Youtube's New Deep Pockets

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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.

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