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Billion-Dollar Battle of the Behemoths

Call it a billion-dollar battle of the behemoths, and we the consumers will be caught in the middle.

Viacom , owner of MTV, VH1, Nickelodeon, Comedy Central, Paramount and Dreamworks, lets the litigation fly, filing a $1 Billion lawsuit against Google's YouTubealleging the company "harnessed technology to willfully infringe copyrights on a huge scale," with "brazen disregard" of intellectual property laws.

Needless to say, Google shares took a nearly 3% hit on the news and the internet world is shuddering because of it. If video is the net's next big thing, and YouTube is already the net's big new thing, this suit will cut to the core of the Google business model and could put the Digital Millenium Copyright Act (DMCA) under a brand new microscope.

Viacom says in a statement: "Their business model, which is based on building traffic and selling advertising off of unlicensed content, is clearly illegal and is in obvious conflict with copyright laws."

To say the suit is a surprise would be an overstatement of gargantuan proportions. To wit, Google already set aside $200 million for possible rights litigation connected to its $1.65 billion acquisition of YouTube.

Google's general counsel David Drummond tells us exclusively that there's a huge difference between his YouTube and the music-sharing site Napster, which ran afoul of the DMCA by letting consumers download and share copyrighted material. YouTube, he says, merely lets users view content; not download it and share it.

"It's not the same thing because Napster did not abide by the DMCA provisions, so it's a very different kind of service," says Drummond. "This is not a downloading service. It really allows you to get other streaming content."

These issues jumped to the front pages last summer when I broke the story of Los Angeles-based helicopter journalist Bob Tur whose infamous beating video of trucker Reginald Denny during the 1991 riots started to appear all over the YouTube website. He filed suit against YouTube, seeking $100,000 per illegally downloaded video and there were thousands of them. He was one of the first to take on the business model and I found him in Las Vegas today to get his reaction.

"The infringement activity is beyond imagination. We're seeing billions of copyrighted works infringed each month," he says.

His case is in the deposition phase now and he says his documentation shows at least $5 million dollars in damages so far, with the number growing every day. He's gratified one of the "big boys" has filed an action of its own, saying of YouTube: "Their business model stinks. It was designed to steal from artists, from content creators, from the rightful owners of copyright and hide behind the DMCA protection."

Of Viacom's suit: "I had heard some rumblings that that was going to happen, and when you broke the news to me, I was so gratified that Viacom was picking up and taking care of business. I wondered where these guys were, I always believed they'd join in and now they've joined in and that'll make my case all that much easier."

But the case may not be all that cut and dry with many on Wall Street calling the case a negotiating ploy. Viacom's accusations are clear: that YouTube lets users post copyrighted content without paying for it, and then generates enormous profits by selling advertising against that protected content.

Google's argument, following the DMCA, goes something along the lines of: Just as you wouldn't hold AT&T liable for murder if someone uses the phone to set up an assassination, you can't hold YouTube liable for the content its users post.

But unlike the AT&T scenario, Google is generating revenue on the backs of other people's content, and that's where the gray area exists.

"There is an issue there. The fact of the matter is that YouTube and Google are making a whole lot of money, and especially from Google's point of view, when you become as rich as Google is, people start asking you to share," says Anthony Falzone, executive director Stanford Law School's Fair Use project at the Center for Internet and Society. "It's a little bit of a culture clash. The old media versus the new media and they have very different ideas of what the rules are and should be and I think that's why this has come to lagerheads."

Many on Wall Street say these two companies will have to reach some kind of resolution that forges a new kind of new media/old media partnership, especially now that a cultural shift is underway with how consumers enjoy their entertainment.

"The genie is out of the bottle and consumers' expectations have shifted radically in terms of how they receive content, what they get to do with it and how they get to share with it," says Stanford's Falzone.

And the courts may not be the place to figure out how those issues get sorted out.

"Suing their way into profitability isn't gonna work here. These companies need to learn how to cooperate," RBC Capital's Jordan Rohan tells me.

But both companies think they're in the driver's seat. For Viacom, content is king and it believes it should determine the rules in the kingdom. But that kingdom is online, and Google is the king there.

"On a global basis, there are about 135 million people who go to YouTube to view content. And that growth rate is something like 1300% year over year. Not 13%, but 1300% year over year. There is obviously enormous interest in, and demand and growth behind YouTube that should serve as a very useful distribution platform for a lot of owners of content," says Citigroup's Mark Mahaney. "I think the context here is that large content companies, and small ones, are trying to figure out what to do with this explosive growth in user generated content. How to monetize it, how to monetize their content, and quite frankly, how to compete with all of the individual content-uploaders out there . A lot of the most valuable, a lot of the most watched, highly rated clips on YouTube don't come from the big content networks. There is an opportunity for them here but there is also risk."

It's a point well-taken since Viacom keeps losing viewership on many of its flagship properties and blames YouTube in part for the ratings slide.

But Mahaney doesn't necessarily blame YouTube and Google and says the law is on their side.

"There is a challenge here. If you have 150 million people worldwide uploading content to your network, it is very hard to stop an individual, anybody, from going and stealing a clip from a television show or some movie and putting it up there. That's a full time job of getting that copyrighted material off the network," he says.

Others argue that maybe Google should spend the money and hire a team to do just that and change its "opt out policy" which suggests it is the content-owners' responsibility to make the request of Google to remove copyrighted material from its site, rather than trusting Google not to allow the material to be uploaded in the first place.

Google seems confident that it will prevail if Viacom want to push its legal case forward.

"We have many, many deals in the video area, many, many deals in the publishing area, so I think we're working very well with content owners and intend to continue that," says Drummond. "We're very confident that YouTube will continue to develop into a very, very valuable service for users and creators and we expect that many creators will work with us to take advantage of that platform."

Questions? Comments? TechCheck@cnbc.com

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