“One reason YouTube’s price tag was so big is that nearly one-third of the $1.65 billion has been set aside to deal with potential legal issues, with the rest being distributed to shareholders, including VC firm Sequoia Capital.

Google realized that $500 hundred million may not be enough (there could be hundreds of thousands of copyright suits here), so they decided to let certain media companies in on the sale. Once major labels got wind, they used the “most favored nation” clause to ensure their piece of the action–about $50 million per major media company from the Google buyout.

Instead of receiving cash, the media companies received an equity position in YouTube, which means they won’t have to pay their artists any royalty fees (most record label contracts call for artists to get 50 percent of license deals). Since it’s an investment, they’re no longer required to share the spoils.

Google basically bought a six-month exclusive on widespread copyright infringement. It figures that deal will ensure that their competitors will slowly fall by the wayside. As a result, expect a legal claim of collusion between Google and big media companies as other video companies begin to spiral downward.”

“Google will acquire YouTube for $1.65 billion, marrying the dominant force in Internet search with the first and most powerful brand in networked Web video sharing, the companies announced. The deal is expected to close in Q4.

The agreement represents a big step into multimedia content and tools for Google. The company has long stated its enthusiasm for video, but has so far struggled to build a large audience around its own platform. With a value pegged at nearly three times the price News Corp. paid for MySpace only 15 months ago, the deal is also testament to the rise of social networking technologies.

“The YouTube team has built an exciting and powerful media platform that complements Google’s mission to organize the world’s information and make it universally accessible and useful,” said Google CEO Eric Schmidt in a statement. “Our companies share similar values; we both always put our users first and are committed to innovating to improve their experience. Together, we are natural partners to offer a compelling media entertainment service to users, content owners and advertisers.”

YouTube CEO Chad Hurley: “By joining forces with Google, we can benefit from its global reach and technology leadership to deliver a more comprehensive entertainment experience for our users and to create new opportunities for our partners. I’m confident that with this partnership we’ll have the flexibility and resources needed to pursue our goal of building the next-generation platform for serving media worldwide.”

YouTube will retain its brand identity and keep its offices in San Bruno, Calif.”