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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Reader Comments
(Page 3)42. I can’t wait until the Writers Guild, SAG, AFTRA etc. get involved…
Matt
Posted at 1:16PM on Oct 31st 2006 by Matt Cook
43. I understand that the content studios want to wring every dollar out of every transaction that is possible- that's why it made sense for them to get in on the deal with YouTube and Google.
But for the life of me, I don't understand why these content owners are asking Google to take their videos down. Take the recent news that YouTube is removing all Comedy Central content. Why would Comedy Central want all that free advertising to go away? Think about it- every low res YouTube video is just an advertisement for the high quality versions Comedy Central sells on DVD. I don't understand why content owners aren't recognizing YouTube for what it is - the best advertising friend they've ever known.
In fact, YouTube should provide a dvd burning service that lets users create personal playlists of videos at YouTube.com and then buy the high res versions to be custom burned onto dvds which are then shipped next day. I write more about it here:
http://phoenomi.com/2006/09/13/youtubes-ultimate-untapped-revenue-stream/
I know I would love to buy my video content in single units like you can on Itunes. But I would really love having them burned on DVD and shipped to me next day. It's probably faster than downloading the same hi res content over the slow broadband connections we endure here in the US. And DVD gives us a storage solution that is viable precisely because it isn't tied to our easily-corruptible computer hard drives.
Posted at 1:27PM on Oct 31st 2006 by JontheWayne
45. Thanks for post Mark. Damn your Mavs beating my Spurs last year.
I bet it is true. Google at its core is not a content creator but rather a provider. They have contempt for the content creator.
Do no evil. Right.
Everyone gives Microsoft hell for not coming up with anything new... they just buy up the little guys and slap their logo on their products. Google is the one that does this. YouTube is just the most recent. groups.google.com used to be DejaNews and before that just raw newsgroups.
I stopped using Google when they cooperated with the Chinese government to track down dissidents but wouldn't help the US government track down pedophiles, also when news.google.com removed conservative blogs and newsites but continued to publish hate-filled anti-Jewish blogs and "newsites".
I stopped using Safari on my Mac because the search engine is restricted to Google. Switched to Firefox and removed Google completely.
Sad... Google used to be a great company with great tools. Now their politics and manipulations outweigh any possibility I will use their tools... I have to hold my nose now when I go to YouTube. I am sure YouTube will be further corrupted by Google's influence such that I will completely avoid it also.
Posted at 1:37PM on Oct 31st 2006 by S. Horne
46. Very interesting piece. If this is the way that the big media companies structured the deal, it just illustrates why they've lost their appeal and power in the marketplace
Posted at 1:38PM on Oct 31st 2006 by Ritch Esra
47. $1.6 billion isn't a substantial amount of money to Google, it's less than 1% of their own value... What company wouldn't acquire another firm in a similar situation if it could be purchased for under a percent?
*
Posted at 2:31PM on Oct 31st 2006 by DismissedasDrone
48. Interesting and, as you say, quite plausible - thanks.
But I think it goes much further. The media companies are generally contemptible and their actions in a) seeking to keep everything for themselves and b) acquiesing in coming down hard on competitors and potential threats is par for the course. The media companies are also fighting a rearguard battle and increasingly running into difficulties whether from alleged illegal downloaders fighting back or artists complaining.
I also doubt whether the media company executives really understand what internet distribution is actually all about or the potential which exists. Google certainly does. And so - and I'm not entirely sure of the development mechanism yet - I suspect that the deal is a poisoned chalice that the media companies have got hold of and they'll come to regret it as distribution starts to slip away even faster than now and they lose control.
Posted at 2:37PM on Oct 31st 2006 by Murdoch
49. Mark, it would be nice if you had a "print" option for your blog entries. ( especially with a larger font option for older eyes. )
It's not that I don't want to see the comments, I often come back to read them, but it's nice to have your blog for subway/bus reading. also it's nice to sit comfortably in an easy chair and read my net print-offs and then go back to the PC
Posted at 3:26PM on Oct 31st 2006 by ben guthrie
50. You knew the guys over at youtube looked up at the heavens with the biggest of grins the second the googtube deal was closed. Why? We now know. With creative deal making like this, a crush the competition attitude, and more cash in the bank than God, who will want to fight Google these days when there's so many opportunities to poke and prod money out of them?
As far as Google now becoming the the evil company they were always trying to avoid, keep in mind that at the very heart and soul of the company has always been the mantra of striving to do revolutionary things, however now that they're a publicly traded company, an additional mantra is, preserve shareholder value which of course is reasonable. Given Google's smarts and cash, this spells disaster for competition. Still though, it's simply impossible for any company, even Google, to keep an equal amount of focus on all the different business they're trying to maintain.
Posted at 4:00PM on Oct 31st 2006 by Obaid
51. I'm rather disappointed that Cuban let this anonymous source post these accusations, including "speculation" when he does not say WHICH parts are speculative. A source should not speculate while hiding his identity.
Specifically, the claim is made that Google "requested" the media companies sue YouTube competitors, with no other evidence than the fact that Universal did sue a couple of them. Universal has the right to sue, and if it has equity in YouTube and a content deal with YouTube but not competitors, whom do you expect it to sue.
This is a sleazy accusation to make with no evidence and taking no responsibility for the claim by remaining anonymous.
http://richardbrandt.blogs.com/richard_brandt_on_google/2006/10/google_paying_o.html
Posted at 4:36PM on Oct 31st 2006 by Richard L. Brandt
53. Mark why wouldn't Google just choose not to index the 1000s of websites owned by these studio behemoths? Google could cripple these websites by not indexing them and serving them in the search results. I would think that this was a card they can will offer to play.
Posted at 4:46PM on Oct 31st 2006 by Jaan Kanellis
54. Google's been showing small signs of "evilness" for some time now and this is just another indication that they're willing to do whatever it takes to make a pile of cash in the long run. The only difference between them and Enron is that I believe Google is looking far down the road to the point where they'll own some very substantial properties and they're willing to take some very big risks along the way.
"Don't be evil" is just a smoke screen.
56. Interesting take on the GY tranx
Still doesn't say why G bought
$1.6B hole in the story
Posted at 6:15PM on Oct 31st 2006 by Ted McElvoy
57. I think Google went in over their head by putting a billion dollar price tag on YouTube. Is YouTube really worth that much? Think Google. Think.
Posted at 6:19PM on Oct 31st 2006 by Juicy Gossip With Nosynews.net
59. This shows how truly brilliant google is. While others toil over copyright problems, they go on the offensive and concrete their business model. Shows why they are number 1 in most areas of computing =]. Notice how smart google is, learn from them, maybe then you wont have to read someone elses blog to notice what everyone else in the industry realized weeks ago. Why would google buy a company built on copyright infringement if they didnt have a smarter plan for it. Everyone who has money in it knew the exact reason, and most others figured it out. Look at myspace, bought for a near half bil, with ten times the market as youtube, use your head, make a logical reference to what is really happening. This is business, not charity. Myspace users will continue to post youtube videos because myspace will be one of the companies brought for copyright infringement, oh no, did I release another secret? Google found a way to make millions on myspace and others backs, brilliant. ... open your eyes.
Posted at 6:45PM on Oct 31st 2006 by sitexec
60. You guys are all confused. Google's mantra is "see no evil" NOT "do no evil".
Posted at 6:52PM on Oct 31st 2006 by JoeD
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41. And let's not forget that the whole transaction was free for Google. The increase in their stock price due to the hype around the deal more than covered the 1.65 billion fee for YouTube.
Posted at 12:38PM on Oct 31st 2006 by Mark Barrera