Jeremy Warner's Outlook: Copyright? What on earth is that? Neither Google nor YouTube recognise the word

For Google, a company now valued by the stock market at about $130bn, the $1.65bn paid for YouTube represents little more than small change. If Google were paying in cash, then more eyebrows might have been raised; instead it is paying in its own already highly valued paper. Google is thus hardly betting the ranch. Even if YouTube never makes a penny of profit, the damage will barely register.

All the same, this is an awfully large sum of money for a website that is both less than two years old and, as things stand, generates hardly any revenues. Is this, and other apparently fabulous prices paid for similarly vacuous businesses over the past year or two, a return to the madness of the dot.com bubble? The answer is both yes and no.

With YouTube, only an established search engine would and could have paid such a price, for only a search engine, with its click-through advertising model, would be capable of monetarising the content on the scale necessary to earn a rate ofreturn. Whether even the mighty Google can justify the valuation is open to question, but with technology which is second to none in matching advertising to content, it is certainly better placed than anyone else to do so.

What's more, Google has already tried to do the same thing through organic means but has largely failed. Google Video is a distant also-ran in the market for video file sharing. In business, there is always something to be said for buying the competition, so the deal may justify itself on these grounds alone.

So far, so positive. Yet there is also a more sinister reason why Google is buying YouTube. It is to do with the fact that the two have a common set of business values in the sense that neither seems to care a fig about the law of copyright. Both rely on the use of free content to drive their business. They therefore have next to no cost, or at least one so marginal that it wouldn't be recognised by any traditional media company.

Google is the most talked-about business phenomenon of recent times. Its founders, Sergey Brin and Larry Page, are feted wherever they go like demi-gods for the wealth they have created and the revolution in business and lifestyles they have helped bring about. No doubt a great deal of this is justified, but I'm still not wholly convinced Google is a proper business. As a sustainable business model, it may even in time prove to be as transitory as the online gaming sites, many of which have been trounced by confirmation of what investors and users chose to ignore - that online gaming is illegal in the US.

Google and YouTube are based on a not dissimilar misapprehension. OK, so both are only too happy to remove content where breach of copyright can be demonstrated, but they are extraordinarily aggressive in the manner in which they attack the soft underbelly of intellectual property rights, and their basic philosophy is that all content should be free.

Insulated from the real world by their newly found billions, it must be nice for Messrs Brin and Page to think this is true. In fact, all content, like any other form of produce, must ultimately be paid for, and if all Google is doing is acting as a supermarket for, or an aggregator of, other people's stolen goods, then in the long run it might have something of a problem.

Google and YouTube are routinely in massive breach of copyright. The fact that this seems to be tolerated is almost as odd as the phenomenon itself of one of the world's most admired companies being based on such a legally dubious business model. Yet the legal challenge to Google has so far been half-hearted.

At YouTube, some of the music majors have adopted the view that if you cannot beat them you must join them, and signed up to revenue-sharing deals on anything that might be generated by their material. Even so, breach of copyright remains the core issue for any business that relies on file sharing. Google and YouTube do just that. Napster and some of the other file-sharing sites that devastated the music industry have been defeated. Google and YouTube have yet to be similarly challenged.

It makes perfect sense for Google to buy YouTube. Based on similar philosophies, the two fit together like hand in glove. But the valuations are powerfully reminiscent of the mistakes that were made in the original dot.com boom seven or eight years back. The thinking relies on the idea that the wheel has in some way been reinvented - and that the traditional laws of business have been suspended. You'll forgive my scepticism.

Inflationary pressures are still with us

The last time the Governor of the Bank of England, Mervyn King, made a keynote speech, the press was unanimous in its interpretation. What the Governor was saying, said one newspaper, was that interest rates would definitely need to rise further. Another said his speech was neutral for rates while a third interpreted his comments as meaning that rates would soon be falling. You pays your money and you takes your choice.

So, making a speech in the Great Hall, Winchester, last night, Mr King was at pains to save commentators any further anguish. Nothing in his speech, he said, was intended as a hint of what the decision on rates would be in November, which will be based on the outlook for inflation two years hence at that time. Much could change between now and then.

Well, some warnings are meant to be ignored, so, with the Governor's words ringing in my ears, here's how I think his speech should be interpreted. One thing he did seem to be saying was that just because energy prices are now quite a bit lower than they were last summer doesn't necessarily mean that wider inflationary pressures are easing. After a prolonged squeeze on margins, many companies will use the lower costs and greater demand brought about by falling oil prices to try and raise their own prices.

Indeed, this seems to have been a pattern during the exceptionally long period of low inflationary growth the British economy has experienced in recent times. Prices do not tend all to rise together at the same rate. Instead, some prices will be climbing rapidly just as others are falling. What's more, it is still not entirely clear that earnings growth has been sufficiently restrained to accommodate past rises in energy costs. Many companies will attempt to use the reversal in energy costs to rebuild profit margins by putting up their prices.

Again, it is not yet clear to what extent the growth in the workforce - through immigration and longer working - will continue to be a braking influence on earnings growth. Mr King has said before he thinks the "nice" decade is over - "nice" standing for non-inflationary consistent expansion. Yet "nice" has so far given way only to "not so bad", so though Mr King does perhaps continue to make the case for higher rates, for the time being nobody should expect them to rise back to the punishing levels seen before the "nice" decade started.

London success, investor distress

One down, 20 to go? If common sense prevailed, the ejection of PartyGaming from the FTSE 100 would be the start of a cull which would see numerous others axed from an index which has become bizarrely unrepresentative either of UK commerce or even the global economy it pretends to track.

Indeed, the various FTSE indices are really only representative of one thing these days - London's astonishing success in attracting overseas listings. Provided the activity is not actually illegal in the UK and the prospectus contains the requisite barrow load of health warnings, almost anything goes. This open-door policy to listing is obviously good for the investment bankers and the vendors; it may not be quite so good for the passive investment funds forced to track these indices, as the disaster of the online gaming industry only too clearly demonstrates.

j.warner@independent.co.uk