Youtube's New Deep Pockets

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 BusinessWeek.com, 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 BusinessWeek.com, 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