Web seen as both a threat and a gold mine

Hollywood veterans are used to the ground shifting quickly, but the case of YouTube is rather extreme.

Just one year ago, studios and networks were bragging that the once-scrappy video Web site was handy for branding, by helping mint hit shows or injecting movies into the youth consciousness.

“To make this kind of promotion work, you have to be able to lose control of the media,” VH1 programming chief Michael Hirschorn told Variety then. “We got millions of impressions with those clips” of the network’s “Flavor of Love.”

The love affair abruptly ended last month, when Hirschorn’s bosses at Viacom demanded that YouTube take down every one of its roughly 100,000 clips.

“We cannot continue to let them profit from our programming,” CEO Philippe Dauman said, after the two companies failed to seal a content distribution and revenue sharing deal.

Every conglom has been affected in one way or another. Soon after “Ghost Rider” bowed, Sony found virtually the entire film on YouTube, chopped into segments of various lengths. The studio demanded their removal, but was unsure if another webbie would simply post them later. It’s a scenario that every other studio has experienced.

The battles over the future of content online now represents arguably the most rancorous and disruptive issue to confront Hollywood in decades. Merely mention the words “viral video” to any player in Hollywood and you will get an earful. At stake, they say, are hundreds of millions, if not billions of dollars being digitally picked from their pockets.

But while Hollywood’s public virulence toward YouTube continues to grow, it’s a more complicated story. Many studios, labels and diskeries are busy taking full advantage of the ever growing promotional power of YouTube, particularly among the younger 18-24 demo, and are actually pushing the Netco to offer them more advertising options.

That has opened up internal schisms. On one side are marketing teams aggressively exploiting Web sites like YouTube, while the other features teams of lawyers fighting to protect their companies’ intellectual property.

“The marketing guys love YouTube and the legal guys hate it,” says Ian Schafer, CEO of online advertising company Deep Focus, which has worked for many studios, nets and labels. “Every media company has a party line, but internally it gets crossed more often than not.”

Hollywood’s internal conflict is particularly pronounced at NBC U, where the marketing arm operates a channel on the site YouTube with 200 authorized videos at the same time the legal arm is sending more than 1,000 letters a month threatening legal action over unauthorized posts.

“It’s fair to characterize it as schizophrenic, and I think that’s OK,” says NBC U digital prexy George Kliavkoff. “We need a compelling business model that recognizes the value of the content and partners that respect intellectual property.”

When Hirschorn was using YouTube to pump VH1 viewership a year ago, few in Hollywood saw YouTube as a threat or a major player, even though pirated clips were rampant.

But two things have changed that. One is the site’s ever growing traffic, which dwarfs anything big media has on the Web, save for News Corp.-owned MySpace.

The other is money. When Google paid an astonishing $1.7 billion to buy YouTube last fall, nobody in the traditional media business could afford to ignore the implications.

“One day we woke up and found out this little Web site was sold to Google for over $1 billion and we realized they just built a business off of our content,” says one senior TV exec.

The dialogue has grown more tense as news of deals or illegal clips or detentes hits almost hourly, causing constant shifts in strategy. NBC U has gone from ordering YouTube to take down popular “Saturday Night Live” clip “Lazy Sunday” to seeding the network with dozens of shorts, all while its legal department routinely sends threatening missives to have other content taken down.

CBS, the first network to share content and revenue with YouTube, has also pulled back from talks that could lead to a long-term deal.

The head of one major studio says, “YouTube is going to have to rise to the next level to prove it has a business model. User-generated content will not be enough to get them there. But the only way they’re going to get rich content is to pay us. So that’s where we’re stuck.”

The power brokers at all the media congloms are discussing — and, inevitably, squabbling over — ways to circumvent YouTube. Some have proposed an alternative to YouTube that one hopes would be more effective than the studio-backed anti-piracy downloading venture, MovieLink.

Fox Interactive Media topper Peter Levinsohn characterized the talks as “very active” in remarks to investors last week at the Bear Stearns confab in Palm Beach, Fla. “Those conversations are ongoing but they’re going very well.”

While stopping short of calling such a venture a YouTube killer, he said the site would allow “a number of the media companies to get together. And if they do, no doubt MySpace will be a huge beneficiary of that.”

Therein lies a problem within the bigger problem. Fox owns MySpace, where it wants to host a broad array of big media content and where it already streams several Fox TV shows. But Fox marketing execs know they can’t limit their efforts to inhouse Web sites to reach the necessary audience online.

Some studios and nets looking for YouTube alternatives are wary about MySpace, since they don’t want to give News Corp. a leg up, even at the expense of YouTube. Insiders say News Corp.’s desire to boost MySpace drove away some potential partners in discussions for a big media online video joint venture. Disney, for example, has emphasized its redesign for Disney.com and its preference to fly solo on the Net.

That latter point is especially contentious, as Google has a history of launching businesses first and asking questions about copyrights later. Media companies that see millions of their clips being pirated on YouTube and other viral video sites expect their concerns to be front and center.

In particular, they have been counting on YouTube to implement filtering software that would screen out unauthorized content from the site, rather than relying on media companies to issue takedown requests after a video is posted, in an endless game of cat and mouse.

“YouTube was supposed to fork over the new software to protect content; they hadn’t shown us that,” says former CBS digital chief Larry Kramer.

YouTube, in other words, is caught at the center of two conflicting imperatives for big media: the need to monetize digital content and the need to promote traditional platforms on the Net.

So big media companies are proceeding with caution, using YouTube where possible while stopping short of turning over high-value films and network shows.

“Our worst nightmare in the world is that we put our content out to our partners online and they build communities around it and we don’t get anything from it,” says CBS Digital chief Quincy Smith.

While lawyers are demanding filtering technology, many Hollywood execs actually enjoy the fact that YouTube only takes down clips when they request it.

“If I found part of a successful show up on YouTube today, I’d probably pull it down immediately,” the TV exec admits. “If I had a show that wasn’t doing so well in the ratings and could use the promotion, I wouldn’t be in a rush to do that.”

Big media’s relationship with Hollywood only gets more complicated as congloms increasingly invest in their own Web ventures. Viacom, for instance, has been upping the amount of content it puts on sites like IFilm and MTV.com as it takes down clips from YouTube. It’s also making deals with such start-ups as Joost and GoFish.com that are more eager to come to terms.

The simple fact is that with more than 40 million visitors per month, YouTube is a behemoth, way bigger than any other player in the space, whether independent or owned by a conglom. Ignoring its ever-growing user base, and the huge amounts of advertising revenue they’re starting to generate, is an impossibility.

When Google closed its deal to acquire YouTube, it set aside more than $200 million worth of stock to “secure indemnification claims,” i.e. handle potential copyright lawsuits. Media execs scoff that the figure is laughably small compared to the value of their stolen content. They want a cut of Google’s $11 billion cash horde.

“It would be in the trillions to cover damages from one show,” says one exec.

But valuing content on digital platforms is impossible at this early stage and Google and big media have very different ideas of how to reach a figure.

“You have people saying, ‘Our content is worth X’ and you have Google saying, ‘prove it,’ ” Google topper Eric Schmidt said at a recent conference. “It’s in that context that there is both genuine disagreement and the opportunity for a new experiment. We can go back to our partners and say remember that hit that you thought was so wonderful? On the Internet, no one watches it. And we can prove it.”

Nets are also miffed that Google, which spends $2 billion to $3 billion on research and development each year, hasn’t been more aggressive in solving the filtering problem.

“A viable solution is what MySpace will be doing very shortly — employing technology on a proactive basis that identifies copyrighted material and blocks its display on the site, period. It’s straightforward, it’s simple and the technology is available,” says NBC U general counsel Rick Cotton.

Media execs always point to Audible Magic, a start-up whose filtering software is being used by MySpace and other sites.

But many critics say Audible Magic and other filtering technologies may work well for content owners, but aren’t yet good enough for users.

Microsoft, for instance, recently informed congloms that it’s developing advanced takedown tools but won’t implement filtering because, sources tell Variety, execs don’t feel it’s effective enough yet. If too many amateur videos that parody “300” get taken down, for instance, users may decamp to other sites.

That’s a particular concern for Google, which has built its dominant position by focusing obsessively on user experience.

“I wish there was a silver bullet (for content protection) but there isn’t,” says Chris Maxcy, partnership development director at YouTube. “We are dedicating tons of resources, but it’s an evolutionary process that takes technology and collaboration.”

In just a few years, YouTube and its corporate parent Google have gone from being the simple creations of Silicon Valley engineers to sitting at the vortex of the digital media revolution that’s transforming Hollywood.

It was only last year that Google appointed former Time Warner and NBC exec David Eun to the new post of VP of content partnerships, signaling a seriousness about getting deals in place.

Google has its own urgency to get a deal done. The net’s paid-search and direct-response ad business generates low margins and it has cast a jealous eye at the big Madison Avenue advertisers that spend billions on network TV. Last week Schmidt said the Netco intended to build an ad business that matches the conglom’s “old media” ad revenue.

But those advertisers don’t want to sponsor lonelygirl15 or the two guys kicking each other in the groin.

“How can I be assured if I’m Sony or Starbucks I’m not running against illegal content that could have been directly stolen or repurposed?” asks Chas Edwards, publisher of blog network Federated Media.

Google has tried to provide safe havens for advertisers by launching controlled channels, such as with Adult Swim, Playboy, the BBC, and even one for White House hopefuls, “You Choose ’08.”

Currently, the site lives primarily on banner ads. The only way to use YouTube’s main capability, video, for advertising is to buy placement for a promotional video on the front page of the site, which costs about $80,000 per day. That spot is often taken by trailers for movies about to come out.

But the holy grail is targeted video advertising on approved content, and Google has so far failed to cut deals with the majors to make that happen. One of the reasons it is proceeding cautiously is that it’s wary of denting YouTube’s explosive popularity by adding pre-roll advertisements to videos.

Google is concerned users will be turned off if they have to watch an ad first. Advertisers are generally unwilling to pay for interstitial ads in Internet video.

But Viacom’s Dauman, along with News Corp.’s Peter Chernin and other top execs, have expressed doubts about the YouTube ad model.

“Our advertisers know what they’re getting,” Dauman says. “They don’t want to be anywhere online where they don’t know where their ad is going to appear.”

Marketing execs say Google, which focuses obsessively on the user experience, is approaching video ads very cautiously in hopes of making them as relevant and unobtrusive as the successful text ads on its search engine.

Sources say Google execs want to see YouTube develop beyond a site for killing a few minutes surfing videos into one that builds community around entertainment.

In the meantime, most marketing execs are taking advantage of YouTube without paying a penny. They create accounts, in some cases under the corporate name and in some cases posing as a regular user, and upload trailers and behind-the-scenes clips.

But just because they’re not paying YouTube for the privilege, doesn’t mean it’s free.

“The problem is that anybody can post responses and you get tons of spam that distracts from your clip,” says one studio marketing exec. “I had to have a team vetting (all the responses to a trailer for a recent release). If they figured out a method for cleaning out the crap, I’d gladly pay for that.”

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