Not Enough Money to Go Around for Google/Viacom

Peter Kafka of SAI is right to state that Viacom’s (VIA) $1B lawsuit against Google’s (GOOG) YouTube can be fixed with a big-sized check, the problem, however, is that Google won’t write it because it won’t be able to meet Viacom’s price.

Indeed, this will go all the way to the Supreme Court, as states YouTube’s VP of content partnerships David Eun.

Note that WatchMojo.com is a content provider to YouTube, so I want to keep my comments general and discuss macro realities of the online video space, and not directly comment on Viacom/YouTube.

So here goes:

• The online video advertising market in the US grew from about $439M in 2006 to $750M in 2007; for 2008, it will be somewhere in the $1.25B ballpark.
• In about five years, that figure can grow to a healthy $7.1B. That’s a long way to go, frankly, and even then, in 2012, that $7.1B figure will represent 10% of current television advertising sales (with total offline revenues - including DVD sales etc. - being a far bigger $250B pie).
• As you can see, Viacom is neither stupid nor masochist: as far as its concerned, yes it needs to have a digital strategy, but the stronger and more potent that strategy, the quicker it bleeds it offline business and corresponding revenue streams.
• What are those revenues? Viacom did over $13B in revenues in 2007, with nearly $1.5B in net income. Its digital sales are in the $500M - 1B range. It’s not enormous relative to offline, but it’s nothing to sneeze at, either.
• From a short to mid term perspective: Viacom gains very little by having all of its content on Viacom-owned properties, and even less on Google’s owned sites.
• The fact that Sumner Redstone has his CBS (CBS) (where he's Chairman) co-exist with YouTube is in fact not hypocritical for reasons we’ve outlined before: Is Sumner Redstone a Hypocrite?; Sumner Redstone not Crazy Part I; Sumner Redstone Not Crazy Part II.
• Quite simply: Sumner Redstone gets media, content and advertising and recognizes that content is king, especially as distribution takes off. The problem is, the Internet effectively shrinks the media business for traditional companies; for [dare I say it] content disruptors like WatchMojo.com, it’s all good.

YouTube is a new, complimentary distribution channel that is both promotional and commercial. To Viacom, it’s the devil. Well, maybe not the devil, but it does not value YouTube’s promotional benefits and given Viacom’s 2007 revenues of $13B and net income of $1.5B… suffice to say Google’s YouTube bears little commercial value.

Now all of this explains Viacom’s disdain for YouTube. Why am I so sure that Google won’t sign a check?

Call us dreamers, but we still think both sides could kiss and make up before this gets to the Supremes. After all, the two sides were negotiating for months before going hostile. And Sumner Redstone’s other media company — CBS — seems quite happy with YouTube. So while both sides can argue that there are important principles at play here, we’re pretty sure they can get resolved with an appropriately sized check.

Google has already written one insanely large check to MySpace for the right to monetize the social networking site’s pages. Until Google can better monetize YouTube - something which apparently CEO Eric Schmidt says he cannot yet do - Google has no economic incentive to sign such a check, even though advertisers certainly prefer professional content over user generated crap content. The reason for that is simple: what Google considers to be “an appropriately sized check” is universes smaller than what Viacom considers to be “an appropriately sized check”.

If you want more proof or support of this, consider a recent post by Mark Cuban who wisely sold Broadcast.com and is pretty much short the Internet. In short: the economics of online video content don’t add up to traditional media and the vast majority of new media aspirants are coming at it with the blueprint of yesteryear meaning that most are DOA.