Silicon Insider: Viacom vs. Google

March 15, 2007 — -- It's MTV vs. Google, the icons of Gen X and Gen Y, in a Battle Royale. And didn't you just know it would come to this?

I probably don't have to tell you that on Tuesday, entertainment giant Viacom Inc. sued Web giant Google Inc. for $1 billion.

Viacom claimed that Google's subsidiary YouTube had violated copyright laws by allowing users to post and download proprietary Viacom company content, and it demanded that this content be removed from YouTube.

The sheer amount of money in the lawsuit aside, this may not seem a big deal, until you realize that Viacom is MTV, Comedy Channel and Nickelodeon, and that Viacom's legendary honcho, Sumner Redstone, also is the controlling shareholder of CBS, Paramount and Dreamworks.

Add to that the fact that YouTube has become one of the most popular social networking (i.e., Web 2.0) sites on the Web, and that its parent company, Google, increasingly is the Web (and a big chunk of the Web's advertising business to boot) and you have all of the ingredients for the most important corporate legal battle of this century to date.

Indeed, it is very likely that the outcome of Viacom vs. Google will determine the nature of the Internet economy as we go forward. At the very least it will set the cost structure for the Web and set important precedents regarding the protection of intellectual property, especially copyrights.

And that, I suspect, is precisely what Redstone has set out to accomplish.

Redstone Understands YouTube's Significance

To understand what's really going on here, we need to step back and get some perspective. First, some background:

Redstone, who will soon be 84, began his career working for his father's theater chain company, now known as National Amusements.

That early training, which began just before World War II, taught Redstone the value -- and profitability -- of content over carrier. He has pursued that strategy aggressively and shrewdly now for six decades, and today he stands not only as America's leading entertainment mogul, but also as its leading expert on the value of that content.

You can be very sure that Redstone spotted early on the future threat from YouTube and, before that, Google.. Unlike Time Warner and Conde Nast, his businesses avoided the mistake of unwittingly handing over control of its advertising revenues to Google.

You can also be sure that Redstone was watching carefully as pirate downloading ripped apart the business model of the music industry, and he surely noted how the industry itself had made the situation even worse through a truly stupid combination of digging in its heels and turning its biggest customers -- children -- into criminals.

Finally, he undoubtedly saw -- and nearly 70 years of his own business experience confirmed to him -- that you could not withstand the one-two punch of a technological revolution and a cultural change.

He saw how the record industry blew it: having kids arrested, suing Napster into oblivion, and trying to force consumers to buy an increasingly obsolete delivery technology: CDs. That move alone alienated industry's customer base.

After crippling itself with self-inflicted wounds, the industry finally acquiesced to the new reality. And even then, it took Steve Jobs to save the recording industry from its own folly.

Learning a Lesson From Record Industry's Failure

You can see that Redstone learned his lessons from this debacle by the way the Viacom vs. Google suit has been handled. Put aside the $1 billion claim -- it may be a big number, but one suspects it was devised to get both Google's and the world's attention.

Far more important than the dollar figure is the way Viacom has rolled out its strategy. Viacom has not gone after all of those young consumers who copy episodes of the "Colbert Report" or "South Park," and dump them on YouTube 20 minutes later.

Instead, Viacom has gone after Google -- a smart move for several reasons. First, if the real goal is to force a rational new cost structure on the industry, then you need to go to the major player in the business and make it happen.

Second, while YouTube is the most popular kid in school these days, Google -- by becoming big and powerful, by turning on its avowed philosophy of "not doing evil" and doing just that to censors everywhere, and by making a whole lot of big corporate enemies -- has lost a lot of the warm glow it enjoyed just two years ago.

But Viacom's smartest move has been to give consumers an alternative. It isn't making the record companies' mistake of trying to close off a new tech world to consumers, thereby alienating its lifeblood customers. Instead, Viacom has done the exact opposite, offering consumers more choices rather than less.

A YouTube Competitor?

On Feb. 2, in a much-publicized announcement, Viacom demanded that Google remove 100,000 videos from YouTube that Viacom declared had violated its copyright.

Less noticed was the fact that three weeks later, Viacom turned around and cut a deal with the Web site Joost to carry its content. This was a clever play, because it enabled Redstone to come to the table with Google without risking a consumer backlash, and even with a viable revenue model.

No doubt Redstone would rather have Viacom content on a huge-traffic site like YouTube, but if he can't make money doing it, he'll happily settle for Joost.

But that said, don't underestimate Google in this case. If Viacom understands content better than almost anyone, Google is the god of process, especially the interaction between society and the Web, and has shown a genius for anticipating new Web trends -- and effortlessly migrating its hundreds of millions of users to them.

The acquisition of YouTube was a masterstroke, as we've now seen. Indeed, if Google made a mistake with that acquisition, it was an unlikely one: It bought the company too early, before all of the wrinkles in this new market had been ironed out.

Some industry observers pointed out at the time that Google was setting itself up for copyright infringement lawsuits, and those experts are feeling vindicated right now. But there may be another explanation: that Google knew all along these lawsuits were probably coming, that the company determined that it could afford the challenge, and most interestingly, that Google had already incorporated these lawsuits into its business strategy.

Think about it from Google's point of view. The hottest company of the new century acquires the hottest new company of the last five years, and does so almost before anyone notices. The question now is how to monetize YouTube to recoup the $1.6 billion Google spent for it.

In the best scenario, Google will simply absorb YouTube into its current revenue model -- that is, offer the content for free and let vendors pay for the searches. Meanwhile, YouTube, unchanged, will continue to grow exponentially and becomes the Google of entertainment content.

On the other hand, should some company like Viacom decide to sue Google/YouTube for copyright infringement, then the onus is on that firm to come up with a realistic cost structure -- and take the public blame for having forced people to pay to see their favorite Mentos experiments.

In this scenario, Google gets to play the victim, fight in the people's name for the best pricing deal and hold out the threat of forcing the litigant to go someplace else, like Joost, and charge for its content. Then Google/YouTube either goes back to its free model, or simply uses its sheer size to underprice the competitor. Either way, it makes billions, and doesn't have to take the rap for having rationalized the economics of the video download market.

If that sounds incredibly clever, subtle and a little devious, well, that's Google for you.

Court Case Unlikely

My prediction is that this case will never get close to a courthouse and that no penny will change hands -- at least not in a judgment. As for the final details of the deal between Viacom and Google, that, I believe, will come down to the characters of the two principals.

I know Google's CEO, Eric Schmidt, quite well. He is a very, very smart guy. And he is the rare case of a senior executive still willing to learn. A decade ago, at Sun Microsystems, he was the Valley's top technologist, the guru of Java. Since then, he has done the near impossible: morphed into a brilliant business leader and strategist.

He failed the first time at Novell, mostly because he was taking on Microsoft. But that experience only made him wiser and more capable. His leadership at Google has been peerless and has put him in the first rank of high-tech leaders of the last 50 years.

I've never met Redstone, but I know people who have and they describe the experience as being in a box with a tiger. Redstone isn't just a billionaire and a great businessman, he is also just about the toughest guy you ever heard of.

How tough? Read the part in his bio about being trapped in a burning Boston hotel in 1979 and hanging outside from the ledge, with one hand, while on fire, waiting to be rescued. This is a man who needs nothing, fears nothing and will never let go.

How does Viacom vs. Google end? Redstone gets his revenues. Google gets the content back. The agreed-up pricing structure becomes the de facto standard for the industry. You and I end up paying more for videos than we like but less than we can bear, and Schmidt and his staff come away from the negotiations in shock and praying they never have to face Redstone again.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Michael S. Malone, once called the Boswell of Silicon Valley, is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News, as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is best-known as the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNEWS.com "Silicon Insider" columnist since 2000.