9:21am PT by Eriq Gardner
Judge Must Decide If YouTube Channel Is Worth $79 Billion or Nothing At All
For nearly two years, David Moss and Brandon Keating have been chasing a pair of YouTube stars for allegedly cheating them out of the fruits of a channel devoted to video games that had racked up more than 800 million clicks and millions in subscribers and advertising dollars. In April, Moss and Keating were handed an extraordinary $18.6 million judgment and 60 percent interest in the company after convincing a Texas jury they were burned. Now, however, it's the plaintiffs who are arguing that the enterprise is worthless.
The saga showcases the growth of digital entertainment platforms as well as the pitfalls of partnership. The adversaries in this case are Marko Princip and Brian Martin, who according to a federal lawsuit, took $1,500 back in 2012 from Keating in exchange for 30 percent of the business. At the time, there was talk of a sponsorship deal with the video game company Machinima, and over the course of the next few years, with savvy promotion and a little help from bots, the YouTube Video game Channel grew and grew and grew. But whatever fame and fortune beckoned for the group all imploded thanks to the failure to work out differences and a trial verdict in favor of the investors.
This is the story of the nature of the blowup.
Not too long after the jury's verdict, Martin acted angrily by asking users to submit pornography to him so he could upload it to the channel. The plaintiffs demanded sanctions, but the judge determined it was in the best interest of everyone to withhold a contempt finding as long as Martin didn't make any further efforts to harm the channel.
But that hardly soothed the raw feelings.
Moss and Keating brought a motion aimed at expelling Princip and Martin from the YouTube Video Game Channel, to which the YouTube stars, suddenly on the hook for $18.6 million, objected to the court's jurisdiction. And if they were expelled, contended Princip and Martin, they should be paid for their share of the partnership.
In late May, U.S. District Judge Paul Stickney agreed to this plan, saying that a permanent injunction providing for expulsion was warranted given that the investors had "demonstrated that monetary damages would be inadequate to compensate for the injury of VG being permanently banned for receiving three strikes or pornography being uploaded on the channel."
The judge added, however, that if the 40 percent owned by Princip and Martin had value, that amount should be credited against the amount owed to plaintiffs.
As the parties continued to fight over how exactly to unwind their partnership (Moss and Keating quickly discovered that it wasn't easy to "de-link" their names from the YouTube channel without additional user names, passwords and other data), a discussion arose in court papers about the worth of the enterprise. Valuing digital media properties has never been easy. Under this context, one can imagine the fight ahead.
Moss and Keating argued for a value predicated upon taking a multiple of the channel's income. What kind of a multiple?
"Industry statistics from over 300 transactions reveal the low-end, median, and high-end multiple of low-cost, high revenue internet websites like the one here to be 22.80, 33.63, and 43.49, respectively," they stated in a June 15 brief. "That yields a valuation range for the Youtube VideoGames Channel, predicated on the jury verdict, of $159,600,000 on the low end, and $304,430,000 on the high end. Accordingly, Defendants’ combined 40% interest would be valued between $63,600,000 and $121,772,000... This value is predicated on owner Marko Princip’s estimate of the valuation of the Channel before it was ruined by the current stewards, Brandon Keating and Ty Moss."
A couple weeks later, they filed another brief arguing for their valuation method with an attached exhibit that allegedly showed Keating had once used a valuation website and "announced that the Channel was worth in excess of $78 billion dollars."
On Thursday, an attorney for Moss and Keating — who have also sought a handover of usernames and passwords — wrote in a court brief that the defendants' valuation was "not really worthy of a response," but gave one anyway.
"They suggest that the overall valuation of the channel is greater than 79 billion dollars," stated the brief. "To put that number into context, Defendants’ counsel is suggesting that the VGYT channel is the third highest valued company/business entity in the entire world, just behind Apple and Google and well ahead of Microsoft, Coca Cola, Facebook, and IBM. Defendants’ counsel further suggests that the VGYT channel is worth exactly twice what Disney or McDonalds are valued at by Forbes. If the Defendants are correct, the VGYT channel is worth more than Rolex, FedEx, Netflix, Thomson Reuters, Boeing, T-Mobile, Philips, Prada, RBC, Hershey, and Costco combined. If this were remotely plausible, wouldn’t the Defendants have attempted to keep their interests in the channel?"
The plaintiffs again pointed to the jury's award of $4.2 million in compensatory damages covering lost royalties of the four years the channel has been in business. Then, they urged the judge to be rational.
"Who wants to pay to own 20% or 40% of a partnership that is controlled by two other partners who own 60% collectively?" they asked. "The Court can and should draw upon its legal experience and common sense when answering the question, 'Is there any market for the shares (partnership interests) of a non-publicly traded company?' The answer in modernity has always been 'no'. Thus, if either or both defendants fail to submit written documentation that their 20% interests in the partnership has not been sold by the time their response to this motion is due, then the court should rule that there is no willing buyer for the expelled partners’ partnership interests and the respective value of their interests is zero."
Judge Stickney will now have to figure out an answer to what this YouTube channel is worth, and while the decision hasn't come yet, there's probably some clues of what the outcome will be.
The YouTube stars already requested that the judge declare the judgment satisfied and to hold off collection efforts pending an appeal. The judge then had to figure out whether to order them to post a bond.
"The Defendants propose to pledge their ownership in the Videogames YouTube Channel or pay money into the Court's registry as security against the judgment," wrote Stickney in a July 20 order. "However, there are continuing accusations between the parties regarding how each side is damaging the Channel. Based on these accusations, the Court is not convinced that the value of the ownership stake rises to the level of protecting the Plaintiffs' interest."
The judge thus ruled that Princip and Martin should post a bond in the amount of $22.3 million if they desired to stay the execution of the judgment. On Monday, a notice of appeal was made to the 5th Circuit.