I first saw this posted on the Pho List. A media related list that I have participated in for years with lots of smart people with great insights. THe posting, as you will read is fascinating and was originally posted anonymously. I emailed the list asking for permission to post it on my blog. In response, the "anonymous author", who I respect and trust.
I cant say this has been fact checked. It hasnt. I cant say its 100 pct accurate, I dont know. But it rings true, and as I said, I trust the source
> I'm an experienced veteran in the digital media business and thought
> I'd share my version of events that happened at Youtube. Some of this
> is based on talks with people involved and some is speculation based
> on my experience working in the industry, negotiating settlements and
> battling in court.
>
> In the months preceding the sale of YouTube the complaints from
> copyright owners began to mount at a ferocious pace. Small content
> owners and big were lodging official takedown notices only to see
> their works almost immediately reappear. These issues had to be
> disclosed to the suitors who were sniffing around like Google but
> Yahoo was deep in the process as well. (News Corp inquired but since
> Myspace knew they were a big source of Youtube's traffic they quickly
> choked on the 9 digit price tag.) While the search giants had serious
> interest, the suitors kept stumbling over the potential enormous
> copyright infringement claims that were mounting.
>
> Youtube knew they had an issue and had offered a straight revenue
> share deal if the complainants would call off the dogs and give them
> time. The media companies quickly rejected this path for two reasons.
> First off Youtube wasn't making any money and was fuzzy about how they
> would generate revenue in the future. But more important the media
> companies view is that there was a mountain of past infringement that
> Youtube had engaged in and built their business on and they felt they
> deserved some of this accumulated value. And who could blame them. In
> spite of the media "user generated" puff pieces it was clear to all
> involved that they generated that content by hooking up their TV tuner
> cards to their PCs.
>
> It didn't take a team of Harvard trained investment bankers to come up
> with the obvious solution and that is to set aside a portion of the
> buyout offer to deal with copyright issues. It's not uncommon in
> transactions to have holdbacks to deal with liabilities and Youtube
> knew they had a big one. So the parties (including venture capital
> firm Sequoia Capital) agreed to earmark a portion of the purchase
> price to pay for settlements and/or hire attorneys to fight claims.
> Nearly 500 million of the 1.65 billion purchase price is not being
> disbursed to shareholders but instead held in escrow.
>
> While this seemed good on paper Google attorneys were still
> uncomfortable with the enormous possible legal claims and speculated
> that maybe even 500 million may not be enough - remember were talking
> about hundreds of thousands of possible copyright infringements.
> Youtube attorneys emphasized the DMCA safe harbor provisions and
> pointed to the 3 full timers dedicated to dealing with takedown
> notices, but couldn't get G comfortable. Google wasn't worried about
> the small guys, but the big guys were a significant impediment to a
> sale. They could swing settlement numbers widely in one direction or
> another. So the decision was made to negotiate settlements with some
> of the largest music and film companies. If they could get to a good
> place with these companies they could get confidence from attorneys
> and the ever important "fairness opinion" from the bankers involved
> that this was a sane purchase.
>
> Armed with this kitty of money Youtube approached the media companies
> with an open checkbook to buy peace. The media companies smelled a
> transaction when Youtube radically changed their initial 'revenue
> sharing' offer to one laden with cash. But even they didn't predict
> Google would pay such an exorbitant amount for Youtube so when Youtube
> started talking in multiples of tens of millions of dollars the media
> companies believed this to be fair and would lock in a nice Q3/Q4.
> [Note to self: Buy calls on media companies just prior to Q3/Q4
> earnings calls.] The major labels got wind that their counterparts
> were in heated discussions so they used a now common trick a "most
> favored nation" clause to assure that if if a comparable company
> negotiated a better deal that they would also receive that benefit.
> It's a clever ploy to avoid anti-trust issues and gives them the
> benefit of securing the best negotiating company. They negotiated
> about 50 million for each major media company to be paid from the
> Google buyout monies.
>
> The media companies had their typical challenges. Specifically, how to
> get money from Youtube without being required to give any to the
> talent (musicians and actors)? If monies were received as part of a
> license to Youtube then they would contractually obligated to share a
> substantial portion of the proceeds with others. For example most
> record label contracts call for artists to get 50% of all license
> deals. It was decided the media companies would receive an equity
> position as an investor in Youtube which Google would buy from them.
> This shelters all the up front monies from any royalty demands by
> allowing them to classify it as gains from an investment position. A
> few savvy agents might complain about receiving nothing and get a
> token amount, but most will be unaware of what transpired.
>
> Since everyone was reaching into Google's wallet, the big G wants to
> make sure the Youtube purchase was a wise one. Youtube's value is
> predicated on it's traffic and market leadership which Google needs to
> keep. If they simply agreed to remove all unauthorized content and
> saddle the user experience with ads Youtube would quickly be a
> skeleton of its prior self. Users would quickly move to competing
> sites. The media companies had 50 million reasons to want to help.
> Google needed a two pronged strategy which you see unfolding now.
>
> The first request was a simple one and that was an agreement to look
> the other way for the next 6 months or so while copyright infringement
> continues to flourish. This standstill is cloaked in language about
> building tools to help manage the content and track royalties, some of
> which is true but also G knows that every day they can operate in the
> shadows of copyright law is another day that Youtube can grow. It
> should be noted that Google video is a capable Youtube competitor with
> the ONE big difference being a much more sincere effort to not post
> unauthorized works - and Google fully appreciates what a difference
> that makes. So you can continue to find movie clips, tv show segments
> and just about every music video on Youtube today.
>
> The second request was to pile some lawsuits on competitors to slow
> them down and lock in Youtube's position. As Google looked at it they
> bought a 6 month exclusive on widespread video copyright infringement.
> Universal obliged and sued two capable Youtube clones Bolt and
> Grouper. This has several effects. First, it puts enormous pressure on
> all the other video sites to clamp down on the laissez-faire content
> posting that is prevalent. If Google is agreeing to remove
> unauthorized content they want the rest of the industry doing the same
> thing. Secondly it shuts off the flow of venture capital investments
> into video firms. Without capital these firms can't build the data
> centers and pay for the bandwidth required for these upside down
> businesses.
>
> There are some interesting chapters yet to unfold. One is how much of
> this will become public. Google is required by the SEC to disclose
> material financial developments at their company. Working in Google's
> advantage is their enormous market capitalization and revenues will
> give them considerable leeway to claim that a 50 million transaction
> is not significant to their business. If the other video sites have
> the wherewithal to put up a legal fight any decent attorney will
> demand access to Youtube acquisition documents. Expect a claim of
> collusion between Google and the media companies as a defense
> strategy.
>
> Infringement lawsuits will be served on Youtube and the new proud
> parent Google in the coming months. Google will respond with two
> paths: an expensive legal fight or a quick and easy settlement with
> most choosing the latter. Are there any larger copyright holders such
> as music publishers, movie studios, or unlicensed record label EMI
> that put up a fight rather than accepting the check? We'll have to
> watch and find out.
>
Some intimate details on the Google YouTube Deal
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(Page 2)22. Well if what is written is accurate, the only question is why anyone will hold this Gs stock? Ok they were breaking content laws, who cares, but right now they are breaking anti trust laws. And there are plenty ambitious prosecutors in this country of ours. The last question I have do they really make that much money from ads with their existing business model? Because right now they are doing very risky things and their planning and decision making seems very short-term oriented. I know it is tech biz and 3 months in tech biz is like 5 years in energy biz, but still things look fishy.
If last Mark's post is a work of fiction of some disgrunted emloyee.... but we never know
Posted at 4:24AM on Oct 31st 2006 by LA Kid.
23. In the end, it is all about money. Google has bought the larger entertainment companies. They will go now after the smaller video sites like Grouper.
Posted at 5:07AM on Oct 31st 2006 by YouTubeFan
24. Mark, I'd like more commentary from you about this.
What strikes me is that when you wrote the "I was wrong" post (http://www.blogmaverick.com/2006/10/11/i-was-wrong/) you seemed to have nailed the foul smell coming from those suits, but little did you or any of us know how the rot creating the smell reached deep google.
Your posting, combined with the news today that Google is giving up on the long tail aspect of a part of their video business (http://www.techcrunch.com/2006/10/30/google-video-goes-high-brow-with-revenue-split/) makes the stink even worse.
But given your long tail comment of a couple days ago, you seem to have nailed that one, too.
Good job!
(More about this on my blog, http://CreditCardVC.com)
Posted at 6:49AM on Oct 31st 2006 by Scott Yates
25. Ahem, not that I know what I'm talking about (or that I'm not biased), but this sort of underhanded-ness on Google's part (if it happened) supports my theory that their interest here is to promote hype and vanity to keep the Web 2.0 bubble going. Fo' real.
26. Dang, my link didn't make it: http://uzair.nairang.org/articles/2006/10/13/brave-new-economy/
Posted at 6:58AM on Oct 31st 2006 by Uzair
27.
So the ultimate outcome is that YouTube will eventually just be an oulet for home videos - and Google Video will be their outlet for copyright videos?
Posted at 7:03AM on Oct 31st 2006 by Search Engines WEB
28. I disagree with Steve's comment stating that a revolution isn't an option. It is very much an option and is quietly occurring as I write. It is not a revolution in terms that the word might conjure up in one's mind initially, but a leadership revolution coupled with a consumer rebellion. You will hear more to come very soon in the public domain, and it will be interesting to watch and be a part of.
Posted at 7:35AM on Oct 31st 2006 by Dave
29. Mark, Fascinating stuff, some of which makes sense and is probably true, other stuff that makes sense but probably isn't true.
It makes sense that there was an escrow (holdback) in this deal. It also was no coincidence that the labels announced deals with YouTube the day before Google acquired them. They had inside information about the deal for sure.
The part about taking an equity position in YouTube so they wouldn't need to share the bounty with artists is reprehensible if true. That is low and unethical even for this bunch.
On the agreement to sue other video sites I find this hard to believe. I think you were right a month ago when you said the labels would do this to get some easy wins to scare the rest of the industry into compliance and to establish case law to use in future suits.
I wrote a blog post on this today that is based on my experience with some of the same issues at Napster. The complete post can be found here. http://dondodge.typepad.com/the_next_big_thing/2006/10/details_of_the_.html
30. Want to know why music fans hate the big music conglomerates? This quote is why:
"This shelters all the up front monies from any royalty demands by allowing them to classify it as gains from an investment position. A few savvy agents might complain about receiving nothing and get a token amount, but most will be unaware of what transpired."
The music companies have carefully manipulated the definitions in online distribution (e.g. iTunes) so that an artist receives almost no money per song, CD or bundle that is purchased. Then, the media companies go and do something like this so that they again do not have to pay the artists for the use of their music.
Yes, many of the bands/singers out today do not really have talent and were created by the media companies marketing, but many are very talented and deserve to be compensated for the use of their music when there should be a license of their music.
With that said, fair use should protect anyone that is adding a soundtrack to a personal clip, unless that person is doing it for commercial gain. The only reason that fair use will begin to breakdown for personal uses like this is if people begin to get scared and pay for this usage that will create a market for the use and thus break fair use.
32. Very much likely the true unfolding!
The deal was more financial than strategic.
- Sequoa sits on both Google's board and invested in YouTube, wanted an exit opportunity from a company which has struggled in portraying profitability
- Google with its potentially high valuation conducted an all STOCK deal! (and not cash)- so the 1.65 number, might be lesser in real terms.
THe escrow account did slip my mind, till now!
33. Yea, this does sound "about right", given some of my experiences with major media companies. It really does sound like collusion and insider information. Think the DOJ could get involved?
What hasn't been said is how NBC could have been totally screwed in this deal if they didn't get an equity stake. They basically enabled the rapid ramp up of YouTube with the LazySunday video and they had the ability to blow away YouTube this spring.
This leads me to believe that those that didn't "get a cut" in the transaction may come out swinging litiguously. I'm sure Fox is pissed about the whole thing.
Posted at 9:52AM on Oct 31st 2006 by Chris D
34. It makes sense that Google would hedge their bet on Youtube to fight the copyright battle, but I think only half of it is coming to light.
My prediction is that the mass of smaller producers will take a larger toll on their copyright coffers.
Sure a rogue music video will make it around the web in a few days. But it's the mentos and diet coke stuff that makes it into people's work email in a matter of minutes -- THIS is viral video. Viral video is not a music video, or a 30-second clip of Family Guy, or a snippet of the Daily Show. It's a guy getting pulled behind a car on rollerblades going off a ramp into a tree.
The point is the circus performers are going to want money at some point. And I think that is something Google grossly underestimated in Youtube.
Here's what I'd like to know -- what is the revenue generated per video... and is that revenue proportionally larger for copyrighted video? My argument would be that they are generating about the same, and both owners of videos large and small are getting ripped off.
Again Google, distributing a product does not make it yours.
http://www.artemenko.org
35. Absolutely fascinating - and devilishly collusive and anti-competitive. Not to mention Machiavellian, particularly in terms of the media companies finding a way to get money that they don't have to split with the talent.
Ankit is right: "do not evil" has long since passed its expiry date at Google - if, and I say if - this is all true.
Posted at 9:57AM on Oct 31st 2006 by John Koetsier
36. Working as I do in the image industry, and being very involved in paying artist royalties for the images we licence, I hope very much that the various agents involved here don't allow a tricky mechanism like 'shares' to cause the artists involved to loose out on their just payments. All too often in these events the true 'value creators' (the artists) are the last to be rewarded or acknowledged unless they get so well known and important that they can afford an equal army of lawyers to match the corporations.
Posted at 10:47AM on Oct 31st 2006 by Gyr King
37. Working as I do in the image industry, and being very involved in paying artist royalties for the images we licence, I hope very much that the various agents involved here don't allow a tricky mechanism like 'shares' to cause the artists involved to loose out on their just payments. All too often in these events the true 'value creators' (the artists) are the last to be rewarded or acknowledged unless they get so well known and important that they can afford an equal army of lawyers to match the corporations.
Posted at 10:48AM on Oct 31st 2006 by Gyr King
38. I am so glad that Google is stepping in to save YouTube. However, I never realized it would be this complicated. I think YouTube should be thanking their lucky stars about this one.
Posted at 10:55AM on Oct 31st 2006 by Brian Sutton Photography
39. Its really unlikely that the deal structure you are outlining in fact occured. By sheltering the deal away from the artist with an equity deal the media conglomnerates risk alienating their artists who have a legal right to see some of the settlement. Since this transaction is highly public, and likely all details will make it into the open, than they would be fools to subject themselves to such a blatant abuse of their artist's base. After all, is 50M worth pissing off all your money makers. If in fact this did occur, than we will see a fall out and possible class action suit from the artist base. If a label files to sell shares, the date of that share grant will be made attainable. So, if your claim is true, than it will all be public at some point. I just don't think that the records labels and media folks would want to subject themselves to such a thing for 40-50Million Bucks.
Its a great read though.
Posted at 12:10PM on Oct 31st 2006 by DC Cullinane
40. Great post Mark!
Reading bewteen the lines here it seems like a very wise move from the major labels/media giants involved. They have essentially just been brought (read bought) into the internet's largest monopoly of "free" media content. By offering the most extensive library of media for free, they will deter most users from the traditional methods of illegal aquisition (p2p etc.) and the best thing is, they completely control the delivery and quality of this content.
By encoding the content serverside and keeping it at only a moderate resolution, there will still be a want for a high resolution version of favorite and preferred content. This will be immediately available as a purchase right there in the same window in the form of a paid high res download or express-shipped product. It's an excellent and very convenient marketing tool for their catalogue/new releases.
Any competitor who tries to create an opposing free content site with higher resolution videos (divx etc.) will be shut down immediately as they are now competing with a conglomerate of the most powerful media organisations in the world acting as one. It seems to me to be the kind of control the major's in the industry have been looking for since the beginning of the online phenomenon - who'd have thought that 'free' could be the answer?!
I'd love to hear your thoughts!
Cheers
electricamusic@gmail.com
Posted at 12:18PM on Oct 31st 2006 by Brad St Croix
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21. For those accusing Google of straying from the Do No Evil motto:
Google is helping to curb piracy and the posting of copyrighted content, and it has spread to competitors. So how is that against the Do No Evil philosophy?
Posted at 3:15AM on Oct 31st 2006 by Matt Burris