Google and Viacom: A Tale of Two Universes (and Stocks)

For Google (GOOG) to succeed in video, it needs to start speaking the language of content owners, and not talking down to them.

You have to hand it to Google. They miss out on MySpace, which went on to triple in size after News Corp. (NWS) bought it, so they pay $1.65 billion for YouTube. I have always said that the Google/YouTube was a fait accompli when Sequoia invested in YouTube. In other words, YouTube was Google’s proxy video strategy. YouTube could do to video (build an index of video content) just like Google did for text content. The text content guys were mainly online properties who welcomed the traffic even though Google basically owned them.

With video, since it belonged to traditional media companies whose own hubris outweighed that of Google, no way would they allow a search engine with a $50 billion market cap index their content, make money off of it etc. So by way of YouTube, Sequoia got to parlay their $12 million investment (over two rounds) to become the leading backer of text and video content through Google and YouTube respectively.

Not too shocking, the new year also brought us the end of Google Video, which believe it or not, has some nifty features that Google should fold into YouTube, like the Mass Upload. I would know, we work with both Google Video and YouTube as a content producer. Well, now we work with one company. Ain’t competition grand?

Anyway, this past week was rough for YouTube. First my former employer News Corp.’s 20th Century Fox subpoenas YouTube for the name of someone who uploaded a clip of 24, and then this weekend Viacom basically asked YouTube to take down 100,000 clips.

For the record, let me say that I do not think that media companies are greedy, evil etc., they just have to do what is right for their shareholders in both the short and long term and that means that they miss out on some long term opportunities (Napster vs. digital media, being one example).

I also do not think that Google is greedy or evil. I do not care that their data mining makes them a dangerous entity should they choose to turn evil. I also do not care all that much if they want to promote their products in their search That’s their right. I also think that we publishers have been foolish to open up our websites and let them become the largest ad network in the world… we created the monster, and trust me, Google today is far less threatening that it will be in a few years. I have said, all the way back in summer 2006, that Google was well on its way to becoming in the Standard Oil or Microsoft (MSFT) of the 21st century, and that was before Google overpaid for MySpace/FIM’s inventory and bought YouTube.

Will Google be worth more than MSFT by 2010? Who knows? All I know is that on some days, Google looks like it will be the world’s first trillion dollar company.

I like Google… I like old media. Heck I even like Yahoo! (YHOO) enough to own their stock. But I certainly laugh when I see their reaction to Viacom’s (VIA) take-down request this past weekend.

“YouTube and Google retain all of the revenue generated from this practice, without extending fair compensation to the people who have expended all of the effort and cost to create it,” Viacom said in a statement.

YouTube said it takes copyright issues seriously, but it added that media companies gain from having their shows displayed.

“It’s unfortunate that Viacom will no longer be able to benefit from YouTube’s passionate audience, which has helped to promote many of Viacom’s shows,” a YouTube spokesperson said in a statement.

I love YouTube and all, but “benefit from said audience” is very relative. In other words, we at WatchMojo.com - an online only producer of video content probably get some benefit by bringing our videos to the video community in the hope that people come to our site to see more.” But Viacom? Give me a break. At the risk of quoting AC/DC, who made who?

Google is in this case clearly being unreasonable. They admit that they can introduce filters - as they have for Warner Music - once they sign a deal getting permission to index and play the content. But until they strike such a deal, they will not introduce any filters. That’s not cool, Google.

Google is a company with a market cap now of $150 billion, with $10 billion in cash, and revenue growth of:

- 2002 revenues grew 409%
- 2003 revenues grew 234%
- 2004 revenues grew 118%
- 2005 revenues grew 92%
- 2006 look like they will be growing at least by 70%.

In light of these numbers, it's clearly reasonable for them to say “we’re not pushing for short term revenue, we’re looking for long term benefits.” Yeah, of getting a stranglehold on all video content and then paying out paltry sums to video owners?

Viacom, who was spun off from CBS, and saw its stock flatten (while News Corp. and Disney (DIS) rose) in 2006, cannot sit around for years and wait to monetize their online forays. Content owners who hail from the offline world risk TV ad revenue and syndication revenue so to expect them to “hang tight, Skippy” is plain arrogant.

Do not get me wrong: It’s obvious that when News Corp. sends in the legal notices, it’s to bolster its negotiating power against Google; its MySpace video is a competitor of YouTube, and since MySpace itself streams a lot of YouTube’s daily videos, it probably wants to get a cut. Viacom too wants to strengthen its hand. But guess what? It’s their content, they have that right, no?

I understand Google talks and acts as if they have the Web’s best interests at heart, but that walks to some extent with online-only players whose distribution is dependent on Google. To News Corp., Viacom and other media firms, such talk is simply arrogant and offensive: “Let us build a business model around your content. Once we do, then we’ll let you know.”

Google is typical of technology companies who dream of scalable business models where everything is automated and network effects create value for shareholders, but in the world of content, it does not work that way. For Google to succeed in video, it needs to start speaking the language of content owners, and not talking down to them.

GOOG vs. VIA 1-yr chart: