Because YouTube was making no money, there was a fair amount of sneering from media executives. Like Napster, they said YouTube would be hobbled by copyright lawsuits and would be unable to monetize its enormous traffic. “Right now,” Microsoft CEO Steve Ballmer declared, “there’s no business model for YouTube that would justify $1.6 billion. And what about the rights holders? At the end of the day, a lot of the content that’s up there is owned by somebody else.” That “somebody else,” the broadcast and cable networks believed, was them. YouTube, they asserted, built its success on their backs; thirteen of the twenty most popular videos on the site, the Wall Street Journal reported in early 2007, were professionally made, not user generated. Sumner Redstone, whose Viacom owned The Daily Show With Jon Stewart, told Charlie Rose, “There are some issues with YouTube. They use other people’s products. The only way they avoid litigation now is they stop doing it if you call them.”
To acquire YouTube, Google tapped its enormous market capitalization. The company’s stock value at the time the deal was announced was $132 billion, giving it a competitive advantage over the largest media companies on earth, none of which was worth more than one-third this amount. Those still oblivious to the challenge posed by Google were awakened by the YouTube acquisition. “They can buy anything they want, or lose money on anything they choose to,” said Irwin Gotlieb. “I can only do things that are rational to do for my business.”
Media companies were chasing a new fox. It did not go unnoticed by Gotlieb-or other savvy executives-that Google was expanding its online advertising portfolio to include video. Or that YouTube users would only swell Google’s unmatched database. More ominous for traditional media, Google, despite its denials, was now in the content business. Like the television networks, YouTube publishes content produced by others and sells advertising. The more consumers linger on YouTube, the more pages they view, and the more page views, the more YouTube’s ad rates rise. In search, Google sped users off its site without any particular interest in their destination; with YouTube, it had a stake. The purchase of YouTube represented something else as well. Their Google Video store, announced by Larry Page nine months earlier at the Consumer Electronics Show, was a flop. “YouTube was an admission by Google that they couldn’t just build things,” said Danny Sullivan, longtime editor of Search Engine Land.
WHAT FOLLOWED was a protracted round of negotiations between the broadcast and cable television companies and Google. The discussions revolved around three issues: money, copyright, and trust.
Money was a stumbling block. Traditional media companies sought a version of the system they had long relied upon: an up-front license fee from distributors to air their content. Google agreed to pay something but argued that with a new distribution platform they should not be locked into old and expensive formulas. YouTube, Google argued, was a terrific promotional platform that would expand traditional media’s audience. The networks countered: Show me the money! Cable networks also claimed that if they licensed their content to YouTube for a lower price than they charged distributors, cable systems owners would demand the same discount.
After months of negotiations, traditional media walked away. “They didn’t value our content at a price point we thought was worthwhile,” said NBC/Universal CEO Jeff Zucker. “They built YouTube on the back of our content, and wouldn’t pay us.” NBC, like other television and cable networks, refused to allow their programs to appear on You Tube, though the network has not loudly protested as YouTube clips boosted the ratings of, for example, Saturday Night Live. Philippe Daumann, the CEO of Viacom and Sumner Redstone’s longtime legal adviser, complained that it was frustrating to negotiate with Google. “Every time we thought we came down to a certain point, they changed their mind,” he said. “And they changed the people in the negotiations. I learned that Google had an interesting management structure. I talked to their CEO, and then when Eric went down a certain path he had to have a discussion back in Mountain View with his two associates. Often there would be a total change in direction.”
Schmidt countered that Viacom made demands Google could not meet, including an insistence on large up-front license fees. Because YouTube had “no revenue at the time,” he said Google proposed to share advertising revenues rather than pay an up-front fee. We would “give the majority of revenue to them,” said Larry Page, “as long as it’s real revenue.” Viacom and others declined. Asked how he justified locking into an agreement with, say, AOL, to guarantee payments when AOL chose Google as its search engine, Schmidt said, “We had competition at the time.” This suggests that with YouTube, Google was not looking over its shoulder at Microsoft. Google’s position was at least partly shaped by a belief that it had leverage in this negotiation.
The more consequential issue, said Daumann, was not money but copyright protection-protection against what he referred to as “theft.” YouTube was taking Viacom’s content, he continued, “not as an experiment, not con-sensually, but rather they just take it and say, ‘Why don’t you watch what happens!”’ Google said it was the legal responsibility of old media to tell them what should be yanked from YouTube and said it would immediately comply. Old media disputed this interpretation of the law, insisting that the responsibility, and the expense, of policing belonged to YouTube. Jeff Bewkes, the CEO of Time Warner, echoed Daumann’s concern. The problem is that once Time Warner’s content appears on YouTube, he said, “it gets redistributed to five other places-MySpace, Gorilla, whatever. Those people are now the new sources of the thing.” He added that Google maintained they were not responsible if another site lifted Time Warner’s content from YouTube, giving them “deniability in the event of theft.”
The third issue, trust, was in some ways the most vexing. Daumann was insulted when Google tried to assure him of the promotional value of YouTube. “I don’t need somebody else to say, ‘It’s good for you!’ Let me decide what’s good for me. Maybe I’m totally wrong. Maybe I’m totally stupid, and maybe it would be better for me to put all of my shows on YouTube immediately. Maybe I’m just an idiot. But it’s my right to be the idiot. I think YouTube is an effective promotional tool. We put trailers all over the Internet. We don’t run a walled garden here. We have deals with just about everyone-except YouTube.” He held a hardening conviction that Google was a pirate. Google held a hardening conviction that traditional media wanted to halt progress and slip their paws into Google’s pocket.
Bewkes, unlike Daumann, was willing to believe that Google “was well intentioned,” blaming engineers who are thinking not of his copyright concerns but of solving the “engineering problem of getting it out there.” Asked what a company like Time Warner wanted from YouTube, he conceded, “It’s difficult to figure out.” Like his peers, he wants “what we have wanted for seventy-five years, for our copyrights not to be stolen and used by other commercial enterprises who get paid and we don‘t, and they choose the time it is exhibited without ever contacting us.” But in this new world where every media company gropes for a way out of the tunnel, he said, “There is a question of the best way to do that.” Web programmers like Albie Hecht thought old media was stuck in denial. “You either find a way to make your product available to the public in the right way, or they’re going to get it anyway,” he said. “So you can either create another generation of video as opposed to audio pirates, or you can do the smart thing and give it to them,” and figure out a way to monetize it.
The chasm between new and old was as wide as the gap between Mel Karmazin’s view of how to sell advertising and Google’s view. They each spoke of piracy, but old media thinks it is preventable and new media says it wants to try but is dubious that absolute prevention is possible. They each spoke of content, but by content they meant different things. For traditional media companies, it is usually defined as full-length, professionally produced TV programs or movies. For YouTube, it is shorter-form clips, mostly user generated. In many ways, the debate is pointless since both user-generated and slickly produced content commands attention. “Content is where people spend their time,” said Herbert Allen III, the forty-one-year-old investment banker who is president of Allen amp; Company. “Content is not just what’s on Comedy Central. Content is Facebook too. Content is how the consumer chooses to spend time.”