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YouTube Raises $8 Million from Sequoia Capital


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April 05, 2006

YouTube Raises $8 Million from Sequoia Capital

Heather Green

YouTube, the video sharing service, raised $8 million, bringing the total amount it has raised so far to $11.5 million. The backer is Sequoia Capital, the VC that originally financed the startup in November.

So, even as the company is just beginning to try to shed its copyright problems and transition to becoming an entertainment partner for big media companies, it's bringing in dough. It's had some recent luck signing up established folks, including E! and Comcast's G4 cable network.

The next step is actually trying to make money, and it plans to start doing contextual advertising by the middle of the year. But then, how YouTube resolves copyright issues becomes even more important. Though it and other video publishers are protected from copyright liability by a 1998 law as long as they comply with requests to remove illegally posted videos, the story could change once YouTube starts making money.

12:00 PM

digital media

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? The legal issues around YouTube from Don Dodge on The Next Big Thing

YouTube has raised another $8M from Sequoia bringing the total to $11.5M. Om Malik suggests that YouTube clean up its act to avoid the legal fate of Napster. As many of you know I was a VP at the original Napster and intimately aware of the legal issue... [Read More]

Tracked on April 5, 2006 05:33 PM

? The legal issues around YouTube from Don Dodge on The Next Big Thing

YouTube has raised another $8M from Sequoia bringing the total to $11.5M. Om Malik suggests that YouTube clean up its act to avoid the legal fate of Napster. As many of you know I was a VP at the original Napster and intimately aware of the legal issue... [Read More]

Tracked on April 5, 2006 05:43 PM

? YouTube or YouBoob? from The Adam Dudley Blogletter

I was reading the most recent issue of Forbes last night when I came upon an article that simply blew me away. What blew me away was one significant part of the story that was about a phenomenal little [Read More]

Tracked on April 6, 2006 10:01 AM

? Bazaar Content from theQview

Om Malik describes the online video business as a market that is looking more crowded than an Old Delhi bazaar. A walk through Testing Ground provides an overview of the bazaar including comparison and comments . What I find particularly [Read More]

Tracked on April 11, 2006 07:39 AM

You could buy a farm in upstate NY and do Heather Green Acres on YouTube. Maybe you can get a micro loan or some VC money and open a new general store and hire Steve to run it for stock options. I'd dump the Business Week jobs ASAP. Farm living is the life for me. I can't run the toaster when the coffee pot is on.

Posted by: Jim Dermitt at April 5, 2006 12:08 PM

"The next step is actually trying to make money"

Investing $11.5 million and then trying to make money sounds real risky.

I looked to see what they are doing.

The site said, "You have reached YouTube, the premier digital video repository on the Internet. We are currently rolling out new changes to the site. We'll be back as soon as we figure this out...

YouTube"

I sort of thought that was strange. I think I'd figure it out before I made the changes and then start rolling.

Posted by: Jim Dermitt at April 5, 2006 02:00 PM

Man, that is an very odd/risky business strategy. Grow big by being a bit illegal, clean it up once big enough from showing copyrighted content, then make money. Do they realize how much money can be made from contextual ads? It isn't that much when the people are using the service to view videos, not to search for a webpage. I don't see how they are really going to make a good amount of money. They probably would struggle to just break even with just ads. They would also need to blast a ton of annoying ads to make even more money. Look at iFilm, Launch, MTV overdrive and other more older video places. They need to put ads before videos play, after the video plays, and all over the page to make a buck. They should start experimenting with making money ASAP. It takes some time to develop, much more that that 3 mil would last, that is probably why they got more money now. I wonder how people would like the service once there are ads everywhere, but I guess that is part of their strategy too, get them hooked, then ramp up the ads.

Posted by: John P at April 5, 2006 02:58 PM

Heather, you're last paragraph is spot on... and you should write an indepth piece about it. They'll be subject to the MGM v. Grokster ruling at that juncture.

Posted by: Robert Young at April 5, 2006 04:00 PM

The big difference between Napster and YouTube is that YouTube has “substantial non-infringing use”, which was the critical legal issue in the Sony Beta-max case. If a product or service has “substantial non-infringing use” than it can not be held liable for contributory copyright infringement. However, individual users could be sued for copyright infringement.

From a legal perspective it makes NO difference if YouTube tries to make money off the content or not. Napster never sold ads or charged fees.

I was a VP at the original Napster so I am fairly familiar with the legal issues. I wrote a blog about this today at

http://dondodge.typepad.com/the_next_big_thing/2006/04/the_legal_issue.html

Posted by: Don Dodge at April 5, 2006 05:37 PM

Hey Don,

Thanks for the comment. Actually, I spoke with a couple of lawyers when I was doing the reporting on YouTube, and they don't feel the same way. However, it's law, right, so there has to be a difference of opinion.

Fred von Lohmann from EFF, for instance said the YouTube (or any company claiming safe harbor under the 1998 law, the DMCA) could lost protection if the court decides they're getting a direct financial benefit. No court has weighed on advertising and no court has said so far that advertising is enough to break the tripwire, but Fred thought it was shaky ground and that the ads might interact with the safeharbor.

Posted by: Heather Green at April 5, 2006 06:21 PM

Heather, your response to Don was pretty much what I was going to say as well. However, I would encourage you to speak with FvL again... the MGM v. Grokster ruling did indeed speak of financial benefit (via ads or whatever) as a determining factor for copyright infringement.

Posted by: Robert Young at April 5, 2006 06:41 PM

You missed some stuff Heather.

They have a blog http://www.youtube.com/blog

There's also The Smiley Face Factory™!

http://www.youtube.com/blog?entry=nISYu77cYpo

There's also the cybersmack contest

"You Ready to Bring the Cybersmack? $25,000 Says You Are! At E!, we call those Internet clips flooding your inbox Cybersmack, and we've decided that the world needs more of 'em. So we ask you: Can you create the Cybersmack of the future? Well, can you?

The Soup proudly announces the $25,000 Cybersmack contest and has opened the floodgates to your original--and surely brilliant--short films and viral videos. Between March 31 and May 1, send us your mini masterpiece, so that you can enter for your chance at a huge cash prize."

http://www.youtube.com/group/cybersmack

A friend called it spamalot. Now it's cybersmack and they decided there needs to be more of it flooding your inbox. There's nothing like $25,000 as an incentive to get people flooding inboxes worldwide with viral videos. I hope there is a filter to stop it. :-(

To complain call them.

E! Contacts:

Sarah Goldstein

(323) 692-4552

YouTube Contact:

Julie Supan

(650) 685-6401

Posted by: Jim Dermitt at April 5, 2006 11:28 PM

Heather, as you say, the law always has at least two sides. There are thousands of lawsuits in courts across the country every single day. The law is never clear cut, and the truth is always elusive.

"Substantial non-infringing use" is a major defense for contributory copyright infringement. Another defense is complying with "take down" notices from copyright holders. YouTube just needs to remove the copyrighted content from the site if the copyright holder asks them to do so.

My informal use of YouTube didn't reveal a single copyrighted video from a major company. I am sure there are some but they didn't come up in my searches.

All videos, even those by independents and amateurs have an implied copyright, but unless they request YouTube to "take down" the clip...there is no problem. If YouTube complies with such requests they should not have a legal problem.

Napster and Grokster had several problems. There was no substantial non-infringing use...it was nearly 100% copyrighted material. Secondly, they basically refused to take down infringing content when asked to do so. That is a pretty clear violation, but even that took lots of lawyers and court time to resolve.

The porn issue could also bite YouTube, but again, if they take reasonable precautions they should be able to stay within the law.

Posted by: Don Dodge at April 6, 2006 01:00 PM

Don, while I agree with you on the defense provided by the theory of "contributory" liability, you're failing to recognize the other two forms of secondary liability... inducement and vicarious. The MGM v. Grokster ruling went beyond the Sony Betamax doctrine by applying tests for control over filtering as well as financial benefit. No doubt that it's still very unclear what the law is, but if the entertainment cos have a problem with YouTube, they do have an open path to file suit beyond contributory liability.

Posted by: Robert Young at April 6, 2006 01:58 PM

Let me try to clear up a few copyright law issues as they might apply to YouTube.

First, MGM v. Grokster, A&M Records v. Napster, and the "substantial noninfringing use" question (from Sony v. Universal City Studios), are not the main issue in the YouTube equation. You see, all of those cases dealt with "secondary liability" situations, where the defendant was not directly making/hosting the copies. YouTube, in contrast, has these copies on their own servers, so direct infringement liability is likely to be the chief question.

This is not to say the YouTube is doing anything unlawful here. They have at least two defenses to any copyright infringement claims. First is the "volitional copying" doctrine created in the RTC v. Netcom case in 1995, recently reaffirmed in the CoStar v. Loopnet decision from the Fourth Circuit (both opinions easy to find online using your favorite search engine). In essence, this doctrine says that so long as copies are made automatically, without any "volitional act" by the defendant, there can be no direct infringement liability.

Second, YouTube certainly will point to the DMCA "safe harbor" (17 U.S.C. 512(c)) for storing content on behalf of users. For those who qualify, this provision eliminates any monetary liability for copyright infringement. A "notice-and-takedown" regime is one important requirement, and one that YouTube obviously has put in place.

But there are other requirements, including that YouTube "does not receive a financial benefit directly attributable to the infringing activity, in a case in which [YouTube] has the right and ability to control such activity." (17 U.S.C. 512(c)(1)(B)). Copyright owners may argue that advertising takes YouTube over this line, and that it thereby forfeits the DMCA safe harbor. It's hard to say whether this argument would prevail, as this part of the 512(c) safe harbor has never been measured against "contextual advertising," AFAIK.

So the copyright issues are complex and unresolved, and there is plenty of room for experts to disagree. I don't think anyone can know how a case against YouTube would come out, if it were brought. But YouTube has some very good defenses. And now they have the money to hire lawyers to raise them.

Posted by: Fred von Lohmann at April 6, 2006 02:02 PM


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