Rips, ripoffs, and rip tides

… for Rip van Winkle

You gotta wonder. YouTube was the startup that entrepreneurs dream of, or maybe don’t dare dream of because it seems just too good to be true. Seems? Well, most things that seem that way… often are… too good to be true. I don’t know if it’s true, but this is what I heard on the grapevine…

Three adorable, young, brilliant entrepreneurs, all ex-PayPal employees, founded YouTube 2005, and then sold it for $1.65 billion in Google stock in 2006. At best they can be accused of having accidentally created an adolescent shell game; they were brilliant and naïve. But at the scary worst, they can be seen as playing the greatest confidence game ever played on Silicon Valley Venture Capitalists. In addition to the fact that one those adorable founders has a dad-in-law who is a Silicon Valley legend, I heard from a fly on the wall that the eventual purchase of YouTube was planned in advance and orchestrated by some very sophisticated investment mavens.

YouTube was groomed for the perfect marriage like a first daughter. Google was the ideal candidate; deep pockets and blinded by love. Just in time. Just when hosting costs ($1 million a month) had eaten up the latest round of funding and just before lawsuits for copyright infringement began, and certainly way before there were any signs of serious revenue. If the good news bears ever do materialize, if advertisers ever do decide that it is good business to put ads on the back of the truck being used to sell stolen goods, and if someone convinces content creators that there is no value in copyrights and that they should just produce their music and film for free, then maybe Google got a good deal.

Isn’t this beginning to sound like the scam of all scams? A great user proposition (free content), a site built on copyright infringement (read: stealing), and an investment community ready and willing to endorse the “steal what you can get away with” business model to potential purchasers--who, I might add, are public companies. They are the ones who should know better. Take a bunch of people willing to follow the pied piper anywhere, to purchase the snow making facility in the north pole, and add a little hysteria in the gazillion dollar acquisitions for mere eyeballs, and there is a very good chance that we have seen what we should, by now, recognize as a great big bubble in the making.

It gets worse. It should have been enough that Viacom is suing this very darling of web 2.0 dot.coms. But it isn’t. One Billion dollars. This is a lot of money to be sued for. And that is only the beginning. Have we forgotten all about Enron and Tyco and even Martha Stewart and all of those companies who (you can’t possibly forget unless you are only 10 years old) who have either disappeared due to lesser, and perhaps less complicated evils, or been sued into subservience? Corporate governance and transparence are probably too sophisticated for most of us to understand. But outright theft? That is something we learned about in kindergarten.

Rupert (current MySpace owner) and his cronies have also so far gotten off relatively unscathed by their blatant theft of creative content, their disregard for copyright. But that is because his family owns much of this public company and the other investors have chosen to remain in some drugged-out state of bliss or ignorance. But YouTube was founded by people whose parents and parents-in-laws should have at least known better. Niklas Zennstrom and Janus Friis (currently of Skype fame) were all but sued out of existence for the creation of Kazaa, a technology that aided and abetted the theft of creative content. I guess it is easy to forget this recent history, because, yet again, these thieves were rewarded by the purchase of their most recent dream child, Skype, for $2.6 billion! If there were ever a time to found a company with no revenues, no near term hope of revenue, or like YouTube or MySpace, a business that is based on theft or copyright infringement, the lesson is clear. Now is the time.

So who is the ripper and who is the ripped off? Haven't founders of Kazaa, MySpace and YouTube done great things for the internet? Inarguably. The technology and creativity have inspired all kinds of great user experiences. But the victims of this confidence game are many and will become clearer in the not too distant future when we have to bury the dead (the newly emerging 2.0 dot.coms). But lets focus on the music business here. Artists can’t continue to create if they can’t make money on their content.  However, the labels that represent them, in an attempt to recoup losses from theft legitimized by investors, simply raise prices rather reduce them to better compete with free. So sadly, the biggest loser may well be the consumer. Convincing users to pay for something that is otherwise free, albeit illegal, especially when this free content is so lauded by the media and investment community, is an uphill battle. What is needed here are new business models, ones that reflect the needs of artist, label, consumer and investors who provide fuel for creativity.

This all reminds me of the sad story of Rip van Winkle, the amiable man whose home and farm suffered from his lazy neglect, who fell asleep after an adventure playing games. Twenty years later he wakes up to find all his friends are dead. This is a cautionary tale of the price of blissful ignorance. What will it take to wake up these investors to the fact that they are pawns in a few well designed shell games? A few more lawsuits like that of Warner against Imeem, the latest social network and VC darling (bravo Warner!), whose investors have endorsed yet another case of theft for the greater good by allowing users to upload other people’s copyrighted content? What will it take to wake up the labels and publishers who insist on using old world models for pricing in a new world?  I know I pose more questions than answers, but let us hope that we do not all get carried away by the rip tides.

Posted at 05:56AM May 30, 2007 by Shelley Taylor in Music  |