• Newsweek, Tuesday, October 3, 2006 11:30 AM

Newsweek suggests that pity may have had something to do with the now-famous deal Warner Music Group struck with YouTube. For over a year, the Internet upstart and others like it have basically given Web users free access to songs and music videos from Warner artists such as Madonna and Green Day. But instead of waging war against YouTube, as rival Universal Music Group has threatened, Warner decided to play nice. Alex Zubillaga, a Warner digital strategy executive, felt something like sympathy during a recent trip to YouTube's headquarters in San Mateo, Calif. YouTube's 60 employees share 10 landlines and a very small space in their offices over a downtown pizza joint. Said Zubillaga: "I almost felt bad for them."

Over time, Zubillaga became fond of the company's founders, Chad Hurley and Steve Chen, and the relationship helped produce the landmark deal between YouTube and Warner. By the end of this year, Warner will be able to pull any unauthorized songs or video clips from the site if Warner doesn't like the way they're used. The two will share ad revenue, the model of which is forthcoming, the founders say. Score one for Hurley and Chen, but they still have three big music labels to go.

Last month, Universal Music Group's Doug Morris claimed it was owed "tens of millions of dollars" from YouTube and others due to copyright infringement. It's the same old story: YouTube needs to find actual revenue, and it also needs to secure more partner deals. Until then, it will just keep absorbing venture-capital money and media companies will stay away from acquiring it--because, as Ross Levinsohn, Fox Interactive's chief, says: "The minute a Yahoo, Microsoft or News Corp. buys YouTube, you have a target for anyone who wants to sue." YouTube still has a lot to consider. Meanwhile, as it becomes more popular, the cost of serving and storing those millions of videos keeps going, making the path to profitability longer by the day.

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