shouting loudly

Mark Cuban on YouTube: Why the latest Grokster ruling will ruin technology

In a Rueters story this Thursday, Mark Cuban said that “anyone who [invests in YouTube] is a moron.” I LOVE YouTube, but I fear that he’s basically right.

Cuban has two main points. His first claim, that YouTube is on the verge of being “sued into oblivion,” is hardly a done deal but generally right on. Cuban’s second argument, that YouTube does not have a good revenue model, is a belief I’ve held for awhile.

The site is fortunate to have eluded the copyright liability bug to this point. It isn’t just luck. Much of the content is posted by copyright holders (e.g., the people who brought you AskANinja), and another fraction is pretty clearly fair use. YouTube also takes down copyrighted stuff whenever they’re asked. (For instance, they quickly pulled the now famous FoxNews interview of Bill Clinton; Fox quickly changed course and let it go back up.) In other words, YouTube is no Napster.

From an investor’s point of view, though, putting money down on YouTube despite last year’s Supreme Court ruling in the Grokster case (pdf) would sure make me nervous. On Wednesday, a federal judge in California handed down an interpretation of Grokster (pdf) that implements a substantially lowered threshold for liability. Now, internal memos suggesting that copyright infringement might help the bottom line could subject a company to incomprehensible legal liablity.

Commentators such as William Patry find this to be more than a minor danger to the very important 1984 Supreme Court ruling in Sony v. Universal Studios. That decision permitted Sony to sell you a VCR even though you might use it to commit infringement, because the technology has “substantial noninfringing uses.” Patry argues that the Grokster decision “create[s] a new third theory of liability … deliberately to kill off Sony.”

Patry is right to worry: Sony far exceeded this threshold in the 1970’s, even advertising the VCR as a way to “build a library” of programs. The Sony decision was a watershed decision that empowered decades of technological innovation (pdf; exc. art. by Pamela Samuelson), and that decision provides much less protection for innovators today than it did in 2004.

In short, if a copyright holder pushes the issue, YouTube might get hung out to dry because two junior executives sent each other links to infringing content and cheered that it was helping drive traffic. They might not, too; Title II of the DMCA gives them a certain degree of immunity, as long as they keep taking down infringing content (scroll down to the Title II section of this DMCA explanation by Jonathan Band). All the same, I certainly wouldn’t bet (much) on them making big money without somebody forcing them to spend it on attorneys.

Cuban’s second argument is that YouTube has no good revenue model. Even if I was an optimist about the copyright problems, I’d hold back from investing in YouTube for this reason alone. Find somebody who uses YouTube. Ask them how many ads they’ve clicked on. If you can find anybody who claims to follow ad links once in ten visits (excluding any who do so as a form of click charity for the site), I’d be surprised.

Video eats bandwidth like nothing else, so even keeping the lights on must cost jillions. (YouTube is the goose that lays golden eggs, but only if you feed it the gold.)

The company could increase the ad clicks per MB downloaded by a) making their ads more inescapable (e.g., popovers), or b) giving preference for content holders who pay for preferential treatment. But either will kill their best-in-class netroots loyalty, which is the reason YouTube is in the news to start with.

So yes, Cuban is right: YouTube, while one of the best sites ever devised, may actually be a bad investment. Oh, the irony.

(Thanks to WebProNews for the link.)