GoogTube Would Be Most Expensive, Defensive and Riskiest Acquisiton Ever

Google (GOOG) is in talks to acquire YouTube for $1.6 billion, according to published reports. But such a duo hardly comes at a surprise.

Last week, I wrote about how Google was failing miserably against YouTube in the video wars. Google has also shown that it's a boring place to socialize. Clearly, video sharing and social networking are two growth areas that Google can't really play in by itself. It needs someone else. That's why Google partnered with News Corp's (NWS) MySpace.

Yet if Google bought YouTube, not only would it be the most expensive acquisition in its history, it would be the most defensive and riskiest.

By combining forces Google and YouTube hardly overcome the copyright concerns. GoogTube would have to wipe out 80% of the copyrighted material on the nascent video-sharing site, and then what? If they don't take them down proactively, then GoogTube would be a juicy target for lawsuits.

Still, who wouldn't want to buy the hottest online asset today? At Google's Zeitgeist event this week, every media executive fell over themselves to talk to YouTube founders Chad Hurley and Steven Chen. It was obvious that there were overtures. Michael Moritz, partner at Sequoia Capital, an early investor in YouTube, told an interested buyer attending the Google event that YouTube's not selling. Of course, that's just a line that means absolutely nothing. Of course, everyone is for sale, at a price.

So, what price for YouTube? It's whatever the market will support. Moritz apparently thinks YouTube is the next Google. For that possibility, any price can be justified. Neither Google or YouTube responded to an email, requesting a comment.

Despite YouTube being the fastest-growing online asset in the hottest growth opportunity on the Web, no one can make a case that anything over $500 million, let alone $1 billion is rational.

To be sure, both sides can be viewed as Switzerland, merely aggregators of everyone's content - copyright material and otherwise. Google is losing in the video-sharing battle. It ranked No. 8 in the top-rated video sites, according to Nielsen//NetRatings. YouTube ranked No. 3.

Who buys YouTube? Google? Yahoo? News Corp?

	Streams initiated (mm)	Unique streamers (000)	Streams per streamer
Total Internet	7,182	106,534	67.4
MySpace	1,459	37,422	39
Yahoo sites	812	37,934	21.4
YouTube	649	30,538	21.2
Time Warner Network	258	25,675	10.1
ROO Group	186	5,841	31.9
Microsoft sites	156	16,227	9.6
Viacom Digital	322	14,077	22.9
Google sites	60	7,520	7.9
Ebaumsworld	67	7,143	9.4
MLB	30	6,442	4.6

(source: comScore Media Metrix)

Tomorrow's on-demand generation loves YouTube.

I wrote earlier that it's a surprise if Google buys YouTube, but here's why it's not.

YouTube may be the hottest asset today, but it doesn't make any money. Rather, it's spending millions to support the world's appetite for pirated video tidbits. It needs a business model. Also, it's less likely that YouTube would be sued if it's partnered with Google. Media companies - CBS, Disney's ABC, NBC, Fox - would be less likely to sue a neutral service than each other. It GoogTube positioned itself as Switzerland, and continue to draw a big crowd, media companies will have no choice but to work with them.

As for the price, who knows? Mike Moritz thinks YouTube is the next Google. For that opportunity, any price can be justified.

At less than $2 billion, it's not a big chunk of change for Google. Google may be the only one that can pay up, and take the litigation risk of swallowing up this asset. And, Google has shown that it's willing to embrace the next-generation of Internet consumers by paying $900 million for an exclusive deal with MySpace.

Here's why it makes sense:

1) Google and YouTube become a neutral and major aggregator of video. Together they can attack the long tail of user-generated video content, and content produced by traditional media. Sure, there may be the risk of lawsuits, but if the combined GoogTube can maintain an audience, and work toward a technology that can identify copyright material (something YouTube claims it has), then what media company would sue? All may boycott the sites, but getting that consensus would be a challenge in and of itself. A media company might sue to take their content off YouTube, but if they're the only one doing so, they miss out on the potential audience to their content. It's a risk to sue, if you're the only one.

2) It's about community. Despite being considered a video-sharing site, YouTube is a social network. And, it's clear that social networks are the dominant force online. MySpace ranks No. 2 in pageviews while Facebook ties with Amazon.com at No. 10. YouTube ranks No. 14, by this measure. But in terms of video streams, YouTube and MySpace rank in the top 3, Google is No. 8, according to Nielsen//NetRatings.

3) Google has the advertisers while YouTube has the audience. If anyone can figure out how to provide relevant ads on UGC content, Google can.

4) Video will be the fastest-growing segment on the Web over the next few years. If Google misses the boat with YouTube at this price, YouTube may just get more expensive over time. $2 billion is a drop in the bucket today for Google, but paying up for it next year, may not go over so well on Wall Street.

5) YouTube is a great asset with 34 million unique visitors and 100 million daily video downloads. But it's risky to go it alone. It may be popular, but it doesn't make any money. And, its burning millions supporting our habit of on-demand copyrighted video clips.

6) If they combine, boy does this change the stakes of the game. Does GoogTube become the dominant network of the future? In a world of too many choices, a video aggregator as the No. 1 video destination seems pretty conceivable.

Typically, these deals are struck over a long weekend of negotiations. Let's see if the two come to an agreement by Monday morning. You're bet?

Comments

[kkin365:]

I read, a while ago, that YouTube is losing money every month and that it is in need of cash transfusion. Then, with GOOG, it said "no"; it YouTube playing cute or what? omooc

2006 Oct 08 11:12 AM

[Mr WaveTheory:]

I read Mark's blog posting Some Thoughts on Youtube and Google and I disagree with Mark's view. Mark believes that Google (Nasdaq GOOG) would be moronic to buy YouTube. I say they would be moronic not to buy.

There is only one #1 player in any given market as Internet entrepreneurs and investors have discovered with the outsized valuation given the Google. Leaders like MySpace and YouTube deserve significant premiums because they not only are synonymous with the product being delivered (MySpace/social networking, YouTube/video sharing, Google/search), but users gravitate towards those services because of their reputation. It takes no convincing to get a user to try MySpace, YouTube, or Google because chances are someone they know already uses it - and recommends it.

An advertising deal with YouTube would solidify Google as a #1 in video ads, but a buyout would solidify Google as the leader in Web 2.0 video.

Pop Quiz (Multiple Choice). Select the best answer below.
What do you want to be when you grow up? Do you want to be

* A) WPP Group Plc (selling advertising) (Nasdaq WPPGY)?
* B) Viacom, Inc. (broadcasting content) (Nasdaq VIAB)?
* C) Comcast Corporation (the leader in cable television, content and delivery) (Nasdaq CMCSA)?

<strong>The answer is ...</strong>

2006 Oct 08 01:26 PM

[Sufiy:]

I am looking on all this from investment perspective. Don't you think that with 32 mil unique customers to pay usd50 per head/data entry point is too much?

You are right that there is "Information Arms Race" and like in every tough competition companies are pushed into wrong investment decisions as they found themselves at the peak of business cycle. This is how bubbles are created: they are acting like "...revenue is secondary" it is important to survive and they are increasing capacity just before the period of economic contraction. Here we have very questionable deal even from the point of investment utilisation/increasing capacity: I can not see any middle term substantial revenue for Google from YouTube conbination. We will see this point in coming earnings release from Google I think we will witness further FCF contraction and stock price will drop accordingly. I will try to estimate full earnings for 2006 based on latest PWC report (note growth in online advertising is slowing dramatically in coming years)

sufiy.blogspot.com/

2006 Oct 08 01:30 PM