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Extra3/13/2007 7:00 PM ET

Viacom sues YouTube for $1 billion

The lawsuit, the first big attack on the Google-owned video-sharing site, may just be a negotiating ploy. But it could be the first volley in a war between Google and its old-media rivals.

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By Elizabeth Strott

Just days after Google (GOOG, news, msgs) CEO Eric Schmidt said that media companies will have no choice but to work with online sites such as YouTube, the first of the big media companies has responded -- with a $1 billion lawsuit.

Media giant Viacom (VIA, news, msgs) is charging that the video-sharing site, now owned by Google, has shown 160,000 of its videos without permission.

"Their business model, which is based on building traffic and selling advertising off of unlicensed content, is clearly illegal and is in obvious conflict with copyright laws," Viacom said.

Google spokesman Ricardo Reyes said in a statement that the company has "not received the lawsuit but (is) confident that YouTube has respected the legal rights of copyright holders and believe the courts will agree." Reyes said the suit would not "become a distraction to the continuing growth and strong performance of YouTube."

Corporate arrogance?

One intellectual-property expert said he was "not surprised" by the suit.

"I think this is a problem for Google," said Justin Hughes, director of Benjamin N. Cardozo School of Law's Intellectual Property Law Program. "Google has had a series of situations where it looks like corporate arrogance regarding intellectual property."

In buying YouTube, Google bought a business model largely based on infringement, Hughes said. Google's Book Search Library Project also suggests a corporate disregard for intellectual property, he added.

Wall Street gave the distraction idea some credence today; Google shares fell $11.72 or 2.6% to $443.03. Viacom was down slightly at $39.50.

Stock Charts (Year)

Graphical chart for GOOG
While some of the decline was due to today's big stock sell-off, Google has lost a little of its golden image on Wall Street in the two-and-a-half years since the company went public.

Growth has been slowing, and the stock is down 13% since peaking at $509.65 on Nov. 21. That decline has wiped out $20.7 billion in market capitalization -- more than the total market cap for .

In fairness, Google shares have dropped 13% or more on three other occasions.

Partners or rivals?

Schmidt's earlier comments may have been a way to put pressure on Viacom and other media conglomerates as the one-time video upstart tries to negotiate terms for licensing deals.

Last month, after talks about a licensing deal failed, YouTube said it would remove 100,000 Viacom clips, including a number from Comedy Central shows.

"The growth of YouTube, the growth of online, is so fundamental that these companies are going to be forced to work with and in the Internet," Schmidt said last week in an interview on Bloomberg Television's "Conversations with Judy Woodruff."

The lawsuit "is an initial attempt to move negotiations along," Bear Stearns analyst Robert Peck wrote in a note to clients today. "Both sides would be better served with an agreement."

But not everyone agrees. "Viacom's Web traffic is increasing nicely since it pulled content from 'GooTube,' " Richard Greenfield, an analyst at Pali Capital, told Reuters. "There is certainly an opportunity for YouTube to do a deal with Viacom, but Viacom does not have to have a YouTube deal."

Policing the site

The problem with YouTube, Viacom and the other big media players say, is that it will pull copyright clips only after its been asked to do so, putting the burden of policing content on the copyright holders and allowing users to re-post illegal copies as soon as they are removed.

Google and YouTube are relying on the Digital Millennium Copyright Act, passed in 1998, which criminalizes technology whose primary purpose is to circumvent measures that control access to copyright works -- even when there is no actual infringement.

If a site removes content "expeditiously" when it receives notice from the copyright holder, then the site has a so-called safe harbor from lawsuits.

The problem, Hughes said, was that the act, written during an earlier, pre-Napster Internet era, was not designed for infringement-based business models. While the act is unlikely to be rewritten, Hughes said it is open to judicial interpretation -- and added that a judge could come down hard on Google.

More lawsuits to come?

Meanwhile, media companies have been investing in their own Web video capabilities in an attempt to drive video traffic to their own sites.

Although Viacom, the owner of MTV Networks, Comedy Central and several other cable channels, as well as Paramount Pictures, is the first of the big media conglomerates to sue YouTube, it may not be the last.

News Corp. (NWS, news, msgs), General Electric's (GE, news, msgs) NBC Universal and Dallas Mavericks owner Mark Cuban have also criticized YouTube. News Corp. and Cuban have both gone to court to force the company to identify people who illegally uploaded copyright material.

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Bob Tur, a freelance helicopter reporter who shot video during the Los Angeles riots in 1991 and who has sued YouTube over the publication of his videos, told CNBC that YouTube's business model is like that of TV's Sopranos: They "don't pay for anything, get your content for nothing and sell it to the highest advertiser. It's a wonderful business model, except it's illegal."

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