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'Moronic' video deal buys Google legal woes?

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Analysis Google's $1.6bn purchase of YouTube is "moronic", says entrepreneur Mark Cuban. And he should know. In 1999, Cuban's streaming media company Broadcast.com was bought by Yahoo! for $5.7bn. Back then, Broadcast.com was also losing money, but with a rather sounder business strategy than YouTube today.

His conclusion is not for the most obvious reason: that YouTube has no revenue stream. Cuban's argument is simple. Much of YouTube's content is copyright clips, and the company has built its business on the back of someone else's creative works. Make no mistake, it's this material that makes YouTube the world's video jukebox, and nets it 100m downloads a day - not clips of cats falling off walls, lip syncing teens, or cameraphone clips of students setting fire to their farts, and other such pearls produced by of the "democratisation of media".

Nor is there much of a "community" to speak of here, either, unless one redefines community to include passers by and rubberneckers. We understand the site is a popular with Jihadist terrorists, however, who've been using YouTube to exchange their own creative "user generated content", beheadings and roadside bombs.

Like Google Video, YouTube maintains the fiction that the primary purpose of the site is amateur content, when it's really about pro, copyright material.

And it's in a Catch-22 situation. If the good stuff disappears, so do the eyeballs - taking with them Google's most obvious chance of monetising its latest asset.

No one has sued YouTube yet because without any assets or revenue there's nothing to be gained except closing the site down. YouTube has claimed that much like an ISP, it's protected by the Safe Harbors provisions of the DMCA, and therefore immune to prosecution. The company deletes copyright material once it's informed of it, but one can hardly say it's effective.

So the company has been scrambling to legitimise this in recent weeks, developing an as yet unreleased system that identifies copyright material from watermarks, and striking deals with big content owners.

The world's biggest record company, Universal Music Group (UMG), and the second biggest Sony BMG, will license material to YouTube, we learned hours before the Google deal was officially confirmed. The UMG partnership sounds great on the surface, but less so on closer examination.

"UMG and its artists will be compensated not just for UMG produced videos but also for the unique, user created content that incorporates UMG music", according to the release.

That gives rights holders pennies for the lip syncers, but ignores the main issue. People don't have any difficulty getting UMG videos already - and this isn't what the YouTube audience particularly wants. Ditto with Sony BMG.

And striking a deal with a major label is no prophylactic against lawsuits, as Napster discovered. In October 2000, Bertelsmann blessed the P2P trading site, and eventually pumped over $70m into its operations. Six months later Napster shut up shop as the litigation tightrope ran out - and Bertelsmann was still settling infringement suits four years later.

Google is now a "deep pocketed target", according to Cuban, and negotiating piecemeal with each rights holder will be painful in the absence of a blanket license for video.

"This is where the long tail comes back to bite you in the ass. There aint no compulsory license for video. You got to work your way up the long tail, one at a time. Licensing each. That's an impossible job, which is why the webcasting and related industries have fought for compulsory licenses."

Google has been offering paid downloads under its own Video store since January. It got off to a sticky start and eventually had to offer refunds, and while Apple has made a success of its video store, its real role is to make its iPod player more attractive. Google has no iPod.

So, for now, Google has overnight achieved world domination in one, possibly illegal, and poorly monetised market. YouTube snared almost 60 per cent of UK video visits, and Google 23 per cent. If the market share remains constant, Google will grab seven out of eight UK visits to a video site. It might not last.

Still, champagne glasses were clinking last night in one corner of an incestuous Silicon Valley company. Sequoia Capital, the sole investor in YouTube, has seen its $11.5m investment increase 140-fold. So not a bad day for Google Board member Michael Moritz, a partner at Seqoia Capital.

Any guesses which way his vote went? ®

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