Mark Cuban’s Stunning Scoop on the GooTube Deal

the gootube
It seems that the “real money” that Google paid to YouTube for its instrinsic worth was $ 500 million less than the $ 1.65 billion tag. The shareholders are thus *not* getting $ 1.65 billion but a smaller amount. The YouTube price tag had also spurred wild rumours on the net for the valuation of Facebook by Yahoo!.

In the $ 1.65 billion valuation that everyone thought YouTube got; Google actually paid $ 500 million for dealing with lawsuits from Media companies. After stating that the buyer of YouTube would be a moron — before Google paid $ 1.65 for YouTube; Mark Cuban has come up with these surprising details of the deal on his blog post “Some Intimate Details on the Google YouTube deal“. Mark is quoting a dependable source after he got a lead from a media centered Pho List:

It didn’t take a team of Harvard trained investment bankers to come up with the obvious solution and that is to set aside a portion of the buyout offer to deal with copyright issues. It’s not uncommon in transactions to have holdbacks to deal with liabilities and Youtube knew they had a big one.

So the parties (including venture capital firm Sequoia Capital) agreed to earmark a portion of the purchase price to pay for settlements and/or hire attorneys to fight claims. Nearly 500 million of the 1.65 billion purchase price is not being disbursed to shareholders but instead held in escrow.

While this seemed good on paper Google attorneys were still uncomfortable with the enormous possible legal claims and speculated that maybe even 500 million may not be enough – remember were talking about hundreds of thousands of possible copyright infringements. Youtube attorneys emphasized the DMCA safe harbor provisions and pointed to the 3 full timers dedicated to dealing with takedown notices, but couldn’t get G comfortable.

Google wasn’t worried about the small guys, but the big guys were a significant impediment to a sale. They could swing settlement numbers widely in one direction or another. So the decision was made to negotiate settlements with some of the largest music and film companies.

If they could get to a good place with these companies they could get confidence from attorneys and the ever important “fairness opinion” from the bankers involved that this was a sane purchase.

Armed with this kitty of money Youtube approached the media companies with an open checkbook to buy peace. The media companies smelled a transaction when Youtube radically changed their initial ‘revenue sharing’ offer to one laden with cash.

But even they didn’t predict Google would pay such an exorbitant amount for Youtube so when Youtube started talking in multiples of tens of millions of dollars the media companies believed this to be fair and would lock in a nice Q3/Q4. [Note to self: Buy calls on media companies just prior to Q3/Q4 earnings calls.]

The major labels got wind that their counterparts were in heated discussions so they used a now common trick a “most favored nation” clause to assure that if if a comparable company negotiated a better deal that they would also receive that benefit.

It’s a clever ploy to avoid anti-trust issues and gives them the benefit of securing the best negotiating company. They negotiated about 50 million for each major media company to be paid from the Google buyout monies.

What is interesting is that if the potential for lawsuits converts into a reality then soon Google’s management will find itself worrying about legal issues rather than Search and growth. Will this hurt the company’s financial performance — perhaps not in the short run — but it could really hurt its focus.

The second issue is that several industry folks had started worrying that we were again witnessing a bubble that would soon burst. There were speculations on how much Facebook would be worth given that YouTube got $ 1.65 billion. Some wondered whether Google would again overpay and buy-off Facebook, beating a “slow” and overcautious Yahoo!.

Days after Google Inc. announced a $1.65 billion purchase of YouTube Inc., rival Yahoo Inc.’s efforts to extend its Web reach through an acquisition of Facebook Inc. aren’t making much progress, say people familiar with the matter.

While discussions are continuing, no purchase of the closely held Facebook social-networking site is imminent, these people say. They say a deal is unlikely unless Yahoo increases its roughly $1 billion offer or changing business conditions made Facebook’s management more inclined to sell.

Yahoo’s failure to date to secure a deal for Facebook highlights the slower pace of its efforts to expand, following Mountain View, Calif.-based Google’s swift agreement to purchase online video site YouTube, of San Bruno, Calif. Yahoo had recently held discussions with YouTube concerning an acquisition, according to people familiar with the matter.

There was one Yahoo write-off pundit who laughably advised Yahoo to concede Search Business to Google and focus on the future with Video Advertising — before Google gains there too. How scared could Yahoo! be after being in business for over 12 years and having its stock price at $ 500 in early 2000 — a level that Google is yet to touch.

It may sound heretical for Yahoo! back off on search, but the fact is that Google has won the search battle and the sooner Yahoo! realizes this the better off they will be.

Yahoo! is plowing untold resources into its long-delayed Panama project in an effort to catch up with Google’s extraordinary search and advertising platform. But it seems unlikely that Yahoo! will ever reach parity in this area and the company could redirect those resources into areas where it can win….

With Google’s acquisition of YouTube, it’s a foregone conclusion that video will be the next – and possibly most lucrative – form of Internet advertising. Yahoo! needs to recognize this trend and get in front of it. Yahoo! should actively work with its advertisers to start deploying video ads throughout its sites.

This is an area that Yahoo! must choose to expend resources in a very visible way. Even with the YouTube acquisition, there won’t be a clear winner in video ads for some time. Yahoo has lost the battle of text ads – it can’t lose the battle of video ads.

If Mark’s blog post indeed is true, I think there will be a lot of interesting things happening in the coming weeks.

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