Google-YouTube Deal Structured to Screw Authors?

It’s an anonymous source, but a pretty plausible sounding story. As recounted at Blog Maverick, Some intimate details on the Google YouTube Deal, the Google buy of YouTube was heavily driven by copyright concerns. That’s why YouTube needed to sell, that’s why a huge pot of money was set aside for liability concerns, that’s why the money is going to be shared with content companies in a way that ensure the authors won’t see any royalties, and that’s why there’s a secret deal to make the content companies lay off YouTube for six months — while they are encouraged to sue everyone else in the same business and thus help drive YouTube’s competitors into the ground.

Here’s just part of the fascinating story:

It didn’t take a team of Harvard trained investment bankers to come up with the obvious solution and that is to set aside a portion of the buyout offer to deal with copyright issues. It’s not uncommon in transactions to have holdbacks to deal with liabilities and Youtube knew they had a big one. So the parties (including venture capital firm Sequoia Capital) agreed to earmark a portion of the purchase price to pay for settlements and/or hire attorneys to fight claims. Nearly 500 million of the 1.65 billion purchase price is not being disbursed to shareholders but instead held in escrow.

While this seemed good on paper Google attorneys were still uncomfortable with the enormous possible legal claims and speculated that maybe even 500 million may not be enough – remember were talking about hundreds of thousands of possible copyright infringements. Youtube attorneys emphasized the DMCA safe harbor provisions and pointed to the 3 full timers dedicated to dealing with takedown notices, but couldn’t get G comfortable. Google wasn’t worried about the small guys, but the big guys were a significant impediment to a sale. They could swing settlement numbers widely in one direction or another. So the decision was made to negotiate settlements with some of the largest music and film companies. If they could get to a good place with these companies they could get confidence from attorneys and the ever important “fairness opinion” from the bankers involved that this was a sane purchase.

Armed with this kitty of money Youtube approached the media companies with an open checkbook to buy peace. The media companies smelled a transaction when Youtube radically changed their initial ‘revenue sharing’ offer to one laden with cash. But even they didn’t predict Google would pay such an exorbitant amount for Youtube so when Youtube started talking in multiples of tens of millions of dollars the media companies believed this to be fair and would lock in a nice Q3/Q4. [Note to self: Buy calls on media companies just prior to Q3/Q4 earnings calls.] The major labels got wind that their counterparts were in heated discussions so they used a now common trick a “most favored nation” clause to assure that if if a comparable company negotiated a better deal that they would also receive that benefit. It’s a clever ploy to avoid anti-trust issues and gives them the benefit of securing the best negotiating company. They negotiated about 50 million for each major media company to be paid from the Google buyout monies.

The media companies had their typical challenges. Specifically, how to get money from Youtube without being required to give any to the talent (musicians and actors)? If monies were received as part of a license to Youtube then they would contractually obligated to share a substantial portion of the proceeds with others. For example most record label contracts call for artists to get 50% of all license deals. It was decided the media companies would receive an equity position as an investor in Youtube which Google would buy from them. This shelters all the up front monies from any royalty demands by allowing them to classify it as gains from an investment position. A few savvy agents might complain about receiving nothing and get a token amount, but most will be unaware of what transpired.

Tell me that romantic story again, the one about copyright law being for the benefit of the authors.

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2 Responses to Google-YouTube Deal Structured to Screw Authors?

  1. Shawn says:

    The market has already priced in a Q3/Q4 earnings increases from media companies. Buying calls would not be the way to go.

  2. fiat lux says:

    The only thing I question is the bit about how far media companies will go “to get money from Youtube without being required to give any to the talent”. But then, I know next to nothing about how those guys do business, maybe that’s SOP for them.

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