which is only porn.
Wow on #50… vBulletin does trackback links! 😮
wow, that’s a great analysis.
Hi,
Yes I do think that there is definitely more than meets the eye. Google is not stupid. The legal issues surrounding Youtube is massive, but yet unclear and ambiguous at the same time as you pointed out.
It is going to be interesting how the the battle is going to turn out. I got a sneaky feeling that
>Holy hell. Digg’s users almost destroyed my server!
Well its probably going down now then, you got slashdotted
What is to say that if Viacom win this legal fight with Google, they then go after Myspace Video? A win to Google is a win to Myspace Video.
I would go further and ask, what is stopping Google from financing their own original content (e.g. Firefly season 2!), and bypassing the TV Networks altogether? Their overheads would be lower, meaning that their slice of the advertising revenue could be a lot smaller.
They’d be guaranteed market share, and DRM need not be an issue – who’d bother with .torrent if you can just start streaming the high-quality video right away?
Regular TV 30-second advert slots could be played whenever the user pauses the show playback.
TV show writers would have more creative control – rather than the network second-guessing what the audience wants – if shows did not gain an audience then they would wither from natural (un)selection!
hehe your story just got posed on /.
I think that at the end of the day, after the dust has settled, copyright holders will get some small payment per play, similar to what was worked out with the music industry, and Google will march over onward.
you’ve been linked on slashdot, congratulations.
Related story on techdirt.com – Walt Mossberg of WSJ wants the DMCA rewritten with consumers taken into account.
http://techdirt.com/articles/20070322/002651.shtml
If the legal-defense of the principle is their biggest motivation…
Then WHY NOT let big-con-gloms sue first, then swoop in and rescue YouTube general panic have set in? That will make a lot more sense! You will:
(a) save your shareholders a whole load of money for buying it cheap (1 Bil discount?)
(b) get the benefit of analyzing from the sidelines first.
(c) I bet you big-con-gloms might be asking for so much if the big-money-G is sugar-daddying YouTube, so you get more bang for the buck.
(d) Come up smelling like roses because you defended the underdog.
Yeah, it is possible if Google didn’t buy it someone might… but which someone might with sword hanging over the head? No one else would be that insane to to buy YouTube at the price Google paid… except maybe… hmmm… M$….
Very sensible and plausible!
Andrew: while my theory isn’t necessarily 100% correct, I have two counter scenarios that justify why waiting until they got sued isn’t an option:
1. Shareholders would not be happy about buying a company with a pending $1B lawsuit and potentially more to follow. Google’s stock would have taken a beating far worse than $1B had they purchased YouTube now.
2. It was a calculated risk. As I mentioned in my post, the *ideal* situation is that nobody gets sued and everybody recognizes YouTube as legit. That didn’t happen.
greg: it’s a much longer and lengthier process to try to court “lawmakers” for your side. especially when lawmakers are only concerned about protecting big business these days. Google isn’t Halliburton, so the likely hood of the lawmakers they lobby ever presenting something to congress is nil. not to mention the time required for a bill like that to get approval.
the lawsuit route is a riskier, albiet quicker one. Youtube vs Viacom could become the Roe vs Wade of copyright law if they’re successful.
What gives Gootube users the right to upload copyrighted content? How come no one is going after the actual offenders here. I think that google/youtube could do a lot more to keep copyrighted content off of their site. Of course then they have lost the value of the youtube content. Seems like a risky business model.
The real reason why Google bought YouTube wasn’t just to protect their market share, it is instead to redefine the copyright world as we know it.
Basically Google does not believe that the way copyright law is and has been defined over the decades is longer relevant. As such I believe they have bought YouTube with full knowledge that they will get sued, however their aim being to change copyright laws for benefit of their bottom line, but also more fair for the average person.
Let’s see how it all pans out, but if Viacom throws less money at the lobbying and less money at lawyers they could contribute to the demise of copyright law as we know it today into something much more different that would finally benefit the masses instead of individual IP owners (owners being the operative word as opposed to content creators).
Great analysis and very interesting points.
Jury Nullification anyone? If this goes to Jury and Viacom argues that the law is on its side, I’d like to see the JURY judge the LAW on this one.
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