The toughest negotiations in a corporate acquisition are usually carried out between the two companies directly involved, and they’re usually completed before the merger agreement is signed. But with Google’s $1.65 billion acquisition of YouTube, the real deal-making began after the ink had dried – and now appears to be coming to a head. Top Google executives, including CEO Eric Schmidt, are, reports today’s Financial Times, in the midst of “frantic” negotiations with a slew of major media companies – including “CBS, Viacom, Time Warner, NBC Universal, NewsCorp and others” – in hopes of convincing them to keep their content on YouTube and to not sue the upstart site for copyright infringement. Google has, according to a source quoted by the FT, offered one media firm $100 million for a two-year licensing agreement.
These will be tricky, high-stakes negotiations, not just for Google but for the media companies as well. Google must be hoping for an iTunes scenario – that once a couple of the film and TV giants strike deals to allow YouTube to stream their video, the rest, not wanting to be locked out of an important distribution channel, will follow suit in a kind of network effect. But Apple was in a much stronger position when it cut deals with the record companies. It had the dominant device for playing digital music, it had a genuine media insider as its CEO, it was intending to charge for content rather than make money with advertising, and – most important – it was offering an alternative to rampant piracy. YouTube isn’t the alternative to rampant piracy; it’s the enabler of it.
If Google isn’t successful in the current negotiations, it would be a huge and expensive embarrassment for the company – and, one assumes, could scuttle the YouTube deal entirely. But even if Google succeeds in dodging the copyright bullet, it still faces the risk of overpaying for the rights to the content. If Google ends up having to pay tens or hundreds of millions of dollars in ongoing licensing fees to all the major and minor networks and studios, not to mention music companies and other subsidiary rights holders, “its content costs would rise precipitously,” as Mitch Ratcliffe points out. Apple, by contrast, didn’t have to front any money; it just had to agree to split the sales as they’re made.
The risks are big for the media companies, too. Do they really want another iTunes situation, with an outsider – Google, in this case – controlling a dominant distribution channel for their content? On the other hand, Google is an established company with a lot of money. It’s offering the networks and studios an opportunity to get paid for content that is currently being widely pirated, not only through YouTube but through many other sites and peer-to-peer networks. If they forgo this opportunity, will a better one come along?
My guess is that Google and the studios will succeed in cutting the deals necessary to keep YouTube running as a legitimate business. The risks of failure, for Google in particular but also for the media companies, are greater than the risks of success. But as Google moves further into the media business, as both competitor and partner, it seems fated to lose some of the pristinely profitable elegance of its algorithm-driven business model. The company’s engineering geniuses aren’t much help at the moment. It’s in the lawyers’ hands.
Might it be that Google is focusing on considering the upside because the downside is a bet that they can afford to eat a complete loss on?
The post on Mark Cuban’s blog carrying analysis from a deal insider suggested that Google has set aside $500m from the deal to cover potential lawsuits – this means that Google’s strategy may be as simple as “just keep pay off lawsuits as they come due until we work something out and start generating profits” since although this $1.65B is a huge amount of money, it really is not that much of a big deal for Google that has an (inflated?) $140B capitalization.
I wish I understood exactly how everyone involved thinks this should play out. Maybe if I’m an IP owner, but not directly a producer, then I’m okay with receiving the same $50m as my competitor down the street for some ill-defined (as far as the public is aware) license to everything I own. But won’t this kind of flat licensing fee, seemingly paid up front, change the economics of production fairly substantially? Are the content companies thinking that high production values will lead to viral-scale success as seen by things like the Diet Coke and Mentos videos, or are they thinking they could abandon their current models, flood the channel with cheap product (and you thought today’s reality shows were bad!) in the hopes that, completely unpredictably, one takes off?
One of the problems with something like YouTube is that it is sufficient to scratch many an itch, similarly to how early arguments from the RIAA that pirated music was of variable quality fell on deaf (but satisfied) ears. Going forward, will I be expected to watch a TV show on YouTube and be so motivated that I then pay for it in some other way, too? At least with pirated content you have the guilt factor leading to some purchases.
My reaction to YouTube, were I a content producer, would be to run headlong into Apple’s arms. Yes, producers should be afraid of missing the boat, but this feels like the kind of thing where someone goes out drinking and wakes up on a boat only to find that they’ve gotten a tattoo and joined the navy.
Five producers, 100M$ to one, 500M$ each. The situation sounds clear to me:
– Google buys two years of experiment (which is by Silicon Valley standard a century: think of what was hot in Halloween’04);
– if they can make money, or traffic out of this, they cut it 20/80—otherwise, it’s in both sides interest to separate;
– producers don’t have to reinvent a threatened distribution chain and take the risk: they subcontract it to the best around to make money out of thin air;
– if anything goes wild, they can sue someone with deep pockets, and known by judges for being the combination of two companies playing on the copyright since the begining.
The ony problem (and not for the producers’ side) is if anyone can promise more than 80% of what Google can make. Contrarily to iPod, their is no hardware ties, and nothing is easier than to switch URL; the user community? They will be swifter in two years. Of course there is the “I’m Steve Jobs, I’ve been a fan of folk rock since I invented the electric guitar, so I decide that a track should be one dol’, and not a cent more” effect; face it: he was more saving the music execs for they own greed than anything else. Google is much too geekish to have anything but a variant of the giberrish second-price-multi-cast-two-tiered auctions; ’cause it’s theory’s best answer to cultural BS price pegging’. If they want to make editorial decision, and they own content, they make it on Google Video.
For Google, it’s a wild move, as always, but it opens the gate of what used to be TV ads: definitely worth reassuring someone with half-a-bil’.
Maybe YouTube is just negotiating business deals so that media companies can put up the stuff on their own and share in add revs.
as Google moves further into the media business, as both competitor and partner, it seems fated to lose some of the pristinely profitable elegance of its algorithm-driven business model
At the moment there’s one unifying factor across the Google range: you don’t pay upfront. Which means an ever-expanding range of free stuff. The question is who’s going to crack first – whether the suppliers of ‘content’ will let themselves be bought off with a pseudo-royalty, or Google will go old-school and introduce Google Premium. The latter doesn’t seem at all likely, but I can’t see the former continuing forever. Perhaps the tipping-point will be YouTunes…
Nice title quote, btw. If you read French, I think Graeme Allwright’s version “Jusqu’a la ceinture” is even better than the original.