Google retains part of YouTube payout

From the Associated Press

Google Inc. is holding back more than $200 million of the stock it paid to acquire YouTube Inc. to cover losses or possible legal bills for the frequent copyright violations on YouTube’s video-sharing site.

Google said it was withholding for one year 12.5% of the stock owed to YouTube’s former owners “to secure certain indemnification obligations.”

The Mountain View, Calif.-based company disclosed the escrow account in an announcement marking the completion of its much-anticipated YouTube acquisition.

Google representatives didn’t respond to requests for more details about the escrow account.


Buying San Bruno, Calif.-based YouTube cost Google 3.66 million shares of its prized stock, including a convertible warrant.

As of Tuesday, those shares were worth $1.79 billion -- above the targeted purchase price of $1.65 billion announced last month.

But the escrow account’s existence means that YouTube’s former owners -- a small group led by co-founders Chad Hurley, Steve Chen, Jawed Karim and Sequoia Capital -- may forfeit a substantial portion of the Google stock if YouTube runs into legal trouble or incurs other losses.

The percentage of stock being held in escrow translates into about 457,000 Google shares worth about $224 million after the company’s stock price rose $8.27 on Tuesday to close at $489.30.


The reserve could signal that Google is trying to insulate itself from a possible onslaught of lawsuits aimed at the large number of pirated videos posted on YouTube, which will retain its current management and name.

Since its website first began to catch on about a year ago, YouTube has relied on a mix of homemade and pirated videos to expand its audience.

Although YouTube has promptly removed pirated videos whenever copyright owners complained about violations, questions have continued to linger about the site’s vulnerability to legal claims for distributing content owned by other media.

YouTube may become a more tantalizing target for copyright owners and their lawyers now that it’s owned by Google, a moneymaking machine that had accumulated $10.4 billion in cash through September.

The much-smaller YouTube never turned a profit and even required a $15-million infusion from Google to help pay its bills until the deal closed, according to disclosures made late Monday.

The legal threats raised by the YouTube deal led to widespread speculation that Google had set aside $500 million of the purchase price to pay copyright settlements.

Google Chief Executive Eric Schmidt dismissed that theory as untrue last week during an appearance at an Internet conference.

Although copyright suits are probable, Google should be on solid legal ground as long as YouTube continues to respond to complaints promptly, said Larry Iser, a Santa Monica lawyer specializing in intellectual property rights.


“They should have a safe harbor” under the Digital Millennium Copyright Act, Iser said.

Google executives also have repeatedly vowed to protect the rights of copyright holders.

Those guarantees apparently weren’t enough to satisfy at least one copyright holder who recently sued Google’s own video service for copyright infringement.

Google executives have declined to identify the copyright owner who sued.

They said only that the case was filed in France and was seeking a relatively small amount of money.