Google: Love, Fear and Hate

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Five centuries ago, Niccolo Machiavelli wondered whether it was better for a king to be loved or feared.

How about reviled? If nothing else, the full-bore war that erupted last week between Google and Viacom represents the clash of two powerful leaders capable of eliciting any of those emotions.

At stake in this billion-dollar legal fight is the question of who ends up winning perhaps the most lucrative piece of the Internet TV and video domain.

Viacom, after months of fruitless negotiation with Google and the YouTubers, filed a federal lawsuit seeking at least $1 billion in damages for what it called “massive, intentional copyright infringement of Viacom's entertainment properties.”

Viacom claimed that 160,000 pieces of its content had been viewed on YouTube at least 1.5 billion times, ranging from clips of MTV Unplugged and Comedy Central's The Daily Show With Jon Stewart to a complete copy of the Paramount Pictures feature An Inconvenient Truth. The suit came less than six weeks after Viacom first publicly threw down the gauntlet, demanding YouTube pull down some 100,000 clips.

Viacom clearly has concluded that as things stand now, Google and its YouTube video service are enemies.

That is not the case for some other programmers, including the British Broadcasting Corp., NBC Universal and CBS (an erstwhile piece of Viacom). All three broadcasters, and YouTube's other media partners, appear to value GooTube as a distribution and promotion channel that drives eyes back to their shows, visitors to their own sites and incremental ad revenue that filters down to the bottom line.

But, in private, several of YouTube's current cable and broadcast-television partners also talk about the video-sharing site as requiring an inordinate amount of policing to make sure their content isn't misused.

Promotional clips and short-form skits are one thing. But when it comes to the real crown jewels — full-length television shows and movies — traditional media companies don't want to cede control over the decisions about how that gets turned into cash on the Internet.

So, Google: friend or foe?

Both, said Sanford C. Bernstein analyst Michael Nathanson, and that means YouTube represents “a future distribution path, as long as [Viacom] understands that.”

With Friends Like These

In this view of the world, YouTube is merely a recalcitrant holdout, unwilling to pay what Viacom has demanded or unwilling to agree to other restrictions on how it uses the old-media giant's assets. In its lawsuit, Viacom pointedly noted that it has struck deals with “legitimate” online distributors, including Apple's iTunes download-to-own site and Joost, an Internet-TV startup eager to accommodate copyright owners' wishes.

Left unanswered is whether Viacom's suit against Google is a tactical negotiating ploy — to squeeze more cash out of the King of All Internet Media, which raked in $10.6 billion in sales last year — or a broader strategy to delineate the terms of online video deals more clearly.

In fact, an odd dichotomy buzzes around the video-distribution partnerships Google and YouTube have already landed.

Content creators could be said to want to have their cake — i.e., exploit the massive popularity of YouTube, which purports to serve up 100 million videos a day — and eat it too, with the assurances that unauthorized material isn't served up at the same time.

Start with Viacom itself. At the same time the media conglomerate is suing Google and YouTube for allegedly distributing clips from popular MTV Networks programs, MTVN sells dozens of individual shows through Google Video (http://video.google.com), including MTV's Beavis and Butt-head, Comedy Central's South Park and Nickelodeon's Zoey 101.

Google Video sells MTVN programs for $1.99 apiece, and shares the revenue with the cable programmer. For $1.99, Google Video users can download the shows to their computers, and watch the content for an unlimited period of time. MTVN has a similar download-to-own deal with Apple Computer's iTunes store.

MTVN and Google also agreed last August to distribute a handful of free, ad-supported video clips from MTVN programs, including MTV's Laguna Beach: The Real Orange County and Nickelodeon's SpongeBob SquarePants.

Google and MTVN executives have been tight-lipped about the performance of the download-to-own and free video content available on Google Video. But in January, Google vice president of content partnerships David Eun told attendees at the National Association of Television Programming Executives Conference and Exhibition in Las Vegas that the click-through rates on ads running next to the MTVN content were “much higher than we thought [they] would be.”

Meanwhile, the BBC said in a statement that it “partnered with YouTube to engage with its community and its millions of fans who access the site and to ensure that credit for the content flows back to the BBC.”

Three BBC Channels

The British broadcaster plans to create three branded channels on YouTube: an entertainment-oriented channel, with clips of new shows and other promotional content for series such as Doctor Who and Life on Mars; an ad-supported BBC Worldwide channel, with clips from shows including Top Gear, Spooks and The Catherine Tate Show; and another ad-supported channel provided by news network BBC World, which will have about 30 news clips per day.

Nevertheless, the BBC added: “The partnership hasn't changed our legal position and we'll continue to ask YouTube to take down content where appropriate.”

Next consider the experience of World Wrestling Entertainment. Clips from WWE — whose USA Network program, Monday Night Raw, is consistently ranked the top-rated program each week on basic cable outside the National Football League season — often show up on YouTube.com.

WWE vice president of corporate communications Gary Davis said the company orders YouTube to pull many videos from the grappling group's programs off of the Web site. But WWE is working with YouTube to promote its programming by posting short, promotional clips for events such as its annual Wrestlemania pay-per-view telecast, he said.

“We've been very vigilant and aggressive about going after unauthorized use of our intellectual property on YouTube,” Davis said. “But we also are very aware of the promotional value of YouTube and we continue to look at ways to test and try things out on YouTube.”

WWE sells DVDs through “ShopZone,” an online store on its Web site (http://shopzone.wwe.com), but the company doesn't have deals to sell online video through Google Video, AOL, Apple's iTunes store or other Web venues.

The company is looking at selling online downloads through those outlets, as well as its own Web site, Davis said. WWE.com generates 15 million unique visitors per month and delivers 46 to 50 million free video streams monthly, on average, he added.

Business As Usual?

One reading of the Viacom lawsuit is it's a blunt instrument to get Google's attention, after failing to come to terms at the bargaining table.

“What we keep coming back to is that this is basically a negotiating tactic on Viacom's part,” said Thomas Weisel Partners analyst Christa Quarles.

According to Quarles, Google was offering Viacom “in the lower-hundreds-of-millions range.” Viacom, by asking for $1 billion in its lawsuit, “may hasten Google's response,” she said.

The billion-dollar figure, which works out to 63 cents per alleged view of Viacom's content on YouTube, is well beyond what the site generates today. Wall Street analyst firm Bear Stearns estimated that YouTube generated $15 million in ad revenues for 2006.

Indeed, Google had anticipated being sued over YouTube. When it closed the $1.65 billion deal for YouTube last November, Google said it had set aside 12.5% of the equity in the transaction in escrow for one year “to secure certain indemnification obligations.”

Google CEO Eric Schmidt, speaking at an investment conference one week before Viacom filed its lawsuit, said he had learned that part of being in the media business means that “you are sued to death.”

And Google general counsel Kent Walker, commenting on the Viacom suit, used language that seemed to put the legal action in the context of a business dispute, rather than copyright infringement. “YouTube has become even more popular since we took down Viacom's material,” he said in a prepared statement. “We think that's a testament to the draw of the user-generated content on YouTube.”

YouTube's partnerships with content owners, Walker continued, “offer the YouTube community access to some of the best content in the world, ranging from entertainment and sports to politics and news. And we're only getting started.”

Viacom, however, put the issue in more cataclysmic, far-reaching terms.

'Brazen Disregard'

The company included this warning in its lawsuit, filed in the U.S. District Court for the Southern District of New York: “YouTube's brazen disregard of the intellectual property laws fundamentally threatens not just plaintiffs, but the economic underpinnings of one of the most important sectors of the United States economy.”

Viacom, in effect, accused YouTube of extortion. YouTube has deliberately pursued a strategy of steal content now and ask questions later, Viacom asserted, and the video site offers to proactively scour for and remove illegally posted material only for companies that have already agreed to license content.

Viacom also asked the court to impose an injunction requiring YouTube to “employ reasonable methodologies to prevent or limit infringement of plaintiffs' copyrights.”

“Lawsuits like this get filed over principle, not over dollars,” said a partner at a New York law firm specializing in corporate litigation, who asked to remain unnamed because he has worked with Viacom in the past. “I think Viacom is right to protect that intellectual property. They cannot allow someone else to dictate what can or cannot be done with their content, and what the value of that is.”

If the suit comes to trial, the central issue will be whether YouTube has complied with the letter and spirit of the Digital Millennium Copyright Act of 1998. The DMCA requires that Web hosting companies and other Internet content providers respond to “takedown” notices from copyright holders to remove infringing content.

YouTube has maintained that it's covered under the DMCA. Viacom begs to differ, principally because (Viacom alleges) the YouTubers's entire business model is predicated on copyrighted material being difficult for owners to find and to ask to be removed.

Viacom pointed out that YouTube vigilantly removes pornographic material from the site. But YouTube does not apply the same energy to removing obviously copyrighted clips, according to the complaint.

“YouTube is a significant, for-profit organization that has built a lucrative business out of exploiting the devotion of fans to others' creative works in order to enrich itself and its corporate parent Google,” Viacom said.

Thomas Weisel's Quarles said this could be a long and stubborn face-off. “Both sides have basic reasons to continue to dig in their heels,” she said. “From Google's standpoint, the last thing they want is a precedent that would let others come in and get a piece of the company.”

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