If you can't beat them, buy them

Does it make sense for Google to spend $1.65 billion to buy YouTube?

Sure it does - as long as they've figured out how to solve THE PROBLEM...

First, the plus side.

It's an all-stock deal which is good news for both parties.

YouTubes's co-founders, Chad Hurley and Steven Chen, won't have to pay any tax on the sale until they sell stock. Trading Google stock for YouTube's private stock is a like-for-like exchange, a non-taxable transaction.  Not bad for a year and a half's worth of work.  (YouTube was founded in February 2005.)

Another big winner in the deal: Sequoia Capital.  They put in $11.5 million for a 30% stake in YouTube.
Payback: $495 million in Google stock. A 42,043% return in one year. Not bad.

Good deal for Google because $1.65 billion in Google stock is a lot easier for Google to come up with than $1.65 billion in cash. 

In between the time the deal was a rumor and a reality, Google's market value went up over $3 billion, so if you value the YouTube purchase by Google's market value, the company picked up YouTube for free. It fact, it was actually was "paid" to buy it by Wall Street.

YouTube is the 14th most visited site on the Internet, so acquiring it is going to give Google (currently #3) more traffic to play with. And traffic is their stock in trade. More traffic, more ad opportunities, more revenue. What form these ads will take, no one seems to know, but it's a solvable problem.

By the way, Google's current market value is somewhere in the vicinity of $132 billion, so this deal represents about 1.3% of Google's total value. For Google to spend 1.3% of its worth to sew up the  Internet's leading 800 pound gorilla video site makes total sense.

But here's THE PROBLEM and I haven't heard any convincing solutions to it yet.

How is Google going to deal with all the copyright lawsuits?

The fact is YouTube it chock full of copyrighted material. (Frankly, that's part of its appeal.)

It's one thing for YouTube - a money-losing start up - to get away with that. In their previous state, they were judgement proof. But that's not the case any more. YouTube is now part of cash-rich, paint-a-legal-bullseye-on-my-forehead Google.

I have to think the lawsuits are going to be coming fast and furious.

Josh Burnoff of Forrestor Research was quoted by USA Today as saying "YouTube gets access to Google engineering that could, at the flick of a button, automatically filter out the copyrighted material."

That's a good fantasy, but it has no basis in reality.

More likely is that many corporate copyright owners, appreciating the awesome power of Google, will try to make nice before launching legal attacks. That being said, the number of copyrights currently being violated is stupendenously large.

In any event, grabbing hold of the most important Internet video site was the right thing for Google to do.
If they didn't do it, Yahoo! and others were waiting in the wings happy to pounce.

And as Google's CEO Eric Schmidt said about the deal: "This is the next step in the evolution of the Internet."

I agree Eric, and if you'd been reading this blog, you might have been able to get in a year ago for a whole lot less.

And here's my latest piece of advice...

To YouTube customers:

Start downloading your favorite YouTube videos today because Google is going to have to clean house in a major way - and soon. 

My guess is there will be a rapid-action pipeline set up between Google Legal and YouTube and as soon as credible complaints start coming in, there will be a team of people in place to - manually - make the copyright violating vides disappear one by one.

The "who cares about the copyright?" party so many of us have been enjoying as consumers will be coming to an end soon - at least as far as YouTube/Google is concerned.

P.S. Do you want to be notified when new articles like this one are posted to the blog?

Ken McCarthy was one of the pioneers of the movement to commercialize the Internet and was involved in early tests of what have become Internet promotion mainstays like e-mail marketing, banner ads, and pay-per-click advertising.  If you go to Google Video and search the term "marketing,"  a short film about his work is often in the top ten, if not the number #1.

It's easy. Just go to this page and we'll add your name to our bulletin list:

http://www.internetvideomarketingletter.com/

Copyright: Ken McCarthy, 2006

Reprint rights: You may reprint this article in full as long as you print it in it's entirety including the P.S.

 

Comments

[Adrian Bold]

I think copyright issues are the least of our worries. The biggest shame is that yet another independent resource has been swallowed up by Google. Roll on the Ginternet... :-(

[Dr. Max]

It's the Spanish Armada being defeated by the little English swift ships. Google's getting all worried about this apparent foe or big fat cat when their real demise is lurking in social bookmarking which is going to privatize networks such as video networks and crush corporate search anyway within the next two years. And that they can't control.

[Gilbert Mizrahi]

Actually, Yahoo was in conversations to acquire YouTube a while ago, but Google outsmarted them.

I see this move as a good sign. I mean, a couple of guys coming with the next big idea and cashing in really nice. At least this types of deals motivate all of us to be creative.... ok I have to go to create a startup or two:)

Gilbert

[Fred Holmes]

Google will eventually be able to acquire whatever it desires (eventually may have arrived already), but as others have observed, with enormous reach and range come enormous potential liabilities and legal quagmires, never mind that one's market cap one day gains allow $1.6 billion outlays to be sneezed at.

As many shares as are outstanding, a few cents one way or the other can equal a few hundred million dollars, so what comes quickly can go just as quickly.

Problems? Sure. Solutions? Indubitably. Good Solutions? Probably more likely than not.

Wish I'd bought Google at the IPO

[Cheryl Gonzalez]

Since Larry Page and Sergey Brin have made their goal to Dominate the Online and Offline world...this is just another show of them getting their way. We ALL know they do it their way and show others the hiway.

[Ian Pritchard]

Once again Ken you've thought of something that us 'lesser mortals' have missed. Always interesting, never dull. ttfn

[Glenn Sheiner]

As I was pondering the news of this acquisition by Google, I began giving some thought as to what revenue model Google was going to use.

Here's a few I thought of:

1. Paid subscription service --with 100 million subscribers Google wouldn't have to charge much to recoup it's investment.

2. Similar to #1 but offering a royalty to the copyright holders. This could get Google around the copyright issue. The copyright holders could allow Google to charge for access and receive a royalty.

3. Showing Google ads or links to affiliate programs selling relevant entertainment cd's ,dvds,etc.

Any others come to mind?

[Chui]

Online piracy is redefining the meaning of distribution channels, user-generated content, fandom, and most important of all, defining brand immersion.

OK, now some concrete exmples.

1) Distribution channels:

It used to be that producers produce Desperate Housewives, and TV stations distribute Desperate Housewives. It was a simple but effective arrangement. BitTorrent saw an end to that, and producers had to distribute the shows directly. Since one cannot exist without the other, the distribution channel's function has reduced to that of a promoter, helping to seed the series with initial audiences.

Here's another example. Newsagents (as they are called in Australia, or newspaper stores) used to distribute classified advertisements for newspapers. When CraigsList appeared, newspaper classifieds were forced online too. Since newspapers did not compensate the newsagencies, the response of newsagencies were form an coalition of their own and provide a online classified service to their customers, who are already hungry for such a service.

2) User generated content and fandom

Very few people are creative enough to create brand new content, but it doesn't mean that people can't enjoy themselves pretending they are creative: Look at the thousands of Karaoke bars that pepper Asia. YouTube is one of these Karaoke style outlets. They in their own are no threat to the producers. In contrast, they salt the audiences who may be primed to buy DVDs of the Colbert Report or some long tail Japanese TV game show.

3) Brand immersion

A successful brand has to enjoy being touched at many contact points. After all, a fandom is one of the best word of mouth. To call them pirates when they are literally breaking the law to promote your product does not fully appreciate what potential they are capable of. Online stores have appreciated that having an offline contact point, such as a real address or a phone number boost sales. Offline products like TV shows HAVE to embrace an online distribution channel as much as any other channel.

[Brian Lord]

Very interesting thread - thanks Ken. Very thought provoking.

So it's a done deal and Google Machine gets bigger ... great :( but it could be worse ... Microsoft could have purchased it :) . Always look on the Bright Side Of Life!

Anyway not to be negative about it... I would like to hear more about what Dr. Max has to say . The second comment in this thread; that of social bookmarking.

Would anyone like to elaborate further? Ken what are your thoughts here?

Thanks for a great post.

Brian

[Bruce Barnes]

I go to youtube to look at video not to click on ads. Noboby has said how much youtube was losing and the burn rate. All google wants to do is keep the brand and sneak in ways through ads to generate money.
That is a fad site with many clones coming every day. Remember broadcast.com that yahoo bought for 6 billion? Google stock will be trending down from now on not up. The law of large numbers is catching them. We are heading into a recession with declining ad revenue their bread and butter.

[STEVE OKEEFE]

A smaller Google item appeared in Wednesday's Wall Street Journal about Google beefing-up thier "Docs&Spreadsheets" services and offering basically "Office-Lite" for free online in competition with Microsoft's (ever)forthcoming Office 2007.

Suddenly it dawned on me that Google's model is not to charge for subscription or download but to give you every info-content-toy free accompanied by ads. That's exactly how they're approaching the potential copyright threat of YouTube -- by offering content owners a share of ad revenue.

Google will hopefully be able to buy off enough content providers with ASCAP or BMI style licensing to keep the lawsuits down to an acceptable level -- far below the advertising windfall they stand to gain through dominating video advertising the way they dominate search advertising.

[Randall Evenson]

For those who would suggest that Google can monetize their YouTube acquisition by making YouTube a paid subscription service is off base. Google fully understands they absolutely would fail turning it into a paid subscription service simply because they'd easily lose at least 95% of their current user base.

[Jeanne]

Great posts! Thanks.

Here's a report from the ground from someone who is a heavy user of both services.

Sounds like YouTube not only has a bigger audience than Google, they also have a better handle on how to provide Internet video sharing services.

"I have 49 videos on Google and 10 on YouTube.

YouTube has their act together better than Google, which lingers still in Beta; I have encountered problems with Google dragging their heels on listing all my videos; I have pointed out to them several times over that some of my videos (about 10%) are missing, to no avail; also, several days in a row three times now, my stats have not been recorded at all. Google always says they're aware of issues and are working on them; I have never had this problem with YouTube.

Positive on Google: they will let you upload any size/length video, whereas to upload anything longer than 10 minutes/100 MB on YouTube, you have to be in the director's program, which entails having a website and getting accepted.

Another thing I can add: YouTube posts videos much faster than Google does. It takes only a few minutes to get your video on YouTube, especially if you are using a compressed format.

Google takes much longer to upload; depending on which method you've chosen to upload to the site (there are two methods), there can be a second step involved as well.

In the beginning, I waited as long as 3 days to get my videos on Google, but they have improved since I started with them; now, they may take only up to one day, sometimes just a few hours, if you use the long method (which I prefer, because you can choose up to 3 categories to be included in); if you go the short method, you are able to pick only one category. Using this method, you can be up and running quicker, but not as quick as on YouTube, which is lightning fast.

I have uploaded MPEG, WMV and RealVideo files. I feel that since the resolution of neither Google nor YouTube is cutting edge, you're better off using less memory.

I also seem to get a larger audience, faster with YouTube, even though I have a captive group that watches my Google videos and less of a built in audience with YouTube. Nevertheless, I am "discovered" more on YouTube ... still wondering why, as I don't know how they steer their viewers beyond the use of key words...

I just discovered something new; I had never made changes to a video after it was running, but just did so as there was something I forgot to say in the writeup category. So I want to amend what I said in my last email, about only one category available via the short method in Google ... I discovered that after you have uploaded your video and it is running, you can select three categories if you click on your account, go to the list of your uploaded videos, then click on "edit". This will take you to a page where you can choose 3 categories instead of just one.

I just uploaded a new video to Google (my 50th on that site), and it took over one hour to do what YouTube does in ten minutes."

[Randall Evenson]

I agree with Steve O’Keefe’s comment "Google's model is not to charge for subscription or download but to give you every info-content-toy free accompanied by ads. That's exactly how they're approaching the potential copyright threat of YouTube -- by offering content owners a share of ad revenue." This is Google's most likely monetization approach for YouTube given their Adsense content ad program has proven to be fairly successful to date through revenue sharing with outside website owners (regardless of all the Death of Adsense hype and related non-sense).

And if this doesn’t sufficiently appease most copyright owners, then they’ll monetize YouTube via their Adwords partnership ad network approach.

And for those who don’t think ad clicking is a viable monetization approach, just know that Google has been testing for more than a year various ways to monetize online videos and they will be implementing their findings on YouTube soon enough.

And regardless if we’re heading into a recession or not, Adwords advertising success will continue to grow in the next several years, given that far more offline advertisers than not still haven’t even tried Adwords yet alone experienced its successful DM methodology. As more become familiar with just how powerful Adwords advertising is for them, they will continue to move more of their ad budgets over to Google’s ad networks in the coming years.

[Ken McCarthy]

More searches, more pages views, more revenue opportunities for Google's winning ad formula.

It makes sense.

Jeane's comments about the superiority of YouTube is interesting. That means in spite of its much vaunted technical prowess, Google was not able to compete technically on a key point: ease of upload.

Ease of upload = more content = more viewers. Seems like a simple formula.

I know that in my particular areas of interest, the YouTube selection beat Google Video by a mile.

[Ken McCarthy]

Found an old post of mine from 1995 (yes, 1995)

It was something I said at a conference:

"The big companies, like Microsoft and America Online, don't have the intelligence in-house to go after all the small, but lucractive niche markets that exist. They have bright people in-house and they organize them well, but they don't have the kind of creative intelligence that can move into an unstructured situation and create something new that works and generates cash flow. They're good at taking something like that and pumping it up to a large scale. But they don't have the spark that comes from individuals and small teams of people who are dedicated to creating something from scratch. You have the opportunity to go into a new field, the Internet that doesn't have a lot of competition and has a wide open panorama of opportunities. There are people with really deep pockets who will be delighted; if you come up with something successful, to give you a lot of money for it. Look at Global Network Navigator. They created a web site; a good web site but not the greatest and they got eleven million dollars for it when they sold it to America Online, two million in cash and nine million in stock. And there are other stories like that and there will be many more."

Like YouTube for example...

Original:

http://www.kenmccarthy.com/archive/mmlive.html#mccarthy

[Ken McCarthy]

Jeanne sent this analysis from the WSJ:

http://www.opinionjournal.com/columnists/dhenninger/?id=110009081

As I said to someone today, the Google YouTube purchase is the "Netscape IPO" of Internet video.

If the rest of the world has been slow to "get it" they definitely get it now. Historically, this is when the REAL fun begins. The period after Netscape's IPO (1995) was a gold rush for many people.

[Bum Marketer]

I have used both also, and much prefer Youtube.

Will Google recoup their investment?

I believe so. Google has usually done the "impossible" from the get go.

I agree too...that "social bookmarking" is Google's biggest threat. I can see them buying out del.icio.us or similar soon.

But that is going to be a much harder nut to crack.

[Ken Frazza]

My feeling is that along with the other reasons, Google purchased YouTube because of the amount of traffic they have. I believe I read they are 14th most visited site.
Could any of the other top 14 sites have been purchased for anywhere near this price?

I am also surprised how many people never even heard of YouTube.com until this purchase. With all of this press on the deal I am sure that the traffic will have increased even further.

Isn't one of the most important things about having a website the amount of visitors you can generate?
How long will it take for Google to get back it's investment from PPC ads on YouTubes site?
In watching Googles growth I haven't seen them make many mistakes so I am sure that this was well thought out by them.

Ken Frazza

[Dane Maxwell]

Where did you find that information on google testing video ads for over a year?

[richard butler]

Very very interesting. I lecture in a Collge in Ireland and if it's not bebo it's youtube.

I suppose one interesting thing comes out of this, you never know when you could create a successful site! Gives us all hope, if we actually develop good and interesting sites/products

Although the idea of a ginternet is a little scary, he who controls the information....

[Fred Holmes]

Google essentially got YouTUBE for NOTHIN'!!

Their stock price went up $4.24 on the announcement. That means the cost of $1.65 billion in GOOGLE TREASURY STOCK was ZERO.

There IS no investment from the Google point of view.

Just another asset at NO COST.

They don't HAVE to monetize the property to make money.

[Dave Jackson]

Just goes to show you how valuable traffic is.

[Tim 'Gonzo' Gordon]

Seems like a lotta fungolas for YouTube.com, but I agree it was a good purchase. I've posted a couple of videos on each and would echo Jeanne's comments on the ease vs. difficulty issues of posting on either.

From a user standpoint, I only really sit down and search for stuff with my kids. My 6-year old wants to see cute animal videos that make him laugh - and there are hundreds or thousands. My 14-year old and his buddies keep watching some odd game-based videos that they crack up from.

I do know of a podcast marketing company here in Oregon (www.podcastradioshow.com) that videotapes their podcast and uploads the videos to Google - and if you do a search for their keywords they're dominating the niche - and getting views and more podcast listeners. I think either Google or YouTube could be used as a springboard for grabbing more listeners.

Just for fun I posted the 'video tour' of my site at DigitalAudioWorld.com just to see if ANYBODY would EVER watch it and it's got a few dozen views, which has undoubtedly brought a few new viewers to my website. So, as a free marketing tool, if you're not utilizing it you're missing something.

[xoail]

Well, google can always place video ads before every clip to generate revenues from youtube, but wont that throw the viewers away?
what if i start something similar to youtube without any sort of ad?
do you think people will start visiting my site instead?