How would you spend one-point-six-five billion dollars? That’s the question the owners of YouTube now face after their most impressive sale to the mighty Google. It was less than one week ago, in the wee hours of the 6th, that Michael Arrington, apparent spokesman for all things Web 2.0 posted the news of the two companies being in discussion. Two days later on Monday, October 9, the Wall Street Journal among others announced the deal could happen imminently, even as soon as the end of that trading day. And, they were right. That evening, or early afternoon Google / YouTube time, the deal hit the wires, and since then, everyone from AdAge to BusinessWeek to the Hollywood Reporter to the New York Times and Vallywag has spread the word of the all stock deal.
Reporting on the sale is the easy part. The hard but fun part is trying to sift through the noise and understand what the deal means. Google shareholders saw their shares diluted to complete the sale and new world of potential legal headaches come their way. They also bought a company that at best was breaking even according to reports, not to mention one that didn’t have an outwardly flushed out revenue model. In addition, there are no shortages of potential copyright issues, which is a topic that will prove either accurate in critics’ skepticism or the low-hanging fruit for the doubters. Copyright issues included, the other specific issues that seem to have surfaced the most are the price, the impact on its community and losing suitors, along with the “why?” – why YouTube, why video, why now, etc. Others have already dedicated a good deal of attention to almost all of these points, so we won’t take up much space here going deep into each.
The YouTube story is simply amazing. The site went from practically nothing to more than one hundred million streams per day in about 18 months. Its power was shown over the brouhaha with it being the vehicle by which millions watched and shared the Saturday Night Live skit Lazy Sunday. And, where else could a video of two girls lip synching end up being viewed more than ten million times? That’s incredible. And, that type of user base and behavior is not only part of the appeal but something to be protected. The technology can be recreated with ease, but the people’s devotion cannot. It is reminiscent of eBay and the critical role its community played in the business’ success. YouTube’s community might be worried, change does that, but if MySpace can grow after being acquired by News Corp, the YouTube’s audience should have nothing but enthusiasm at being now owned by the very egalitarian Google.
As important as the YouTube purchase is for Google, it’s just as important the companies that either lost or maybe saved more than one and a half billion dollars. In its article titled “Google Competitors Beware,” BusinessWeek explains what Microsoft, Yahoo, Time Warner (AOL), Newsweek, and Viacom should be worried about. Almost all of those companies had an interest in YouTube, and by getting the deal, Google showed they know how to execute. Chances are they weren’t the first or longest suitor; they were the NewsCorp to MySpace – the company that paid a price that made some question, but they did it with such speed and commitment that either makes them crazy (for such a large purchase) or genius. And, as they paid in stock, one that only rose after the announcement, it was almost a no-lose situation for Google. They get one of the most influential sites and all of the buzz. The deal too seems to take the wind out of a Yahoo-Facebook acquisition. In a sense, the leader in Internet and Internet advertising just said video is hot, so analysts and share holders might downgrade the idea of Yahoo spending one billion on a social networking site.
Online video as an industry is almost non-existent. The total amount of money spent this year won’t be half of what analysts predict the entire online video advertising segment will do this year. And, at $1.65 billion, it’s no wonder that former intermix chairman Brad Greenspan tried unsuccessfully to sue claiming that MySpace sold for too little. My first reaction upon hearing the potential price wasn’t quite the same as well-known venture capitalist and noted blogger Fred Wilson who said the founders deserve every penny. Fred has been among the strongest supporters of the site and on its impact on the Internet and media, something he details in a post titled, “How They Did It” and in “Stop the YouTube Hating” in which he writes, “I love YouTube. It is the single best thing that has happened to the Net in the past several years. Nobody is going to convince me otherwise, no matter how hard they try.”
While my first reaction might have been something more similar to “What?!” with it being a stock deal, Google definitely seems to have minimized much of the risk, and more importantly, they will make their money back. I cannot comment on the legal issues, but Google has seemingly navigated similar waters successfully, and it is my belief that they will with YouTube. I have little doubt that this acquisition will parallel MySpace’s in that with time, it will seem like a brilliant move and like Fred Wilson has already said worth the price. YouTube has the traffic, and when it comes to media, there is no substitute for having access to the people. Not only that, but Google has the platform. It’s a platform with hundreds of thousands of advertisers that will support more than ten billion dollars in revenue this year alone. They have the sales staff and are adding more; plus, they have the support of the current major online media buyers. Combine them together, and Google will find a way to make money off these videos and provide a means for publishers too as well.
In the end, it all comes back to search. Online media is no longer just about web pages; it is more fragmented and multi-faceted now than ever before. The popularity of YouTube shows that people want video. And, search is about giving people what they want. YouTube’s one hundred million streams per day is simply one hundred millions more queries for Google, and it’s just the tip of the iceberg. Right now, we might still think of search as keywords and web pages, but soon we won’t, which is why, in many ways, Google couldn’t afford not to do this deal.
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