Digital Media

Since 2006, many observers have scratched their head over what prompted Google to pay $1.65 billion for the video site YouTube. We're now a little closer to the answer.

Google CEO Eric Schmidt said in May, "I believe YouTube was worth somewhere around $600 million to $700 million."

(Credit: Elinor Mills/CNET)

The blockbuster acquisition for the 18-month-old start-up played a large role in sending valuations in the tech sector skyrocketing. Although YouTube made little revenue, the all-stock transaction gave Google control of a company many believed would change the face of mass entertainment. It also led to criticism from skeptics who thought that Google would never get its money back.

Google has revealed little about how it decided to pay $1.65 billion but CEO Eric Schmidt said under oath last spring that he was willing to pay a premium--a big one--for YouTube. Leading up to the acquisition, Schmidt told Google's board of directors that his estimate of YouTube's worth was somewhere between $600 million and $700 million, according to court records reviewed by CNET.

A Google representative declined to comment about Schmidt's valuation.

Schmidt had his reasons for asking his board to OK an offer of $1 billion more than what he thought the site was worth. The CEO made the comments during a deposition he gave in May as part of the copyright lawsuit Viacom filed against Google and YouTube in 2007. In short, he believed that Google had to offer that much, or competitors, presumably Microsoft or Yahoo, would walk away with the increasingly popular video site.

"This is a company with very little revenue," Schmidt said while being questioned by Stuart Jay Baskin, a Viacom attorney. "(YouTube was) growing quickly with user adoption, growing much faster than Google Video, which was the product that Google had. And they had indicated to us that they would be sold, and we believed that there would be a competing offer--because of who Google was--paying much more than they were worth...We ultimately concluded that $1.65 billion included a premium for moving quickly and making sure that we could participate in the user success in YouTube."

Three years later, that user success continues: YouTube has grown from 12 million unique users (in May 2006) to more than 100 million users just in the United States. Every minute, more than 10 hours of video is uploaded to the site. But Google is also fighting a $1 billion copyright lawsuit with entertainment giant Viacom, which claims that YouTube encouraged users to violate its copyright. On top of that, the company is still trying to figure out how to turn its prize acquisition into a profitable business.

YouTube managers have toiled to find the right way to generate revenue, experimenting with a wide range of advertising methods and models--everything from prerolls to overlays. Perhaps most importantly, managers changed their approach to copyright owners.

Whereas Hollywood executives once called YouTube a "rogue company," the video site can now boast numerous partnerships with top entertainment companies, including as Walt Disney, CBS (publisher of CNET News), Sony Pictures, and Metro Goldwyn-Mayer. YouTube also has deals with all four major music labels. And YouTube's finances may finally be turning the corner: company representatives have hinted in the past several months that it's on the road to becoming the kind of revenue generator that Google always envisioned.

Whether Google paid too much for YouTube then is a sort of barroom debate among media analysts, not unlike arguing whether the New York Yankees overpaid on free-agent ballplayers in the off-season. James McQuivey, a digital-media analyst at Forrester Research, said that if he were in Schmidt's shoes, he would have made the same deal.

"It actually becomes worth the additional value because Google can tie all of its advertising expertise and search traffic into YouTube," McQuivey said. "It's not like it's going to pay back that $1.6 billion any time soon, but what it does is, it ensures that these millions and millions of viewers are coming to a Google-owned site rather than someone's else's site...As a loss leader goes, if it never makes its money back, its still going to be worth it."

McQuivey acknowledged that those focusing only on hard business numbers are probably not going to agree with him. Count Josh Martin among them. Martin, a research analyst, was an early skeptic of YouTube's profit potential, arguing on behalf of Yankee Group Research that Google overpaid.

"I don't think Schmidt is wrong in assuming that someone would have overpaid for YouTube," Martin said. "If Google was willing to overpay for it, then someone else would have too. But it was a bad business decision for Google. We said it at the time, and three years later, we have been proven right."

Martin said that when Google priced YouTube, it should have deducted heavily for the legal liabilities, as well as for the company's ability to draw an audience, if it couldn't offer pirated content.

"You go back to the reason why YouTube was popular, and it was because of (the 'Saturday Night Live' skit) Lazy Sunday," Martin said. "That is what put YouTube on the map. So it was popular because it had access to content that it shouldn't have had and that you couldn't get elsewhere because no one else was willing to put it up illegally...Clearly, (Google's leaders) needed to understand what was driving momentum behind YouTube."

The following is an edited excerpt of Schmidt's deposition:

Stuart Jay Baskin, a Viacom attorney: And what was management's valuation?

Schmidt: Much lower than we paid for it.

Baskin: And how was that communicated to the board?

Schmidt: I told them.

Baskin: So why don't you tell us what you remember telling the board in connection with the valuation?

Schmidt: I believe YouTube was worth somewhere around $600 million to $700 million.

Baskin: And you communicated that to the board?

Schmidt: I did.

Baskin: Of Google?

Schmidt: I did.

Baskin: What methodology did you use to come up with that number?

John P. Mancini, an attorney working for Google, objects.

Schmidt: My judgment.

Baskin: Was it based on cash flow analysis? Comparable companies? What were you using as the basis for your judgment?

Mancini objects.

Schmidt: It's just my judgment. I've been doing this a long time.

Baskin: So you orally communicated to your board during the course of the board meeting that you thought a more correct valuation for YouTube was $600 million to $700 million; is that what you said, sir?

Mancini objects to characterization of the testimony.

Schmidt: Again, to help you along, I believe that they were worth $600 million to $700 million.

Baskin: And am I correct that you were asking your board to approve an acquisition price of $1.65 billion; correct?

Schmidt: I did.

Mancini objects.

Baskin: I'm not very good at math, but I think that would be $1 billion or so more than you thought the company was, in fact, worth.

Mancini objects.

Schmidt: That is correct.

Later...

Baskin: Can you tell us what reasoning you explained?

Schmidt: Sure, this is a company with very little revenue, growing quickly with user adoption, growing much faster than Google Video, which was the product that Google had. And they had indicated to us that they would be sold, and we believed that there would be a competing offer--because of who Google was--paying much more than they were worth. In the deal dynamics, the price, remember, is not set by my judgment or by financial model or discounted cash flow. It's set by what people are willing to pay. And we ultimately concluded that $1.65 billion included a premium for moving quickly and making sure that we could participate in the user success in YouTube.

In the cafes along Sunset Boulevard and the high-rises on Fifth Avenue, executives and lawyers at powerful entertainment conglomerates were talking about Veoh on Tuesday morning.

The rooftop pool of The Standard Hotel in Los Angeles.

(Credit: Greg Sandoval/CNET)

They were not joyful discussions. Copyright owners in the film and music sectors were stunned Monday by the news that U.S. District Judge A. Howard Matz ruled that Veoh, an online-video service, is protected by the Digital Millennium Copyright Act's safe-harbor provision and cannot be held liable for acts of copyright infringement committed by users. This was the most significant court victory that the tech sector has won against copyright owners in some time.

Universal Music Group had filed suit against Veoh, but on Friday, the judge tossed the case out. Universal said it will file an appeal soon. While entertainment companies await the appeal, Matz's reading of the DMCA has shaken content producers. Two entertainment attorneys from Los Angeles who asked for anonymity said the ruling "disappointed" many in their industries and absolutely isn't good for Viacom or any other copyright owner. Viacom filed a copyright lawsuit against Google and its YouTube two years ago. Some attorneys believe that Veoh's case is very similar to Viacom's.

Matz's decision isn't binding, but if allowed to stand, it could influence other courts, legal experts said.

What has so spooked the entertainment industry is that Matz would require content creators to play a cat-and-mouse game with those that upload unauthorized copies of films, songs, music videos, and TV shows onto Web sites.

In order to have a piece of content removed from a site such as Veoh or YouTube, they must file what is commonly referred to as take-down notice. If they get one clip pulled, someone could conceivably post the same clip 30 seconds later, and a content owner would have to file yet another notice, says Chris Castle, an attorney and outspoken proponent of artist rights.

"According to some interpretations of this new law, copyright owners--from multinational corporations to independent songwriters--are required to stand at the ready on a 24-7 basis to police the Internet," Castle wrote on his blog. According to Castle, the ruling legitimizes the "catch me if you can" business models that he claims some companies create to avoid paying licensing fees.

Companies such as YouTube and Veoh have filtering technologies in place that help keep infringing materials off the site, and Fred von Lohmann, senior attorney at the Electronic Frontier Foundation, has always said there isn't any way for such services to determine what content is infringing and what isn't. The copyright owners, according to EFF, are in the best position to do that.

As for the content-filtering technologies, they are totally foolproof. In a story in All Things Digital on Tuesday, the blog reported that Viacom had to pay staff to "work through the night on Sunday" to provide YouTube with "reference files" to help remove unauthorized clips from the Video Music Awards. One would go down, and more would show up.

"This is not the way forward for legitimate companies to come together with sustainable innovation in the digital society," Castle wrote.

That's an important point because despite claims by some on the copyright side, this isn't a situation where YouTube is sitting back while users commit piracy on its site. For two years, the company has implemented filtering technologies and created systems designed to help keep pirated material off of its site. Veoh had its own systems in place.

There's no arguing that YouTube was once more defiant and less interested in appeasing content creators than it is now. For the past couple of years, Google, which bought YouTube in 2006 for $1.65 billion, has wooed the film and music industries, and has signed all but one of the four major record labels and such studios as Disney, Sony Pictures, CBS (publisher of CNET News), and MGM.

Those antipiracy systems were an olive branch welcomed by content producers, but that won't cure all the ills. According to Doug Lichtman, a law professor at the University of California at Los Angeles and an attorney working for Viacom, many of the problems will be solved in the boardroom and not the courtroom.

"The most important antipiracy efforts under way these days aren't cases but (rather) business initiatives like Hulu and Redbox," Lichtman said, "where the content community is struggling to figure out how to give consumers what they want, in forms they want, and at reasonable prices."

If that's the case, though, then why don't Google and Viacom send their attorneys home and cut a business deal whereby everyone makes money? Maybe it will still happen.

Update 4:15 p.m.: To include comments from YouTube and Viacom.

A federal district court says Veoh, a Web video site that has come under legal fire from entertainment companies the past several years, is not liable for the copyright violations committed by its users, a decision that could help YouTube defend itself against Viacom's $1 billion copyright suit.

Universal Music Group, the largest of the four top record companies, accused Veoh of copyright violations in a lawsuit filed two years ago. But on Friday, U.S. District Judge A. Howard Matz granted Veoh's motion for summary judgment, and ruled that the company is protected against such claims by the Digital Millennium Copyright Act.

The decision would have meant more for Veoh if the video site was still relevant. The company has fallen on hard times since YouTube and Hulu took control of most of the online-video sector. Veoh's legacy, however, could be that it helped to establish that Internet service providers aren't liable for crimes committed by users.

"This decision reaffirms the judicial consensus and what we've known all along: the DMCA protects services like YouTube," Zahavah Levine, YouTube's chief counsel said. "With the DMCA, Congress intended to foster online platforms like YouTube, which empower users, offer new distribution channels for content owners, and respect copyright."

To be sure, Universal Music will file an appeal to Matz's decision and the case likely still has a long way to go.

"The ruling today is wrong because it runs counter to established precedent and legislative intent and to the express language of the DMCA," Universal Music said in a statement. "Because of this and our commitment to protecting the rights of our artists and songwriters who deserve to be compensated for the use of their music, we will appeal this ruling immediately."

Martz's decision is not binding on other courts and it must be noted that the case was heard in the Ninth District while YouTube's court fight is in the Second District.

"Our case is in a different forum, not bound by the Veoh case," said Michael Fricklas, Viacom's general counsel, in a statement. "We remain confident that we will prevail on the law and the facts. Today's decision contradicts the consensus that sites and copyright owners share the responsibility to use readily available tools to minimize copyright infringements."

How YouTube may benefit
YouTube and Google could be the big winner in all of this, said Fred von Lohmann, senior attorney for the Electronic Frontier Foundation. Viacom accused YouTube of infringing its copyright in a lawsuit filed in March 2007.

"Veoh's policies are very similar to YouTube's," von Lohmann said. "The judge gave Veoh a clean bill of health. I think the court in New York (where the Viacom-YouTube case is being heard) is going to take this ruling very seriously. The facts are very, very close."

In Martz's decision, he noted that this was not the first time a court has ruled that Veoh is covered by the DMCA's Safe Harbor provision.

"On August 27, 2008, Magistrate Judge Howard R. Lloyd, sitting in the Northern District of California, wrote that the court does not find that the DMCA was intended to have Veoh shoulder the entire burden of policing third-party copyrights on its Web site (at the cost of losing its business if it cannot)," Martz wrote in his decision.

"Rather, the issue is whether Veoh takes appropriate steps to deal with copyright infringement that takes place. The record presented demonstrates that, far from encouraging copyright infringement, Veoh has a strong DMCA policy, takes active steps to limit incidents of infringement on its Web site, and works diligently to keep unauthorized works off its Web site. In sum, Veoh has met its burden in establishing its entitlement to safe harbor for the alleged infringements here."

While the judge ruled against Universal Music group and delivered a blow to copyright owners, he also confirmed that such sites must take reasonable steps to stop infringement once they've been made aware of its existence on their sites.

The legal fight between Viacom and YouTube will likely go to trial sometime next year. Many observers thought that case would be the one to establish whether managers at YouTube and similar services would be required to police their sites. But YouTube vs. Viacom could be anticlimatic, according to von Lohmann.

"The ironic thing is that so much attention has been paid to the YouTube litigation," von Lohmann said. "But the law is actually being made in other cases because the YouTube case is turning into an eternal trench war. In the meantime, smaller companies like Veoh and Perfect 10 are defining the law. The courts have consistently given an interpretation (of the law) that has been in line with what Web 2.0 companies have been arguing."

In July 2008, two months before start-up SpiralFrog's aspirations were shredded by the souring economy and a series of management gaffes, the long knives were already drawn in the music service's executive suite.

In a private meeting, CEO Mel Schrieberg was stripped of most of his power after SpiralFrog's board grew tired of his heavy spending on salaries and ineffective marketing strategies. Even worse for Schrieberg, the man intent on driving him out was an old friend and one of his main allies at the company, founder Joe Mohen.

"The board wants him removed now," Mohen wrote in a July 21, 2008, e-mail exchange with Amir Khan, an executive at 3V Capital Management, SpiralFrog's biggest financial backer. "He adds no value at this time. The management will be very demoralized, if he remains."

The start-up's short, troubled history saw other clashes among managers. At the center of most of them was Mohen. He butted heads with his handpicked CEO, as well as SpiralFrog's board of directors and financial backers.

To Mohen, SpiralFrog "was all about him controlling the company, no matter who was in charge," Schrieberg, who maintained his CEO title from January 2007 to October 2008, told CNET News in a phone interview. But Mohen, who had founded the pioneering voting site Election.com, hardly deserves all the blame for what went wrong.

Schrieberg, a former IBM executive, had no operational experience in advertising or in music. In e-mails sent to several SpiralFrog employees, Mohen called some of Schrieberg's decisions "insane."

Adding to the management dysfunction was Scott Stagg, who managed 3V (now called Stagg Capital), the company that loaned SpiralFrog $34 million. For nearly two years, Stagg paid all of SpiralFrog's bills. Only sumo wrestlers are more likely to throw their weight around than Stagg, former employees have indicated, and even Mohen says management couldn't do much without first checking with Stagg.

On March 13, 2009, the music service was forced to turn over assets to creditors and shut down. To find out how a company that some called a potential iTunes killer so quickly turned into yet another dot-com flameout, CNET reviewed numerous documents and interviewed 13 people formerly associated with the company, including former board members, executives, and employees.

Certainly, SpiralFrog, which was trying to succeed with an unproven business model, wasn't exactly in an ideal position from the start. But former insiders, most of whom requested anonymity, say inexperienced managers who allowed petty squabbles to cloud their judgment didn't do themselves or their company any favors.

Could have been a contender
In December 2008, cash-strapped SpiralFrog appeared doomed. Entertainment conglomerate Viacom had expressed interest in acquiring a minority stake in the start-up three months beforehand, but the deal fell through. Yahoo would also eventually kick the tires on SpiralFrog but it also passed. Stagg, in a December 11, 2008, e-mail to SpiralFrog's board, from which he had recently resigned, sized up SpiralFrog's bleak financial situation.

"At this time, the company is out of money, all employees have been terminated, (and) over $8 million of payables remain outstanding," Stagg wrote. "There are multiple lawsuits with pending judgments, and the major music publishers, including Sony/ATV, Warner Chappell, and Harry Fox are expecting $550,000 of long overdue payments. Sony ATV is demanding a payment of $100,000 by Monday, December 15, which, if the company fails to meet, might force SpiralFrog to remove all of Sony ATV's content from the site."

Stagg may have overstated the situation a bit. Money would eventually trickle back in--virtually all of it from him--to help the company limp along while the board searched for an acquirer. There's no doubt, however, that at that time, SpiralFrog was nearing collapse.

Mohen, 53, acknowledges that mistakes were made. But, he added, what else could you expect? SpiralFrog was breaking new ground as it attempted to become the first service to offer music downloads free of charge to the public. In his version of the company story, everyone did their best and came close to turning SpiralFrog into a hit service, which attracted more than 2.5 million register users before closing.

What really killed SpiralFrog, according to Mohen and Schrieberg, 66, was the collapse of the investment-banking industry in September and the nation's subsequent financial meltdown. "There is not much you can do when funding and advertising sales go down precipitously due to economic conditions," Schrieberg said.

Until the economic meltdown, Mohen said SpiralFrog was on track. "It was all going to happen for us in October," he said. "We came a lot closer than people will ever know."

Although Mohen declined to specify how SpiralFrog's prospects might have changed in October, records show that company executives believed that a Viacom investment, which to them seemed imminent, would save the start-up.

The terms of drawn-up contracts, copies of which were obtained by CNET, called for Viacom to give SpiralFrog $100,000 in cash and $6.5 million worth of advertising on its MTV Networks unit. In exchange, Viacom would receive 4.3 million shares of preferred stock. The deal, if closed, would have valued SpiralFrog at about $120 million.

In September, at about the time the economy was becoming unglued, Viacom backed out of investment talks, and SpiralFrog's chances to survive the recession soured. One executive who did business with SpiralFrog and had seen the company's books said it's hard for him to conceive that anyone would have bought it. The source said the company's debt was just too big and complicated.

Who is in charge?
Headquartered in New York, SpiralFrog was a different kind of start-up from the get-go. It funded operations through loans. The company issued secured notes, essentially a contract whereby a company promises to repay at a certain interest rate.

After receiving $9 million in traditional equity funding in 2006, Stagg's investment firm began loaning SpiralFrog money in May 2007. Eventually, Stagg would lend the music service $34 million in convertible notes, which gave him the option of converting the loans into stock. Stagg said he never recouped the money.

So why go that riskier route, borrowing money? Most companies that can attract venture capital do. Taking out loans is less attractive because loans typically have to be repaid with interest, regardless of how the company fares.

Another way SpiralFrog differed from most start-ups was that it spent lavishly on salaries. Start-up CEOs typically ask for more equity in their companies rather than a big paycheck. It's common to see Silicon Valley managers earn less than $150,000 a year.

Not at SpiralFrog, which paid Mohen $360,000 a year in annual "consulting fees," documents show. Before he departed, former CEO Robin Kent was paid a $340,000 salary. Schrieberg's salary was $279,000.

A power struggle between Kent and Mohen paved the way for Schrieberg's appointment as CEO. In December 2006, Kent nearly drove Mohen out of SpiralFrog in a failed takeover bid. Mohen barely had enough board votes to keep control, and Kent, who had become CEO only seven months earlier, was sent packing. Just days after that, Mohen handed SpiralFrog's CEO position to Schrieberg, whom he had known for 11 years, Schrieberg said.

It was a questionable call. According to several former employees, to entice users of illegal peer-to-peer sites to SpiralFrog's legal and free music service, the company needed a CEO with a strong background in advertising and music. Schrieberg, who spent most of his career as a sales manager at companies like Xerox and IBM, had neither.

Power struggle
In early 2008, Schrieberg spearheaded a massive search engine- and affiliate-marketing campaign that would eventually cost the company $11 million, records show. The strategy was successful at drawing visitors but failed to generate lasting interest. Most people stayed a few minutes, viewed a few Web pages, and moved on. The practice of paying for traffic was supported by the board of directors and Mohen, but eventually, they lost faith in the strategy and in Schrieberg.

Perhaps not surprisingly, by the summer of 2008, it was becoming apparent that Mohen, Schrieberg, and Stagg were competing for control of the privately held SpiralFrog, former employees say. SpiralFrog was dependent on Stagg's money, which gave him considerable influence. Schrieberg had the board behind him at least until July. Mohen's personal financial troubles and feuding with fellow board members, meanwhile, sapped much of his power.

Despite his significant consulting fees and the private sale of some of his SpiralFrog shares, Mohen took out a personal loan of $115,000 in 2007 from a financial-services firm that was doing business with SpiralFrog, records show. He acknowledged to CNET News that he has not yet repaid the loan.

Schrieberg said Mohen asked him to be the guarantor of an American Express card that Mohen would use for business expenses. And since it was Stagg covering those expenses, he could deny any charge. That made Mohen beholden to Stagg as well as well as Schrieberg, who said he was never reimbursed for more than $40,000 that Mohen rung up on the credit card.

As for how he got into financial trouble, Mohen suggested that it was because of SpiralFrog's collapse. "I risked everything on the company," he said, adding that he invested $400,000 of his personal wealth, an amount he says he never recovered.

But why would Schrieberg share his card with Mohen? Schrieberg said he was just trying to help him out. Several former employees said, however, that Schrieberg went to great lengths to ingratiate himself with board members, including Mohen.

During the two years Schrieberg was CEO, the company hired the sons of board members Steve Norcia, Tom Mackell, and Bob Gordon. Schrieberg confirmed this but said the board member's sons were well-qualified.

Hiring relatives of board members can be problematic, according to corporate-governance experts. Employees can file discrimination suits, if they believe that a board member's relative was given a promotion that rightfully should have gone to them. Schrieberg said all the hires were cleared by the company's legal counsel. He also denied that such decisions made him unpopular with SpiralFrog employees. On the contrary, he said, "I was revered."

Click on the image above to see a full AOL invoice that led SpiralFrog's board to strip CEO Mel Schrieberg of most of his authority.

Nonetheless, Schrieberg lost the board's backing on July 21, when a $974,000 invoice from AOL, for affiliate-marketing services, reached the desks of Mohen and other board members. The bill was a shock; Schrieberg had told the board that the costs add up to about $600,000, according to 3V's Khan. In an e-mail exchange between Mohen and Khan, who was also a board member, Mohen lobbied for 3V to oust Schrieberg.

"(Schrieberg) needs to be kept out of the office," Mohen wrote. "When I saw the invoice today, I realized how serious this is...At this point, the majority of the board and senior-(management) team find him incompetent...Make him vice chair, and pay him for his cooperation."

Khan replied that Schrieberg was "CEO only in name. His duties are all gone to me." But Khan stopped short of agreeing to remove Schrieberg. "We can't have another CEO leave," he wrote.

Schrieberg said he resigned of his own volition in October. But he acknowledged that Mohen came to him sometime around July 21 and told him that Khan would be taking over most of the CEO duties. He said he agreed to go along with the plan because Stagg and 3V were already calling most of the shots. But Schrieberg strongly maintains that he performed well at SpiralFrog and that the board and senior management were aware of "every penny" he spent as CEO.

Starting over
In an interview, Khan and Stagg said Schrieberg was kept around because of the ongoing Viacom negotiations. Stagg said he and the rest of the board believed that removing Schrieberg would have rattled the entertainment conglomerate, which had expressed interest in obtaining a minority stake in SpiralFrog. With Stagg's blessing, Khan and some of his lieutenants at the hedge fund tried operating the start-up for several months without any official titles. In an interview, Mohen called this effort a disaster.

Click the image above to read our story on how SpiralFrog's founder, Joe Mohen, enabled a former employee to sell customers' e-mails.

"The management team to a person was alienated by Stagg's people," Mohen said. "That was because they tried to operate a business, and they didn't have the skills to do it."

In mid-September, the wheels came off. Viacom declined to invest in SpiralFrog. Stagg continued to provide some funding, but only a small percentage of what he once did. In November, Mohen gathered employees still left and told them that the company would not make payroll.

The situation was tough, but there was a brief upside for Mohen: without Stagg's money, SpiralFrog's management no longer had to placate him, former employees said. Mohen was named interim CEO and began looking for new investors. He tried convincing 3V to continue funding the company by threatening to steer SpiralFrog into bankruptcy and start all over with a new company.

Still, everyone knew that such an endeavor would be impossible, according to Stagg, because the licensing deals that SpiralFrog had with Universal Music and EMI were nontransferable. If SpiralFrog went bankrupt, Mohen would have to renegotiate for new music licenses.

Stagg made several unsuccessful attempts to take control of the board but always failed. "The truth is, we never had control (of the company) because we never had control of the board," Stagg said.

Click the image above to see copies of some of SpiralFrog's correspondence.

Proof that Stagg and 3V did control SpiralFrog could potentially cost the investor more than he's already lost over it. Antaeus Capital, a financial-services firm that began working with SpiralFrog in 2006, has asserted in a lawsuit that the start-up breached several agreements. The complaint, filed last November, alleges that SpiralFrog was really Stagg's property and that he should make good on the money the company owed. The case is still moving through the courts.

In the end, the current suit is a fight over the bones of a dead company. SpiralFrog's domain name was sold in May to MyMojo, a mobile-content site, for $20,000, sources say. After three years' worth of turf wars, more than $40 million worth of loans and investments, and a long list of unfulfilled promises, that's pretty much all that was left.

This is sort of interesting. MTV Networks, which certainly has a lot of video content out there on the Web, on Wednesday released the results of an internal study to determine what kinds of advertisements are most effective and online-friendly matches for short-form online videos.

The conclusion? "Project Inform," the MTV survey, found that a five-second-long "pre-roll" ad in advance of the clip, combined with ten seconds of a semi-transparent ad unit that takes up the lower third of the video (and starts about ten seconds in), makes up "both the most effective and the most audience-friendly ad product for short-form online video," according to a release.

MTVN calls this the "lower one-third product suite." It was tested against two other ad packages, the "sideloader," which combines the five-second pre-roll with an ad that rolls out of the side of the video window; and a traditional 30-second pre-roll before the ad.

So, obviously, that's a limited number of options and certainly doesn't reflect the full range of possibilities for online ads. But it was thorough: Project Inform ran consumer survey tests across about 50 million video streams on the Web properties for media brands like MTV, Comedy Central, and Nickelodeon.

"Short-form online video consumption is exploding, but there's still a lot of confusion among marketers over which ad formats deliver for brands without compromising the user experience," Nada Stirratt, executive vice president of digital advertising at the Viacom-owned MTV Networks, said in the release. "By exploring the viability of new ad products around short-form online video, Project Inform provides the type of insights crucial to creating the innovative, custom solutions that this marketplace needs."

The catch is whether even the highest-performing varieties of online video ads still really rake in the dollars. Online video has been notoriously difficult for companies to monetize, but that's in part because the first variety of video to gain traction on the Web was amateur, user-created content (do top-notch advertisers really want their message next to a video of a squirrel on water skis?) and also because traditional, TV-style ads don't have the same impact alongside shorter Web clips.

There have been some promising signs, though. Video portal Hulu has investigated a couple of experimental video ad formats since launching last year, and has had good news to report on the advertising front--like that its inventory sold out a month after its public debut.

Viacom isn't a member of the Hulu joint venture, which now consists of NBC Universal, Disney's ABC Entertainment, and News Corp. But a limited number of episodes from Comedy Central talk shows "The Daily Show with Jon Stewart" and "The Colbert Report" started playing on Hulu last year.

As it defends itself against allegations of copyright infringement made by multiple copyright owners, Google's YouTube won some minor legal victories on Tuesday, legal documents show.

No, the decisions had nothing to do with the main event, which is the suit filed in March 2007 against YouTube by Viacom, parent company of MTV and Paramount Pictures. But Google's attorneys did manage to convince a federal judge to dismiss a number of the claims for statutory damages asked for by group of copyright holders that included a European soccer league and music publishers.

U.S. District Judge Louis Stanton, of the Southern District of New York, also threw out punitive damages, saying that the videos, from the Premiere Football League, were foreign works and weren't covered by U.S. copyright law.

Stanton wrote that the Copyright Act "bars statutory damages for all foreign and domestic works not timely registered."

The soccer league is part of a class action group that includes, The National Music Publishers Association and Bob Tur, the videographer who filmed many well known clips of the Los Angeles riots and the O.J. Simpson police chase in the early 1990s. He was the first person to sue YouTube for copyright infringement.

How the judge's decision will affect the rest of the plaintiffs is unclear. The work by Tur and the NMPA, both based in the United States, are presumably covered by U.S. copyright law.

Lawyers from the New York firm Proskauer Rose, which represents the class, did not immediately respond to an interview request.

Viacom has cooperated with the class-action group and even combined some parts of their case but the entertainment conglomerate is not a member of the class and was not named in the judge's order.

Viacom's MTV Networks has brought some of its television content to Netflix's library of streaming online video, the companies announced Monday.

Yaaaaaaay! SpongeBob is taking over your Netflix account!

(Credit: Nickelodeon)

The offering consists primarily of kids' shows from the Nickelodeon network, with select seasons from the shows "iCarly," "Blue's Clues," "Dora the Explorer," "SpongeBob SquarePants," and a handful of others, as well as the first nine seasons of "South Park," the Comedy Central animated series that you probably don't want your kids watching.

Netflix's streaming-video service still very much takes the back burner to its DVDs-by-mail service, but the company has deals in place with TiVo, Boxee, Microsoft's Xbox, and some HDTV providers.

It's also the second streaming Netflix deal for Viacom, which licensed content from its Logo network last year. Viacom has also signed content deals with Joost (Disclosure: CNET News publisher CBS is an investor in Joost) and NBC Universal-News Corp. joint venture Hulu, which now runs episodes of Comedy Central's hit talk shows "The Daily Show with Jon Stewart" and "The Colbert Report."

One major player in the video world with which you probably won't see MTV Networks making a deal any time soon: YouTube. Viacom still has an outstanding lawsuit against YouTube parent company Google over infringing content.

So either Jon Stewart is really on to something with his mad-as-hell crusade against financial hypocrisy and stupidity, or there are a lot of unemployed people watching Comedy Central clips to pass the time.

Either way, an on-air freakout by CNBC reporter Rick Santelli may have been one of the best things to happen to Comedy Central in months: Fake-news pundits Stewart (of "The Daily Show with Jon Stewart") and Stephen Colbert (of "The Colbert Report") have seen traffic to their Web sites and online video clips soar after the two went on mocking vendettas against Santelli, fellow CNBC personality Jim Cramer, and the NBC Universal-owned business network in general.

Traffic to the shows' Web sites has been at its highest of the year so far in the past week, at over 60 percent their weekly average for 2009. ComedyCentral.com, which hosts video clips of both programs, also had its best traffic of the year, and the digital version of a viciously funny clip called "CNBC Gives Financial Advice" logged over 1.3 million views in a week, the sort of numbers usually reserved for grainy videos of cats behaving unnaturally.

Here's the back story: Santelli was supposed to appear on "The Daily Show" after his tirade about the federal government's economic bailout, but backed out abruptly. That's when Stewart and Colbert--but especially Stewart--turned up the heat. Stewart went on the aforementioned anti-CNBC rant on March 5, putting "Mad Money" host Jim Cramer squarely in his crosshairs. Cramer appeared on "The Colbert Report" the following night.

Now, Cramer is scheduled to make a "Daily Show" appearance on Thursday night.

Stewart and Colbert have been two of the most visible figures in cable television's slow crawl onto the Web. Not only are they wildly popular with young and tech-savvy audiences, but the segmented format of their talk shows lends itself well to being split into short clips and swapped via video-sharing sites, which meant that unauthorized clips of the two were some of YouTube's earliest hits. That's what indirectly led to Comedy Central parent company Viacom's massive copyright lawsuit against YouTube owner Google.

Later on, the full archives of both shows were made available on Comedy Central's Web site, and recent episodes are available in full on Hulu (as well as iTunes and Xbox Live).

Colbert, who started out as a commentator on "The Daily Show" before spinning off his blowhard persona into his own talk show, also owes a big chunk of his notoriety to the Web. Video of C-SPAN's coverage of the White House Press Correspondents' dinner three years ago, in which Colbert performed a shockingly blunt comedy routine that skewered then-President George W. Bush, was a huge hit on the Web among those who wouldn't have considered actually watching C-SPAN in the first place.

Last year, Colbert was honored by the annual Webby Awards as "Person of the Year." Take that, nonbelievers!

Update at 7:59 a.m. PST: A RealNetworks representative quashes a rumor about a RealNetworks-MTV joint venture.

The long-expected layoffs at Viacom, parent company of MTV Networks, have finally taken place.

According to an internal memo (first leaked to gossip blog Gawker), 850 positions have been cut. That amounts to 7 percent of the company's workforce.

"Our advantages and best efforts can't completely protect Viacom from the very serious and broad-based challenges of this economic recession," CEO Philippe Dauman wrote in the e-mail. "Viacom's long-term health will depend on our shared commitment to adapt, to innovate and to make difficult choices. To compete and thrive, we need to create an organization and a cost structure that are in step with the evolving economic environment."

A press release Thursday from Viacom gave a more detailed explanation: "The restructuring and write-down together will result in a pre-tax charge of $400 million to $450 million, or $0.42 to $0.48 per diluted share, in the fourth quarter of 2008. These staffing and compensation actions and write-downs are expected to result in pre-tax savings of $200 million to $250 million in 2009."

It's been common knowledge that Viacom layoffs were on the way, and the company had already canceled its big holiday parties this year, giving employees two extra vacation days in exchange.

In addition to MTV, Viacom owns BET Networks and Paramount Pictures. Its cable channels include Comedy Central, Nickelodeon, VH1, and Noggin.

According to a separate post on Gawker, the New York office for MTV-RealNetworks joint venture Rhapsody America is rumored to have closed, leaving 25 people jobless. RealNetworks spokesman Ryan Luckin said in an e-mail to me on Thursday that the rumor is false.