YouTube’s Magic Number - $1.5 Billion

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1. Seth Brundle
   

   September 21st, 2006 at 5:09 am

   The DMCA is very clear - no pre-qualification of content is defined. If the video is infringing, serve a DMCA notice, and they take it down. And evidentally, YouTube has been in complete compliance. There simply is no legal issue for YouTube whatsoever, period.

2. Michael Arrington
   

   September 21st, 2006 at 5:12 am

   unless they are directly profiting from the infringement of copyrights by their users…yes, there are legal issues.

3. xxdesmus
   

   September 21st, 2006 at 5:16 am

   “…if music is playing in the background while someone is dancing around, that’s still copyright infringement.”

   Is it just me, or is that a little bit ridiculous?

   Well how about this, what if I happen to have a can of Pepsi in the background sitting on a table in my YouTube video?

   Is that copyright infringement also? That sure sounds like free publicity/advertising for Pepsi if you ask me.

4. Michael Arrington
   

   September 21st, 2006 at 5:18 am

   trademark law is different, fair use applies.

5. Skip Tracer
   

   September 21st, 2006 at 5:27 am

   YouTube should monetize their videos, but share a percentage of the ad revenue like revver does.

6. Michael Arrington
   

   September 21st, 2006 at 5:38 am

   yes, they should. I suspect they are working very, very hard to get deals in place as soon as possible.

7. Jim
   

   September 21st, 2006 at 6:05 am

   $100,000 per day = 36.5 million in _revenue_ per year. (with optimistic numbers)

   How can 1.5 billion be justified? They would need to increase traffic by (say) ten fold, _and_ keep it running at that level for 5 years just for the total revenue to match the expense.

   No doubt the potential is big, but making a steady income ought to play some role in the calculation.

8. Mark
   

   September 21st, 2006 at 6:20 am

   Absurd and insane. The moment YT ‘monetizes’ the traffic by adding ads to clips is the moment that the next video-serving upstart waves its ‘no ads here!’ banner and the droves of users that built YT start looking around for the next truly free service. Freefall ensues and then *everyone* comes out of the closet say, “I knew YT would never make it!” and the ship is scuttled.

   They need to find other ways of incorporating revenue-generating services while keeping the core function free.

9. NeoTechie
   

   September 21st, 2006 at 6:21 am

   Traffic is key to having a success online product. I love traffic Jams!

10. Sam Davyson
    

    September 21st, 2006 at 6:21 am

    Second link in the thrid paragraph isn’t quite right. You’ve missed the “r” in “recently”.

11. Chris D
    

    September 21st, 2006 at 6:43 am

    First of all, we don’t know if the report is credible or not. Also, we don’t know if that price was before Universal came out swinging via the press.

    Can’t blame YouTube from at least asking, however.

    Sequoia has deep pockets and will keep YouTube afloat for a long time. This is their “crown jewel” right now and will do what it takes for YouTube to have a shot at a successful exit. They have $11.5m in (or maybe more as a silent round) and I’m sure they would do another $20-$30m at a drop of a hat if these ($1b-$2b) are the exit valuations they are shooting for. They have tons of cash from the Google IPO, so they can ride this out for awhile.

    However, I’m still a skeptic about the business side of this offering. It’s been said before in another blog, but Volume (traffic) with negative margins (cost of service > revenue from service) means simply increasing loss in proportion to the traffic.

12. Random Finance
    

    September 21st, 2006 at 7:18 am

    Once YouTube begins putting ads before the play of videos you can bet many of those millions of people who visit per day will be going elsewhere. People love the idea that its free and don’t realize money is made from advertising. Even if they realize its made from on-site static ads they don’t care, as long as it doesn’t affect their watching videos.

13. mesattack
    

    September 21st, 2006 at 7:26 am

    I think the valuation metric used in this article (Grouper) is not really a valuation metric. Traffic, unless you can monetize it, is worthless. The one argument would be for branding purposes but I think this would be a precarious revenue stream for a public company. Billboards? Are there any public billboard companies?

    Not sure but YouTube is not worth any number that starts with a B.

14. Patricia
    

    September 21st, 2006 at 7:32 am

    ^Ah, I don’t know - the end user isn’t that hard to train. If the clips were super short and smart, maybe YouTube can slip it by. Free for everybody else doesn’t mean free for YouTube - I’m sure they’re cutting some hefty checks over there. If handled properly, it could be an accepted transition from its users, it’s just hard to say. Maybe they can draw in more professional channels (like little tv networks), monetize that and then later monetize what’s user driven, or give percentage of revenue to the most popular/most viewed video clips to keep users happy.

    Great analysis in this article though. I think it’s spot on.

15. TomBomb.com
    

    September 21st, 2006 at 8:46 am

    YouTube is devaluing by the hour. As it continues to alienate its love base–the musicians, hipsters and edglings–who made it a phenom, the smart money is going elsewhere. Sites like revver.com are picking up the malcontents. Without its edge factor, YouTube is just Soapbox in an American Apparel t-shirt.

16. kaiju
    

    September 21st, 2006 at 8:49 am

    They need to start paying the users that UL videos!

17. web design uk
    

    September 21st, 2006 at 9:05 am

    Good luck to YouTube. They deserve a big sale!!

18. free myspace layouts
    

    September 21st, 2006 at 9:22 am

    I love how they put a price tag of $2 Billion… but once they dont see that, they cut it in half. Eh…

19. Tim Marman
    

    September 21st, 2006 at 9:29 am

    Given that they haven’t figure out how to monetize it and their bandwidth bills, one might say that the “bad news” also includes the traffic they get

    There aren’t “no” copyright issues at play, but I suspect they’re going to be fine. Grokster gave us a pretty good test that looks at intention, not strictly whether someone profits from a third party’s infringing use. The test considers things such as their encouragement of infringing use, how the service is marketed, and so on. The DMCA provides a nice shield as a service provider, and their compliance on takedown notices goes a long way towards showing good faith. As does, of course, signing agreements like the one they did with Warner.

    It is also worth noting that fair use MAY apply in the use of a copyrighted song, depending on how much of the song is used, in what capacity, and of course whether there is any commercial interest. So yes, the analysis is different and the burden perhaps higher than with trademarks (again, depending on the actual use), but fair use CAN apply.

20. Ted Thomas
    

    September 21st, 2006 at 9:35 am

    This is just a marketing ploy by YouTube to generate interest.

    If you track Web2.0 acquisitions… #1) send out “news” story about your “potential” buyer… #2) set a price point big enough to get bloggers talking… #3) take the money and run when a buyer comes in at 70-80% of the number you threw out.

    Will history repeat itself with YouTube?

21. Sundroid
    

    September 21st, 2006 at 9:38 am

    It seems that the obstacle that is preventing the founders of YouTube from collecting some hefty paychecks ($1.5 billion, to quote Mr. Arrington’s number) is the issue of YouTube’s carrying “copyright infringement” works on its site.

    For anyone who loves to cry “Copyright Infringement!!!” in a crowded theater, please note:

    DMCA (Digital Millennium Copyright Act, passed by the congress in 1998) Title II clearly states:”The Online Copyright Infringement Liability Limitation Act, creates a safe harbor for online service providers (OSPs, including ISPs) against copyright liability if they adhere to and qualify for certain prescribed safe harbor guidelines and promptly block access if they receive a notification from a copyright holder or their agent…”

    Here is the link to the article about DMCA in Wikipedia: http://en.wikipedia.org/wiki/DMCA

    What this means is that for any copyright holder who feels that YouTube is stealing money from his children’s college tuition he must serve a “take-down” notice to YouTube before he can launch a lawsuit. If YouTube receive his “take-down” letter and promptly removes the said video clip from its site, then the copyright holder does not have a legal ground to initiate a lawsuit. He could try, but I doubt any lawyer worth his law school tuition would tell him he has a chance. If this copyright holder went ahead and sue anyway just to draw publicity to his work, that’s a different story altogether.

22. Klaus
    

    September 21st, 2006 at 9:39 am

    Mark Cuban is right on, “Free Hosting from any 3rd Party site” is a major driver for youtube. But that is nothing you can make money with.

    It is quite obvious, Web2.0 bubble is peaking now.

23. Chris D
    

    September 21st, 2006 at 9:53 am

    @Sundroid. I do indeed think there needs to be a legal challange to such an interpretation of the DMCA. Most writings from lawyers that I’ve seen regarding YouTube also indicate that this is pretty muddy and not at all clear cut as you may think. While lawsuits are distasteful, I do this there needs to be a court case (maybe all the way to the Supreme Court) to clarify the “safe harbor” provisionings.

    YouTube is not an ISP, it is an ASP, an Application Service Provider which is deriving income from potentially copyrighted material.

    YouTube knows this and that why they are cleaning up their inventory before they can really get down to the business of building up a sustainable business.

    Which makes me ask, anyone know the latest on the Tur lawsuit against YouTube? That was filed a couple of months ago, so there may be some preliminary movements on that unless YouTube settled privately.

24. Redneck
    

    September 21st, 2006 at 9:55 am

    It will be a sad day if the sell or close this site down

    http://you-could-be-a-redneck-if.blogspot.com
    http://youtuberaider.blogspot.com
    http://freshvideo.blogspot.com

25. chris
    

    September 21st, 2006 at 10:10 am

    there isnt a single credible big brand advertiser that would feel comfortable putting their high quality/high production video ads in front of consumer generated videos that dont get screened before they are uploaded. If you think P&G for example is going to buy ability to put their video ads in front of random YT videos you are insane. Most of the videos on YT are low quality, unfiltered, and borderline innapropriate. Which would bring down the impressions you think they can sell from 100M a day to less than 1M (an absolute swag on my part). Also video ads online are mostly sold in pods, which means a consumer only sees an ad every 2-4 videos. So even if all 100M streams a day were good enough to put ads against, they wouldnt get 100M ad impressions.

26. Chris D
    

    September 21st, 2006 at 10:21 am

    Using Wikipedia, here are the requirements to full under the “Safe harbor provisions”:

    Requirements to obtain the safe harbor
    To obtain the safe harbor the OSP must:

    - not have actual knowledge that the material or an activity using the material on the system or network is infringing (512(c)(1)(A)(1)).

    - not be aware of facts or circumstances from which infringing activity is apparent (512(c)(1)(A)(2)).

    - upon obtaining such knowledge or awareness, must act expeditiously to remove, or disable access to, the material. (512(c)(1)(A)(2) and 512(c)(1)(C))

    - not receive a financial benefit directly attributable to the infringing activity, in a case in which the service provider has the right and ability to control such activity (512(c)(1)(B)).

    - have a Designated Agent registered with the US Copyright Office to receive notifications of claimed infringement (often called takedown notices). If the designated agent receives a notification which substantially complies with the notification requirements, the OSP now has actual knowledge and must expeditiously disable access to the work. The OSP must make available to the public through its service, including on its web site substantially this information:
    the name, address, phone number and electronic mail address of the agent.
    other contact information which the Register of Copyrights may deem appropriate.

    - adopt, reasonably implement, and inform subscribers and account holders of a policy that provides for the termination in appropriate circumstances of subscribers and account holders of the service provider’s system or network who are repeat infringers (512(i)(1)(A)).

    - accommodate and not interfere with standard technical measures used to identify and protect copyrighted works (512(i)(1)(B)).

    Point #1 is dubious, as YouTube is clearly aware of illegal content. They do have “top-viewed” pages which show copyrighted material. They could never defend themselves that they don’t look at these top-viewed pages.

    #2 I’m not clear what this means

    #3 They are all clear on. They do a good job on following take down notices.

    #4 Is the really the clear cut one here. Selling ads on web pages that display copyrighted content? Pre/post roll ads? They clearly have the “right and the ability to control this” if they would pre-screen the uploaded content. They choose not to do so.

    The remaining points are not particularly interesting.

27. patrick
    

    September 21st, 2006 at 10:30 am

    They should sell. If they tried to IPO anyone with content infringed would immediately sue. This is a common tactic in business. YouTube would be forced to settle most of these lawsuits or drop their IPO. They couldn’t try to find relief in court because it would take years. The only reason they aren’t being sued now is because they have no real value. It’s all virtual. Right now it’s a waiting game. Wait till YouTube runs out of money and drops their selling price. IPO is not a viable option.

28. Bjoern Sjut
    

    September 21st, 2006 at 10:32 am

    Hmm, when speaking about the buyer would have to have a strong legal team and the will to fight a potentially devastating IP war, this whole story really reminds me of the time, when Napster was bought by Bertelsmann and the music industry just jumped on the opportunity, once a financially potent investor was behind the site.

    Based on this experience, I would expect intellectual property discussion of YouTubes business practices to explode, if a buyer shells out money for the company.

29. Michael Urlocker
    

    September 21st, 2006 at 10:46 am

    Rising M&A activity might be evidence of a market facing disruption. When CEOs can’t figure out how to deliver growth on their own, investment bankers and shareholders nudge them along to consider big ticket acquisitions.

    Other warning signs of disruption which may apply in the media sector:

    * Customers stop appreciating and paying for innovations they used to value;
    * Strange niche suppliers start gaining share;
    * Tried and true management techniques fail;
    * A growth gap emerges between shareholder expectations and what management thinks it can deliver;

    More at:

    http://www.ondisruption.com/my.....arnin.html

30. King Bastard
    

    September 21st, 2006 at 10:52 am

    That bad news:

    Lots and lots of porn.

31. Sundroid
    

    September 21st, 2006 at 11:21 am

    People who make claims such as “90% of the videos on YouTube are copyright infringement works” are using the strictest, most draconian interpretation of copyright laws. In that scenario, whenever you sing the “Happy Birthday To You” song, you will have to pay royalty to the copyright holder of that song, as it was copyrighted in 1935, and the copyright will not expire until 2030. Here is the Wikipedia article on this topic: http://en.wikipedia.org/wiki/Happy_Birthday_to_You

    YouTube could rightfully claim that they could not determine whether, for instance, a Bar Mitzvah party tape that has a Metallica tune playing in the soundtrack violates the copyright laws or the video maker is simply exercising his First Amendment free speech rights under the “fair use” doctrine. The link to the “fair use” doctrine in Wikipedia: http://en.wikipedia.org/wiki/Fair_use

    Lawyers sue because that’s what they do for a living, and I understand. MySpace has as many “copyright infringement” issues as YouTube (if not more) and it was sold for $580 million in July 2005 to News Corp. One year later, is Rupert Murdoch fidgeting in his private jet because some lawyers are secretly preparing a massive copyright-infringement lawsuit against News Corp?

    I rest my case.

32. Burner
    

    September 21st, 2006 at 11:21 am

    The question is “what is YouTube without legally bound content?” Who would go there? The quality on YT can be equated to diamonds in the rough. YouTube is a phenomenon because people use(d) their video player on other sites, and visitors on these sites could be sure that they would be looking at relevant content.

    I can only speak for myself when I say that I have never searched for video content on YouTube, nor would I. It is a waste of time. Of course, I’d have to look at a lot of pages to find what I was looking for. $3.6 Billion…that’s my final offer!

33. Yann
    

    September 21st, 2006 at 11:56 am

    Let’s remember the 90’s where every telecom/chip/software company built a business plan based on ever-growing bandwidth needs. The growing spend on telecom was going to make everyone RICH!

    So we overfunded, but more importantly, capacity grew at a MUCH FASTER rate than growing demand, and after a cyclical downturn, telecom rates plunged. In 1996, it cost $10K/month to get a good hosted server, today, $100. In 1996, it cost $0.50/mn to call London, today it’s free.

    Now let’s fast forward 10years and the new telecom is advertising, and yes online advertising will grow over the next 10years. But all the new technologies (web2, dvr, sms search, blogs, etc) are increasing the supply of ad impressions at a MUCH FASTER rate than demand. Eventually, the laws of economics kick in and prices adjust downward very dramatically.

    Let’s remember that advertising space is a virtual good with a very very low marginal cost, just like a telecom minute. Within the next 5years, we’ll get to a point where price=marginal cost. The dedicated server costing $100 is the marginal cost of acquiring and serving the customer because hosting capacity was overfunded and became almost infinite. The overfunding, overbuilding of advertising slots will cause CPM to go down to a level never imagined in anyone’s proforma numbers….Just my opinion of course.

34. Tobias Reissner
    

    September 21st, 2006 at 12:00 pm

    Michael, you may want to tell the NYPost guy to correct his article. He wrote that YT serves “100,000″ videos per day, which would be a pathetic figure if it were correct.

35. Tim Marman
    

    September 21st, 2006 at 12:12 pm

    Also, just to clarify some misconception - as of July, 86 of the top 100 videos were user generated, not commercial (read: infringing) work.

    http://slashstar.com/blogs/tim.....video.aspx

    So, yes, Lazy Sunday may have put YouTube on the map, but people apparently WOULD go there even without the infringing content.

36. sc
    

    September 21st, 2006 at 12:40 pm

    The Good Old eyeball-based valuation methods are back again…

37. James
    

    September 21st, 2006 at 2:42 pm

    I agree with folks above who point out that uploaders will just go elsewhere — if youtube starts placing ads in videos or cracks down on copyright infringing videos. What the corporate powers see as copyright violations, I see as free advertising.

    So let youtube do what it will. If it screws up that’s just an opportunity for some other website to become “the next big thing.”

38. Chris D
    

    September 21st, 2006 at 3:58 pm

    @Sundroid

    If “Happy Birthday” is sung in a movie (Hollywood or independent), the producers indeed need to get permission to do so from the rights holders. Thus, if you watch the end credits of movies, you’ll see “Happy Birthday” credits and acknowledgements. So, why should it be different for other content producers.

    One of the first things film students learn (I went to NYU film school) is that you have to get permission to use other people’s music. NYU was quite strict on this and - as I recall - wouldn’t screen any films (in the student shows) that did not have the correct clearances for it’s music.

    This “permission” however can be - and typically is - given without cost by the rights holders, particularly, if there’s really no value creation in the use of its materials.

    I personally agree that it is the right of the content creator to stipulate how his/her artistic output of music (or film) is used. Otherwise widespread abuse will occur.

    I really can’t stand the “well, this is all good publicity for that , so they won’t mind or they simply ‘don’t get it’. ” agrement that I see others put forth in the YouTube discource. Maybe the producers do view it as promotion, maybe others may not. However it is their right to determine this.

    I think everyone is forgetting that content producers will be becoming more and more “non-professionals” with little financial means. Right now the virtolic discource is about Hollywood/Record Labels “being greedy”, “serves them right”, “don’t care about the consumers”, etc. However as the Internet allows for a wide range of content producers, there will be lots of little folks that will depend on income from their creations.

    Therefore, in my opinion, there needs to be respect paid to the underlying principles of protecting creative output. And, no, I don’t work for a studio, indie film production company, record label.

39. Alex
    

    September 21st, 2006 at 5:05 pm

    Very good article Michael.

40. Sundroid
    

    September 21st, 2006 at 5:15 pm

    Chris D,

    Hello to a fellow NYU Film School alumnus. Got my MFA from the venerable institute there.

    To me, YouTube (or any other video hosting sites) has started a media revolution, and it probably doesn’t know it. When this “media hurricane” is over, the landscape will be rearranged in a shape far different from the one you and I used to know. And it is way beyond the issue of how YouTube is worth. As someone pointed out, if YouTube screws up, another video hosting service is ready to take its leadership place.

    Media analysts and legal experts are intensely studying the case of YouTube because it is pushing the edges and breaking grounds all over, thus causing a lot of Hollywood lawyers to reach for their Valium bottles more often than their doctors allow them to. Nevertheless, this is a fine drama of Scorsese’s scale I wouldn’t mind watching. Between the camp that says YouTube is worth $1.5 billion and the camp that says YouTube will be sued out of existence, I think the truth is somewhere in between, as the saying goes.

41. Jason M. Lemkin
    

    September 21st, 2006 at 6:30 pm

    With all respect to Mark Cuban, Yahoo did spend $5b for Broadcast.com . . . might as well do $1 or $2b on YouTube, it would at least be a relative bargain . . .

42. nyt
    

    September 22nd, 2006 at 12:08 am

    CEO of any public company pays $1B for such acquisition should be fired for wasting shareholders value.

    YT has no value prop. Their user base can tune-off very fast!

43. Nalts
    

    September 22nd, 2006 at 2:21 am

    I’d like to buy YouTube for what I think it’s worth and sell it for what the VC community and media think it’s worth.

    How much tax would I have to pay on $1.45 billion?

44. Dan G
    

    September 22nd, 2006 at 3:39 am

    If Youtube is to avoid copyright problems by making deals with copyright holders, it would have to make deals with *every* copyright holder on earth, as they could all be potentially infringed upon on Youtube.

    Can’t quite see that happening, myself…

45. web hosting company
    

    September 22nd, 2006 at 9:45 am

    What do you think should YouTube wipe out the copyrighted content to make themself more acquirable?

46. Future Billionaire
    

    October 10th, 2006 at 9:03 pm

    Thats it, if these guys can do it, so can I..