Could Viacom Destroy YouTube?

Lawsuit sends shockwaves throughout Internet and media industries.
March 15, 2007

By Sunshine K. Mugrabi

There was a lot of brash and optimistic talk around the Googleplex last fall when Internet search giant Google made its bold and opportunistic play for upstart video-sharing site YouTube.

The Google gang predicted the $1.65-billion acquisition, coupled with their mastery of online advertising, would vault their company to the forefront of the Internet video revolution.

But that revolution has taken an ominous turn for Google after media giant Viacom slapped it with a $1-billion lawsuit Tuesday that charges the search king has allegedly allowed rampant copyright violations on its video site.

It may well be that Viacom’s suit is merely a negotiation tactic to squeeze better revenue-sharing terms out of Google.

But some industry observers suggest the lawsuit shows that Google’s cavalier approach to copyright has alienated big media companies to a degree that threatens the search company’s plans to expand into a range of other markets. And they point out the case could well tilt the balance of power in the ongoing battle between Silicon Valley and Hollywood.

“If Viacom is perceived as a winner, that means all studios have better negotiating levers with all Internet companies,” said Tim Boyd, an analyst with Caris & Co.

There is no shortage of observers who could say, “I told you so.” Critics of the YouTube acquisition were quick to point out the controversial site served up millions of copyrighted video clips a day and that Google was acquiring a legal minefield.

Google’s top executives, however, noted that YouTube had just struck a handful of deals with entertainment companies that seemed to suggest it had found the secret formula to bridge the revenue-sharing divide between Silicon Valley and Hollywood.

The Gloves Come Off

The Internet search king notched up a few additional deals with small content providers and a handful of larger ones including the British Broadcasting Corporation.

But the story before long began to focus on growing tensions between Google and major media companies such as News Corp. and NBC Universal. Viacom’s lawsuit, by the time it came, merely confirmed just how badly the relationship between Google and media groups had deteriorated.

The tone of Viacom’s complaint, filed in the United States District Court for the Southern District of New York, does make it sound like the gloves are well and truly off: “YouTube has harnessed technology to willfully infringe copyrights on a huge scale … reducing the incentives of America’s creative industries, and profiting from the illegal conduct of others as well.”

Google, for its part, argues that YouTube’s business model is protected under the terms of the Digital Millennium Copyright Act, a 1998 law that includes a safe harbor provision for Internet service providers. Legal experts, however, are divided on whether that will turn out to be an adequate shield.

Much is at stake for Google and other Internet companies that want to distribute movies, TV shows, videos, music, and other content to the masses. Google, of course, is pushing for “open access” to information and content, while content owners want to retain control and make sure they are compensated.

Deep Divisions

Leland Westerfield, an analyst at BMO Capital Markets, cautioned the lawsuit exposes “deep divisions” between the business cultures of the technology and media industries. This clash could end badly, he predicted, if media conglomerates can come up with ways to sideline Google.

And he warned that “missteps” with media companies could “derail future revenue streams,” such as the company’s plan to move into radio, print, and TV advertising.

Moreover, Viacom’s assertion that YouTube’s business model is at its heart illegal has some advocates worried about the chilling effect it could have on innovation. “If more and more companies take the Viacom approach … that’s got to be scary for small businesses and startups,” said Corynne McSherry, staff attorney at the Electronic Frontier Foundation.

In many ways, the worst case scenario for Google—and many other Internet companies—isn’t losing the lawsuit, but losing the goodwill that allows for long-term partnerships with media companies. With no content, there’s nothing to search for, and nothing to watch.

*QUESTIONS FOR DISCUSSION:

What is your opinion? Do you feel that the movie and television companies should have the only right to play their own content, or should the Internet provide "open access"?

Can you think of a possible compromise?