NYT: A Fork in the Road for Google

Whenever companies sue each other, my ears perk up. Not that I really care who wins, but lawsuits often showcase hidden vulnerabilities. Inevitably, as the fight plays out, the market thinks a lot differently about the long-term prospects of both parties, and money often sloshes away to play elsewhere.

The Internet has been all cute and cuddly throughout its childhood, given a pass for youthful indiscretions like stealing music and video clips. That just ended with Viacom’s copyright infringement suit against Google. By the time this lawsuit and others are finished, Google may have to change its way of doing business. That would be a shock.

Viacom, which owns cable channels like MTV and Comedy Central, recently charged Google with blatant copyright infringement for hosting 160,000 clips of Viacom shows and then having the audacity to allow bored workers and kids at home to view them 1.5 billion times. Viacom had to sue to protect itself because, well, beneath the surface, Viacom and Google are both in the same business, selling ads. For all Google’s claims to be a technology company, 99 percent of its business is ads — for essentials like megapixel cameras, poker sites and ambulance-chasing asbestos lawyers.

TV attracts huge audiences with Orange County teens and Dr. McDreamies and, once our eyeballs are locked in, advertisers sell us things we’re not even sure we need. Like Budweiser Select, Dove Regenerating Hand Cream Night Care With Shea Butter and ever-less-desirable GM cars. Some $70 billion in TV advertising drives a $7 trillion consumer economy.

But TV is expensive. Shows that cost millions per week to produce may not turn profitable until they are syndicated for late-night reruns or DVD sales. It’s a tired business model ripe for change.

Megabit Internet access changes the rules by making videos available away from the controlled conduits of network TV and cable. This is scary for Viacom, because why would advertisers pay to run commercials on “The Daily Show with Jon Stewart” if folks can watch the show on YouTube? Proponents of YouTube claim Viacom should be happy about getting free publicity for “The Daily Show.” YouTube has a 10-minute limit on video length and claims it’s not copyright infringement, but fair use (a fuzzy loophole in copyright law). This may sound compelling, but it is nothing more than a fig leaf on piracy. Why? Because Viacom owns its programming and should get to pick where and when the shows are shown.

To remain viable, Viacom had to have its clips taken down from YouTube. In fact, all broadcasters must limit the reuse of their expensive material or their business model will implode. They must build and control their own Internet ad networks or risk going the way of trolley cars.

And Google? Internet advertising is growing like a weed. Google makes profits large enough to make Tony Soprano blush simply by scanning all the Internet pages the rest of us put up (which costs them very little), and returning the results with ads. The ads are meant to encourage impluse shopping: see it, want it, buy it, click and ship. So we click on 25-word text ads, and Google becomes a $140 billion valued behemoth. More valuable than Viacom or CBS. Hey, no one said life was fair.

But now suddenly video is cool. Sensing opportunity, the Google geek squad tried to build its own video-delivery service. It was put to shame by an 18-month-old company, YouTube, which Google then bought for $1.65 billion in shares of Google stock. By the way, in the terms of the deal, Google also set aside several hundred million dollars for potential lawsuits. Not enough as it turns out.

The success of YouTube has been nothing short of stunning. More than 100 million videos are watched every day, and probably 100,000 new clips are uploaded. So what if many of them have been highlights of “The Colbert Report” and “The Family Guy,” copyrighted material to which YouTube has no rights.

Suing YouTube as a private company only would have ruined a few venture capitalists’ tee times. Once Google, with pockets as deep as the Mariana Trench, bought YouTube, lawyers from coast to coast started salivating. Viacom is the first of many. I hear talk of giant class-action suits, for billions and billions. Maybe Viacom is thinking too small.

But here is Google’s dilemma. The company’s huge margins are the reason why it is valued at $140 billion on the stock market. If Google suddenly finds itself in a less profitable business because it has to pay for content, instead of just sponging off of SpongeBob, it could see its stock price fall faster than Katie Couric’s ratings.

Don’t get me wrong. The Internet will soon deliver all our video clips — sitcoms, sports, the whole shebang. But whoever creates and controls this content is who will make the big returns from it. Google is tops at search. It’s not yet obvious it will be tops in video. The game of lifting video clips made by others is almost over. If Google wants to stay in the game, it will need to ramp up its spending on video big time.

As consumers, I suspect, we’ll win, because we’ll have better shows delivered in new ways. But when companies start suing each other, investors should be careful. It usually means the game has changed for both sides.

http://kessler.blogs.nytimes.com/2007/04/09/a-fork-in-the-road-for-google

 

Comments

Well so much for the Google-Viacom Battle. Google claims it has copyright protection software that they will release soon that will make illegal uploads impossible, and make the Viacom lawsuit irrelevant: http://www.economicpolicymonitor.com/2007/04/google-has-copyright-protection.html

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