• The New York Times, Thursday, October 19, 2006 12:15 PM

There's a deeper reason why the major record companies signed deals rather than litigation letters to YouTube prior to its acquisition by Google: They all made a cut of the $1.65 billion Google paid for the viral video site. Three of the four recording industry majors--Vivendi's Universal Music Group, Sony and Bertelsmann's jointly owned Sony BMG and the Warner Music Group--collectively bagged as much as $50 million as part of a quietly negotiated stake in YouTube prior to the deal's official announcement.

Egg on whose face? MySpace. Why? Because MySpace wanted a piece of that action, too, and the News Corp. social-networking site continues to drive a significant amount of traffic to YouTube. But it got nothing.

Nevertheless, Google and YouTube probably looked at the recording-industry deals as cover for any potential copyright infringement suits. However, other copyright holders, including Hollywood and television studios, may yet decide to pursue legal action--although one would think Google is now busy trying to tie up video deals with them, too.

Don't forget that the music deals signed prior to the acquisition were revenue-share agreements in addition to the stake. Google (YouTube) will share any ad revenue that comes from the use of their copyrighted material on YouTube.

Read the whole story at The New York Times »