The Google/YouTube Deal:
Why the Biggest Acquisition in Google's History Likely Hung on Getting the Less-Hyped Content License Deals Done First

By CECILY MAK

Thursday, Oct. 12, 2006

On the same day, YouTube announced video licensing deals with the two largest and most powerful major record labels, and Google confirmed its acquisition of YouTube. If you ask me, it is no coincidence: Though most commentary on the acquisition has buried this point, it is safe to assume that Google conditioned the deal on YouTube's first getting such licensing deals in place.

This deal, then, is a multi-tiered arrangement - and one in which all parties seem to win. It looks like the giants in the content licensing sector might finally be catching on to how to get a piece of the digital pie.

The Problem YouTube Poses: Content without Payment to the Rights-Holder

With more than 100 million video views and 65,000 new videos updated daily, YouTube has clearly become the dominant destination for video content. Though much of the content on YouTube is legally posted by the rights-holder, a significant portion of it is not. It is all too easy to copy and post music videos, television shows and other proprietary content - whereupon YouTube users can access that content free, with no payment to the rights-holder.

As I discussed in my prior column for this site, the content industries - those that focus on music, television, and film - have frequently faced the dilemma of what to do in such a situation. With content available for free, how can the industries get people to pay for it?

YouTube, then, seems to be biting into the potential success companies might otherwise enjoy via their legal distribution channels. But the new deal may change all that.

Is YouTube A Friend or Foe to the Content Industries?

It was a mere few weeks ago when Universal Music Group CEO Doug Morris publicly suggested that Universal would sue YouTube for encouraging users to infringe on its copyrights. "We believe these new businesses are copyright infringers and owe us tens of millions of dollars," said Morris. "How we deal with these companies will be revealed shortly."

But what was revealed wasn't a new lawsuit; it was the deal I mentioned above, in which YouTube and Universal agreed to partner up and share revenue from the distribution of their content. We may never know if Morris made this public statement as a negotiation tactic or if Universal really was preparing to sue (perhaps both are true). Either way, the deals are done. Universal Music Group, the largest music company, and Sony BMG Music Entertainment, the second-largest, have just joined Warner Music in agreeing to let people watch their videos on YouTube. The deal is mutually advantageous: YouTube avoids any suits like the ones Napster faced, for vicarious and/or contributory copyright infringement. And the music companies can take advantage of YouTube's ability to reach millions of Internet viewers with their videos, and thereby promote their music.

Though the details remain confidential, the deals grant YouTube the right to distribute the labels' video content in exchange for a share of advertising revenue - revenue that will, in all likelihood, be greater now that Google is at the helm. After all, Google has already mastered the art of matching particular searchers' interests with ads that cater specifically to them, and such targeted advertising is worth a great deal.

The companies all needed each other to build on their already impressive success. And each can offer aid to the others - with YouTube helping the music labels in promoting their content via videos, Google helping YouTube in generating ad revenue, and the labels bringing profit to (and forgoing lawsuits against ) YouTube.

A Lesson From the Napster Case?

It's hard to believe, given the pace of change on the Internet, but it was only five years ago when we witnessed a similar story in the audio-only context.

By 2001, Napster, like YouTube, had generated a strong buzz. (Napster then had somewhere from 25 to 40 million users worldwide.) Also like YouTube, Napster offered a service that resulted in users enjoying content made available by other users - often despite the fact that the user did not hold the copyright in what he or she offered.

As readers will recall, there was initially no talk of partnering with Napster; instead, the music companies as much as declared war. They filed suit for vicarious and contributory copyright infringement, received favorable court rulings, and ultimately shut Napster down.

Still, this was a Pyrrhic victory. Although Napster was shut down, other sites' file-swapping services prospered - with some so decentralized they were very difficult to sue. Even now, despite aggressive music company initiatives against large-scale file sharers, traffic to peer-to-peer sites still far outweighs that to legal channels.

Until recently, it looked like YouTube was bound to suffer a fate similar to Napster's. Everybody from Mark Cuban to your local radio talk show host dismissed the start up as a fast burn - sure to suffer a quick and painful death at the hands of an angry plaintiff company with the law on its side.

But then the potential plaintiffs saw the opportunity to get a piece of the pie, and partner up with one of the most popular web destinations of all time.

Why Google Cared About YouTube's Making Peace with the Record Companies

Without some kind of approval from the major record labels, a notoriously powerful and litigious group, Google would have been ill-advised to partner with YouTube. After all, without a deal involving the record companies, such a partnership could have merely make Google's deep pockets available to fund the defense of, and/or the payment of large award in, a web of aggressive lawsuits.

By getting formal sign-off and agreements in place with the labels, Google avoids putting itself at that kind of risk. It also opens up the possibility for more profit: We can expect to see more licensing deals executed, with other content providers.

In addition, Google has moved into the profitable area of offering content that is both "free" (or, more accurately, ad-sponsored) and legal (because a deal has been struck with the rights-holder.) As I discussed in my prior column, the "free and legal" approach has become more and more alluring, as the content industries have begun to embrace web distribution, rather than waging a futile fight against it.

At the end of the day, the Google/YouTube/record companies deal is a phenomenal success for several large players - as well as for the young YouTube co-founders and their small team. Three parties that have all opposed one another on an issue now will benefit from sharing with each other, what each has to bring to the equation. Maybe this decision to cooperate, and not litigate, will set a trend.


Cecily Deane Mak is Senior Counsel, Music at RealNetworks, Inc. where she supports RealNetworks' Rhapsody music subscription service. She is a frequent public speaker and writer on a range of topics including music rights, online media and entertainment law matters.

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