I first saw this posted on the Pho List. A media related list that I have participated in for years with lots of smart people with great insights. THe posting, as you will read is fascinating and was originally posted anonymously. I emailed the list asking for permission to post it on my blog. In response, the “anonymous author”, who I respect and trust.

I cant say this has been fact checked. It hasnt. I cant say its 100 pct accurate, I dont know. But it rings true, and as I said, I trust the source

> I’m an experienced veteran in the digital media business and thought

> I’d share my version of events that happened at Youtube. Some of this

> is based on talks with people involved and some is speculation based

> on my experience working in the industry, negotiating settlements and

> battling in court.

>

> In the months preceding the sale of YouTube the complaints from

> copyright owners began to mount at a ferocious pace. Small content

> owners and big were lodging official takedown notices only to see

> their works almost immediately reappear. These issues had to be

> disclosed to the suitors who were sniffing around like Google but

> Yahoo was deep in the process as well. (News Corp inquired but since

> Myspace knew they were a big source of Youtube’s traffic they quickly

> choked on the 9 digit price tag.) While the search giants had serious

> interest, the suitors kept stumbling over the potential enormous

> copyright infringement claims that were mounting.

>

> Youtube knew they had an issue and had offered a straight revenue

> share deal if the complainants would call off the dogs and give them

> time. The media companies quickly rejected this path for two reasons.

> First off Youtube wasn’t making any money and was fuzzy about how they

> would generate revenue in the future. But more important the media

> companies view is that there was a mountain of past infringement that

> Youtube had engaged in and built their business on and they felt they

> deserved some of this accumulated value. And who could blame them. In

> spite of the media “user generated” puff pieces it was clear to all

> involved that they generated that content by hooking up their TV tuner

> cards to their PCs.

>

> 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.

>

> Since everyone was reaching into Google’s wallet, the big G wants to

> make sure the Youtube purchase was a wise one. Youtube’s value is

> predicated on it’s traffic and market leadership which Google needs to

> keep. If they simply agreed to remove all unauthorized content and

> saddle the user experience with ads Youtube would quickly be a

> skeleton of its prior self. Users would quickly move to competing

> sites. The media companies had 50 million reasons to want to help.

> Google needed a two pronged strategy which you see unfolding now.

>

> The first request was a simple one and that was an agreement to look

> the other way for the next 6 months or so while copyright infringement

> continues to flourish. This standstill is cloaked in language about

> building tools to help manage the content and track royalties, some of

> which is true but also G knows that every day they can operate in the

> shadows of copyright law is another day that Youtube can grow. It

> should be noted that Google video is a capable Youtube competitor with

> the ONE big difference being a much more sincere effort to not post

> unauthorized works – and Google fully appreciates what a difference

> that makes. So you can continue to find movie clips, tv show segments

> and just about every music video on Youtube today.

>

> The second request was to pile some lawsuits on competitors to slow

> them down and lock in Youtube’s position. As Google looked at it they

> bought a 6 month exclusive on widespread v

ideo copyright infringement.

> Universal obliged and sued two capable Youtube clones Bolt and

> Grouper. This has several effects. First, it puts enormous pressure on

> all the other video sites to clamp down on the laissez-faire content

> posting that is prevalent. If Google is agreeing to remove

> unauthorized content they want the rest of the industry doing the same

> thing. Secondly it shuts off the flow of venture capital investments

> into video firms. Without capital these firms can’t build the data

> centers and pay for the bandwidth required for these upside down

> businesses.

>

> There are some interesting chapters yet to unfold. One is how much of

> this will become public. Google is required by the SEC to disclose

> material financial developments at their company. Working in Google’s

> advantage is their enormous market capitalization and revenues will

> give them considerable leeway to claim that a 50 million transaction

> is not significant to their business. If the other video sites have

> the wherewithal to put up a legal fight any decent attorney will

> demand access to Youtube acquisition documents. Expect a claim of

> collusion between Google and the media companies as a defense

> strategy.

>

> Infringement lawsuits will be served on Youtube and the new proud

> parent Google in the coming months. Google will respond with two

> paths: an expensive legal fight or a quick and easy settlement with

> most choosing the latter. Are there any larger copyright holders such

> as music publishers, movie studios, or unlicensed record label EMI

> that put up a fight rather than accepting the check? We’ll have to

> watch and find out.

>