With Viacom embarking upon a $1 billion copyright infringement lawsuit, YouTube-owner Google is facing tough decisions on its future

Eric Schmidt, chief executive of Google, sounded almost plaintive last week as he pondered his company's increasingly embattled position in its relations with the rest of the media business.

"I have learned that, as part of being a player in the media industry, the way one negotiates is, everything is leaked and you're sued to death," he said.

He must be hoping now that those comments do not turn out to be prophetic. Viacom's $1 billion (€756 million) lawsuit this week against Google and its YouTube subsidiary, along with a request for an injunction against the popular video website, represent the first big legal challenge to a website that has captivated the imagination of internet users - and provoked the anger of media companies - around the world.

Equally important, they are a step backwards for Google in what has become its most important strategic initiative: to forge alliances in the media industry so that it can draw more professionally produced media "content", in particular video, within the reach of both its core search engine and YouTube. Success would help to put it at the very heart of the emerging online entertainment industry, while failure could relegate it to bit-part status as internet users go elsewhere.

Viacom's lawsuit, filed in a federal court in the southern district of New York, is the latest in a growing line of legal cases aimed squarely at the protections offered to online companies by the US Digital Millennium Copyright Act (DMCA), a 1998 piece of legislation that was meant to adapt copyright law to the digital age.

Ironically, while it was condemned by many in the technology sector as being over-restrictive, the law has become the main line of defence for internet companies facing legal challenges from "content" producers. Provided they remove offending material when a copyright owner complains, online service providers face no liability.

While "Viacom has a case" when it says it is the victim of widespread breach of copyright, "the DMCA is enough to take care of the problem it perceives", says Gigi Sohn, president of Public Knowledge, a Washington pressure group.

Viacom's lawsuit, however, picks at the defence offered to internet companies under the act, in the process echoing increasingly common complaints in the media industry that the law is already out of date. Viacom maintains that YouTube is clearly acting like a fully-fledged media company: it loads videos on to its own website, "publicly performs" it by streaming it to users, and stamps its own brand and advertising around the material.

Such arguments are unlikely to win much support in the courts, according to some legal experts. To redefine YouTube as a media company would be like treating eBay as a fully-fledged product company, says Gregory Rutchik of the Arts and Technology Law Group.

By claiming that YouTube wilfully posts copyrighted material on its site - indeed, that its entire business model depends on it - Viacom is also seeking to draw on a landmark decision from the US supreme court last year. The court ruled against Grokster, a peer-to-peer music service, on the grounds that its main purpose was to let users download copyrighted music.

YouTube, by contrast, exists mainly as a site for user-generated content, says Rutchik, and it would be hard for Viacom to draw on the Grokster ruling.

Yet, even if the case gets to trial and YouTube can pull off a successful legal defence, any victory might turn out to be of only limited value to Google.

Without willing participation from Viacom and other media companies, it would be starved of the material that is central to its ambitions.

Those efforts have hit several roadblocks, such as Google's inability to offer media owners a foolproof way of blocking users from uploading unauthorised content.

The problems are partly technical. In October, YouTube promised it would have a system in place before the end of last year that would use "digital fingerprinting" technology to identify copyrighted material and block it as it was being uploaded. In spite of assurances from Google executives that they are already testing the technology, and the fact that MySpace and other sites already claim to use it, it has yet to live up to this promise.

Yet a foolproof filtering system would present Google with other ethical and legal problems that would challenge its famous promise to "do no evil". As Sohn points out, not all of the unauthorised content on YouTube is illegal: the doctrine of fair use allows some use of material within the law.

If Google was to block this, it would have backed away from an important part of its mission to make "all the world's information" universally available.

As it tries to fit its technology more closely to the needs of media giants like Viacom, though, this may be a nettle that Google will have to grasp, and soon.