Business ethics 88.
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Last week, it was announced that Internet behemoth Google was buying video-sharing site YouTube for $1.65 billion in stock. This seems to represent a decisive victory for YouTube's controversial business model.
YouTube is a video-sharing site that enables users to post short videos that can be downloaded by visitors and members of the YouTube community.
Many of these videos are no more than innocent, and often adorable, home movies - some filmed using inexpensive digital cameras or cellphones - or homegrown animations. A visit to the site reveals many intriguing links to videos, and a few scattered ads.
However, it is widely assumed that a piece of the true business model is a kind of business brinksmanship: YouTube is aware that users will be posting copyrighted videos on the site far faster than the media companies can ask them to pull them down, and that the media companies are reticent about alienating customers by aggressively prosecuting viewers. Furthermore, the low-quality videos suitable for YouTube are a potent marketing tool for the media companies to publicize higher-quality commercial releases. The assumption is that YouTube's gambit all along was that given the carrot of massive exposure and the stick of outof-control piracy, the media companies would be persuaded (or compelled) to enter into legal licensing arrangements with YouTube.
This assumption proved correct. One media company after another has begun legal action against YouTube (lawsuits or a demand to desist from posting material) and ended by signing licensing agreements on attractive terms (generally a fraction of YouTube's revenue from the material).
This strategy is attractive to YouTube because of the huge upside and the small downside. If the strategy works, you go home with a billion dollars (in fact, $1.65b.). If it doesn't work, you lose your working capital and go home. A start-up company has no assets to pay billions of dollars in legal judgments, and if they cause that much damage they don't pay, but merely declare bankruptcy.
In this sense, YouTube succeeded where Napster failed. It is again widely assumed that the pioneering, famous (or infamous) peer-topeer music sharing service was started with the same goal - to force the hand of the giant record companies which had no meaningful Internet presence.
However, the recording industry giants did not play along. They adopted a take-no-prisoners legal approach, which drove Napster into court and from there into bankruptcy. (Napster then emerged from bankruptcy and is now run as a legal music site.)
YouTube has many advantages over Napster. One is that there is no doubt that the bulk of YouTube's content is completely legal, unlike Napster which was almost completely pirated material. (There is also a lot of YouTube material that is borderline, including a lot of amateur "lip-sync" music videos.) Another is the benefit of hindsight: The management of YouTube was able to examine the Napster case to negotiate the legal minefield, and the management of the media companies were able to rationally consider whether they really adopted the most productive strategy in fighting Napster.
In either case, the business ethics dilemma is similar. To what extent is it ethical to engage in activity at the edge of the law (such as enabling piracy) not in order to profit directly, but rather as a bargaining ploy to force the hand of the rights owners?
Similar strategies exist in other areas of intellectual property. If someone is sitting on a valuable patent, is it ethical to start using the patent in order to demonstrate its value and pressure the owner into giving a license?
My impression is that it depends on the scope of the provocation. A small-scale stunt to demonstrate the business potential of someone's product today is accepted by many as part of the rules of the game.
Let's compare YouTube to Napster on this score.
The copyrighted material on YouTube is both a small fraction of YouTube content and a relatively small fraction of the offerings of media companies. Compare this with Napster, which was almost all copyrighted material and offered almost all major records. YouTube agreed early on to at least respond to copyright owners claims, unlike Napster which sought to hide behind peer-to-peer status, as if its users were sharing only recipes and not valuable music files.
Thus, Napster was perceived as an enemy and felt the full wrath of the recording industry - even if this may not have been in their best business interest. By contrast, YouTube was perceived as a provocative newcomer and legal action went hand in hand with a search for a mutually beneficial arrangement.
The fact that this kind of strategy hides behind the limited liability of the bankruptcy law is a two-edged sword. On the one hand, it is a bit unfair that a company can blithely risk causing billions of dollars in damages to copyright (or patent) owners with a tiny downside of their own. On the other hand, the limited liability of corporations was designed intentionally to encourage risk-taking. Furthermore, in cases of malice (for example, reckless damage), there is the risk that the individual, rather than the corporation, will be held responsible. So there is some accountability to avoid the worst abuses.
An obvious caveat is that these stunts can only be legitimate against commercial companies. If someone is keeping his artistic creation or patent private for personal, principled reasons then there is no right to exploit them, or pressure him to exploit them, for commercial value.
But large media companies are in it for the money, and if a small-scale stunt can be the trigger for a value-increasing deal, this is considered nowadays by many a legitimate, though daring, strategy. There's no question that this strategy has more in common with ice hockey than with croquet, but within the context of this aggressive-hitting contact sport, many feel they are playing within the rules.
Unauthorized exploitation of other people's intellectual property is a serious legal and ethical breach. Napster tried to force the hand of record companies by an all-out attack on the assets of the record companies, showing complete disregard for their rights, and thus provoked a hostile and successful counterattack.
By comparison, YouTube developed a nuanced strategy of thoughtful provocation, more like a border skirmish than a war, and carefully avoided showing callous disregard for intellectual property rights. Many lawyers are convinced that their behavior is completely legal. This was certainly a daring and risky strategy, and its ultimate success remains to be seen. Google may still face billions of dollars in lawsuits, and its huge market cap means that it may actually have to pay up.
I am still undecided as to whether this is truly ethical, but it is much different from Napster and a strong case can be made that while they pushed out the envelope of ethical behavior, their gambit was ultimately legitimate.
The writer is research director at the business Ethics Center of Jerusalem (www.besr.org). an independent institute in the Jerusalem College of Technology.