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Why Google's $1 Billion Premium for YouTube Was Worth It

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Even with Viacom's billion-dollar lawsuit.

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On Tuesday, CNET News issued double-whammy reports (see here and here) regarding the ongoing legal proceedings between Google (GOOG) and Viacom (VIA) over YouTube's supposed copyright infringement. Not only did Viacom lawyers purportedly uncover internal emails that YouTube employees knowingly uploaded and left copyrighted material on the site, Google CEO Eric Schmidt admitted to laying down an extra billion dollars when it acquired the popular video site in late 2006.

Under deposition, Schmidt revealed that, prior to the acquisition, Google's management team valued YouTube "somewhere around $600 million to $700 million" -- a figure based on Schmidt's judgment. Given that the final buyout price was $1.65 billion, Viacom attorney Stuart Jay Baskin was naturally curious as to why Google would fork over an extra billion for the site.

Schmidt responded that his company was well aware that YouTube was a hot commodity -- despite its low revenue. Its growth was one of rapid acceleration -- much faster, he admitted, than Google Video -- and its increasing user adoption indicated that YouTube was soon going to be sold to a competitor -- likely Yahoo (YHOO) or Microsoft (MSFT).

Wishing to beat others to the punch, Schmidt said, "We ultimately concluded that $1.65 billion included a premium for moving quickly and making sure that we could participate in the user success in YouTube."

While critics have contended that Google overpaid, that sentiment has likely increased after reports that Viacom stumbled upon a smoking gun in the $1 billion lawsuit brought against Google in March 2007, claiming both sites encouraged intellectual-property theft.

Three unnamed sources spoke with CNET News, revealing that internal YouTube emails were discovered that proved company staff was aware of the copyrighted films, TV shows, and music being uploaded to the site -- an obvious conclusion given how many appeared in the Most Views or Most Discussed sections -- and chose to leave them online. As such, YouTube may not be protected by the Digital Millennium Copyright Act's safe-harbor provision, of which it has held claim.

However, Viacom itself has acknowledged uploading its own material as a means of self-promotion -- not only a gross double-standard, but also evidence that YouTube could easily confuse whether a posted video could qualify as legal or pirated. Also working in YouTube's favor, a judge presiding over a similar case between Veoh and Universal Music Group ruled in favor of the video-hosting site, saying it wasn't responsible for copyright violations committed by its users.

Viacom has made headlines for being notoriously overzealous when it comes to copyright infringement. In 2007, it admitted to hastily and erroneously demanding that a Stephen Colbert parody clip be pulled from YouTube, later recognizing it was protected under parody law. And most egregious, not five months later, Viacom pulled a similar stunt when it requested a local campaign commercial be taken down -- after it had used that very commercial without permission in a VH1 clip show.

But no matter what the outcome of the lawsuit between YouTube and Viacom will be, the $1.65 billion is not -- as some critics say -- a waste of money. It just might take a while to earn back.

In three short years, YouTube's unique users have grown from 12 million to over 100 million just in the United States alone. It currently ranks fourth in the most-visited websites in the world, according to Alexa, and strides are being made for new revenue streams.

Like other video sites Hulu and Joost, YouTube is brokering deals with media companies and branching out to hosting feature-length films and TV shows. Partnerships now include Walt Disney (DIS), CBS (CBS), Metro-Goldwyn-Mayer, and Sony Pictures (SNE), and a recent deal with Warner Bros (TWX) adds it to the growing list. In due time, even Viacom is likely to realize its mistakes and strike a deal with YouTube.

Speaking with CNET, James McQuivey -- a digital-media analyst at Forrester Research (FORR) -- agrees that Google made a great deal.

"It's not like it's going to pay back that $1.6 billion any time soon, but what it does is, it ensures that these millions and millions of viewers are coming to a Google-owned site rather than someone else's site...As a loss leader goes, if it never makes its money back, its still going to be worth it."

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