In the latest “Google bought YouTube, now it’s worthwhile to sue them” sweepstakes, Viacom demands that YouTube delete 100,000 videos from its site. This happened Friday and isn’t news. However, the real story that has been missed by everyone, starting with the Viacom executive team, is that Viacom has just destroyed a $1B business opportunity. No doubt Viacom legal team advised this on two fronts: hold up GooTube for the maximum amount of money and for leverage in any future content deals. OK, that’s their right.

But, what if, instead of taking this approach the Viacom execs showed some creativity and embraced the phenomena that is user posted video? I mean, let’s be real here, due to the video posting rules, the average video size a user posts is 6 minutes. It’s not like they’re ripping off an entire 44 minute CSI episode here…..What they’re doing is providing FREE PROMOTION of the content being pushed by Viacom. After all, didn’t someone like it enough to go to the trouble of posting it? Isn’t it in Viacom’s interest to have a broader audience than is available on broadcast mediums alone? Isn’t it great to have a single place to engage this audience?

There are all kinds of fancy things that could have been done. But what about this dirt simple approach: GooTube, you keep the content up if you like, but we want you to add a live link back to Viacom on which we will do what we like to further promote and monetize the traffic. It could be done in an afternoon. What if Viacom had said “let’s create a Viacom community on GooTube” where our content can be showcased, shared, and discussed with multiple means of monetizing starting with advertising?

Let’s do some math: 100,000 videos. Each video averages 1,000 views over a year (I’ve posted one video 40 days ago that has had 404 views – it’s nothing special 3 star rated.) That brings us very quickly to 100 million viewing opportunities. Aside from the normal advertising stuff, let’s say we use contextual advertising where the video lead-in to the ads is relevant both to the content of the video and the profile of the viewer. That boosts the value of the ad tremendously. If we can average $1/view, we get $100M dollars. $10/view, we get $1B dollars in a year. $10/view will be very tough. $1 per view is possible (and to be explicit, I’m not talking about charging the viewer $1, that would be the fastest way to shrink this audience) if the ads are highly targeted and highly context sensitive.

But let’s not take the 1 year view, since Viacom has now demonstrated that they “get it” the number of videos grows to 200,000, then to 500,000 – audiences grow on the other transmission mediums, rates for traditional advertising increase. The linkage between broadcast and network blurs as people share and engage around their favorite content as Viacom springs into the lead by making the content freely viewable and promotes participation in the audience. Even at $1 per view, Viacom can reach $1B without requiring much in the way of imagination. Argue that $1 per view is tough, fine, it’s still greater than $0 per view.

Now I don’t know what Viacom’s lawyers think they can extort from GooTube through traditional means… But I do know this: the amount is less than $1B, this approach damages Viacom’s reputation in the audience as it’s clear Viacom doesn’t “get it,” and it damages a ready-made $1B business opportunity irrevocably. After all, do you really for a moment think those videos don’t exist elsewhere on the net? Puh-leaze! Instead of having a known audience in a single place, they’ve just dispersed the asset to other places where it’s not likely that copyright laws will reach (China anyone?)

If you’re a Viacom shareholder, you deserve and should demand more than simple extortion at the hands of broken copyright laws. You should demand that the leadership start engaging the audience on the network and harvesting cash from them in creative ways that grow the community. I’m not arguing about Viacom’s content rights, I’m arguing their ham-handed and ineffective way of using them in this instance. Why not harvest the energy of the tide rather than engage in a futile and stupid attempt to hold it back? If you’re a shareholder (and I’m not) I think you should be asking some pointed questions at the next annual meeting…you deserve better and more creative leadership. What they’re doing now amounts to passing $1B on the sidewalk simply because they can’t recognize it’s exists. Viacom trades at 24 times earnings today, adding a billion dollars to current earnings moves the share price from $41 to $76 per stub.

Investment advice: Short Viacom as a long-term issue. They’ll be a fully owned Microsoft subsidiary in 10 years time after being purchased for pennies on the dollar of current market value.

Update: Check Jim Moore’s blog out for an actual story of someone caught up in the sweep. If you check the video, it’s obvious Viacom has no ownership yet Jim was forced to remove it anyway. Talk about alienating an audience!

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