Google/YouTube Acquisition Conference Call Transcript

Google Inc. (GOOG)
Google to Acquire YouTube for $1.65 Billion in Stock
October 9, 2006 4.30 pm EST

Executives:

Kim Jabal, Director of Investor Relations, Google
Dr. Eric Schmidt, Chief Executive Officer, Google
Sergey Brin, Co-Founder & President, Technology, Google
David C. Drummond, Senior Vice President, Corporate Development
Chad Hurley, Co-Founder and Chief Executive Officer, YouTube
Steve Chen, Co-Founder and Chief Technology Officer, YouTube

Analysts:

Mary Meeker, Morgan Stanley
Imran Khan, JP Morgan
Doug Anmuth, Lehman Brothers
Mark Rowen, Prudential
Justin Post, Merrill Lynch
Kevin Allison, Financial Times
Daniel Arnell[?], ABC News
Victor Anthony, Bear Stearns
Laura Lach[?], Time Magazine

Presentation

Operator

Good day and welcome everyone to the Google Inc. conference call. This call is being recorded. At this time I would like to turn the call over to Ms Kim Jabal, Director of Investor Relations at Google. Please go ahead.

Kim Jabal, Director of Investor Relations, Google

Hi everyone and thanks for joining us today. On the call today to discuss the announcement are Eric Schmidt, our Chief Executive Officer of Google, Sergey Brin, the Co-founder and President of Technology at Google, David Drummond, Senior Vice President of Corporate Development at Google, Chad Hurley, Co-founder and Chief Executive Officer of YouTube and Steve Chen, Co-founder and Chief Technology Officer of YouTube.

First we’ll share some thoughts on this news today and then we’ll take your questions. This call will last approximately 30 minutes and a webcast of the call, as well as the press release, are available on our investor relations website. Now, I need to remind you that some of the comments we’ll make today are forward-looking, including statements regarding Google’s and YouTube’s prospects for improving their services and creating new business opportunities and the expected timing of the close of the acquisition. These statements involve a number of risks and uncertainties that could cause actual results to differ from those anticipated including regulatory factors, changes in economics, business, technological and competitive factors, and the failure of YouTube and Google to work together effectively. Please refer to Google’s SEC filings, including Google’s report on Form 10-Q for the quarter ended June 30 2006, for additional risk factors that may affect the outcome of these forward looking statements. Copies of these documents may be obtained from the SEC or by visiting the investor relations section of Google’s website. These forward-looking statements speak as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. Now I’ll turn the call over to Eric.

Dr. Eric Schmidt, Chief Executive Officer, Google

Thanks very much, Kim. This is a very exciting announcement here from YouTube World Headquarters. Joining me are the two co-founders, along with Sergey and David. Just this morning, you all saw five content distribution announcements with Sony BMG, Warner Music Group, Universal Music Group and CBS, which in my view highlight the growing value that content owners place on the Internet as a new channel to distribute and promote their work. This acquisition is an exciting next step in terms of our thinking about the evolution of the Internet and video and one of many investments that we, Google, will be making to make sure that video has its proper place in people’s online lifestyle on the Internet, worldwide.

Chad and Steve remind me, when I first came to Google, of Larry and Sergey and I say that with great affection. They are remarkable people and in a very short time they have built a remarkable team, creative, innovative, visionary and successful, the perfect example of the kind of people that we like to work with. Everyone here knows, on the call, that they’ve built an extraordinary business and a social phenomenon that I’ve never seen before. Their vision, focus and values complement our own and the thing that tipped us over was not the great business success of YouTube or the good working relationships, but in fact the vision.

The vision about serving their end users was exactly the same as Larry and Sergey’s vision in founding Google. We believe the combination of Google and YouTube will create this very new and interesting global media platform for users, content providers and advertisers all around the world. Chad, why don’t you tell everybody both why you decided to join up with Google, and also a little bit about where YouTube is going to go?

Chad Hurley, Co-Founder and Chief Executive Officer, YouTube

Yes, I would love to do that. Thank you, Eric. So we’re excited by this announcement and thrilled to join forces with the Google team. Google has demonstrated how great ideas can change the way people find and use information and from the beginning, we’ve listened to our community to create a stage where everyone’s voice could be heard.

Right now, we’re in the middle of a shift in digital media entertainment. Users are now in control of what they watch and when they want to watch it. They decide what rises to the top. What’s entertaining. So by joining forces with Google, we’ll be able to sharpen our focus on this vision to create a new media platform for consumers and partners to distribute their media worldwide. This will allow us to, you know, with Google’s success in building a revolutionary new ad platform, this has inspired us to create a new model, a new platform for video content on the web.

With this new relationship, we’ll combine Google’s experience and have the resources to continue on our mission to offer the most entertaining online video experience. Now I would like to turn it over to Steve, for his thoughts.

Steve Chen, Co-Founder and Chief Technology Officer, YouTube

From the technical side you know, at YouTube, at this time we are facilitating a powerful and cost effective infrastructure that scales to surf billions of videos. Now with Google’s technology and search leadership, combined with our innovative architecture, we’ll have the resources to take our service to the next level.

We’re committed to developing creative new features for our community so they can continue to express themselves in unique and personal ways. Building YouTube this past year has been an extraordinary experience for us all and we believe that this is just the beginning. We’re extremely excited to be working with Google to define this next generation of online entertainment.

Sergey Brin, Co-Founder & President, Technology, Google

Hello, good afternoon, this is Sergey. I just wanted to tell you how excited I am about this announcement. As you all know, Google’s mission is to organise the world’s information and make it universally accessible and useful. Video is a very important part of the world’s information. We spend a lot of time working in our two core areas of search and advertising. When you think about search, often times when you want an explanation or a true understanding of something, what better way to see it than an actual video stream. It’s just a fantastic source of information and we think it will be one of the keys to having comprehensive search experience, to have great search over video.

I also want to talk a little bit about our advertisers. Video is a great medium for advertising and from that point of view, we’re really excited about YouTube on that side as well, because I expect that will be a great channel for advertising. On the whole, it’s hard for me to imagine a better fit with another company, both in terms of the offerings and the video platform that YouTube has built as well as the cultural fit - this really reminds me of Google just a few short years ago. On the whole, I’m very excited and I’m delighted to be able to participate here with the YouTube founders on this announcement.

Dr. Eric Schmidt

Thank you, Chad, Steve, Sergey. Now I think we should move onto questions, so Operator, perhaps you could get the first question launched?

Questions and Answers

Operator

Yes, sir, thank you. Operator instructions. We’ll take our first question from Mary Meeker, Morgan Stanley. Please go ahead?

Q – Mary Meeker, Morgan Stanley

First, congratulations, which is not a question, that was a statement, but anyway moving on. There is obviously a huge amount of content on the YouTube site. There is a huge amount of searches on the Google site. How are you thinking about potentially accelerating the integration of those two services and assets, i.e. more tagging for the YouTube content? Also, what’s your plan for going out to the Sonys and the Warners and the folks that you just announced relationships with today, talking to them about how you can more effectively get their stuff tagged and then ultimately monetise it? Thanks.

A - Steve Chen

I’ll take the first part on the integration of search and the content on YouTube. I’ve always felt that the YouTube experience is a combination of watching videos as well as being able to find that next interesting video. We’ve had a lot of different ways that we’ve indexed these videos and what we feel like is we’ve reached – with Google’s help and with Google’s expertise in search, what we can really do is elevate the most relevant videos up to the user in an even more innovative fashion than what we’ve done in the past.

A - Chad Hurley

This is Chad – specifically talking about our partnerships with media, you know today announcing Universal, Sony and CBS, you know, combined with previous announcements with Warner Music Group – we’re committed to developing tools to help them identify their content and monetise it in new ways, not only by having a new outlet for distribution for their official catalogue, but the way to harness the power of user-generated content that didn’t exist before.

Operator

We’ll take our next question from Imran Khan, JP Morgan. Please go ahead.

Q - Imran Khan, JP Morgan

Hi, congratulations on the deal. A couple of questions, first of all I was trying to get a better sense of why did you feel it was necessary to buy YouTube when you have a comparable product – a competing product – Google Video. What are the reasons you think are the success of YouTube that led you to buy the company? Secondly, I was wondering why it’s stock, not cash, because I think in the past you made cash acquisitions? Finally, the last question is can you chat, can you give us some sense of what the cost side of the YouTube business – a little bit of color, what kind of cost structure you’re running? Thank you.

A – Dr. Eric Schmidt

This is Eric. When we looked around at our mission and what was out there, it was clear that Google Video is doing very well. Google Video has lots of interesting partnerships, a tremendous amount of content on it and it’s on a path to very, very tight integration inside of Google. When we looked at the marketplace and we say what was going on, there was a clear winner in the networking and social networking side of video, in the sense that people were using these in ways that we were very impressed with. That’s what really drove us to begin the conversations with YouTube.

A – David Drummond

This is David Drummond, on your question with regard to stock, we structured this as a stock transaction in order to make it tax free for the YouTube shareholders, which we think is a good transaction for them and for us, in the sense that it in some ways made it cheaper for us. There is some very slight dilution, but we think this was a good structure. We’re also pleased that the YouTube shareholders want to become shareholders of Google and participate with the rest of us.

A – Dr. Eric Schmidt

I think on the cost structure side, I can tell you, looking around these YouTube people have not spent very much money. They’re very, very thrifty. Let’s go ahead to the next question.

Operator

We’ll take that question from Doug Anmuth, Lehman Brothers. Please go ahead.

Q - Doug Anmuth, Lehman Brothers

Just two questions. First, can you provide some details around YouTube’s new content ID architecture and how that’s going to be implemented in the deal that you signed this morning? Then secondly, you obviously talked a lot about the user experience. Does that mean that going forward you would probably not consider showing pre?roll ads, even on some of the licensed content that you’re working with? Thank you.

A – Dr. Eric Schmidt

Chad, why don’t you go ahead?

A - Chad Hurley

The new systems that we’re putting in place allow our partners to identify their content through audio fingerprinting and metadata searches. It allows them to effectively see what’s going on within the system. Steve, you can elaborate on some other technical details.

A - Steve Chen

Yes, we’ve been hard at work, the engineering team here has been hard at work at creating just improvements in ways that users and content providers can identify the content that exists on the YouTube site. With various mechanisms – we’ve got fingerprinting, audio fingerprinting, as well as key word and context searches. We’re actively in development and hope to release this in the next month.

A - Chad Hurley

In terms of pre-roll advertising specifically, I think we’re going to be exploring a lot of options, you know, utilizing Google’s advance ad technologies and you know, presenting a good experience that you know, benefits our users experience and also helps our partners monetise their content.

A – Dr. Eric Schmidt

Thank you. Next question?

Operator

We’ll go to Mark Rowen, Prudential. Please go ahead?

Q – Mark Rowen, Prudential

Thanks. A couple of quick questions. Number one, when you think about – and I guess this is for Eric, but when you think about monetising YouTube and getting a return on the money that you paid, in the near term and then sort of mid term, maybe three years out, do you think that most of the monetisation is going to be coming from search advertising or video advertising? Then second, you mentioned that it’s slightly dilutive – I wonder if you could be a little bit more specific and tell us how dilutive it will be for this year and next year? Thanks.

A – Dr. Eric Schmidt

The first is I think you know that we don’t actually give guidance of any of that sort, so I really shouldn’t answer any of those sorts of questions. My sort of – I’m really not the expert on how the YouTube video opportunity will play out. What’s interesting is that in the relatively short period of time that the engineering people have had to talk to one another, and under the constraints of – you know – due diligence and so forth, we have come up with 20 or 30 different ways in which the YouTube technology can be assisted by Google technology. Google advertising technology can be applied to YouTube traffic, Google search can be used to improve the user experience for YouTube. We don’t lack from a set of ideas, and I think most people believe that this is just the beginning of an Internet video revolution. There will be many ways in which that video gets uploaded, monetised and copyrights respected, which is another key component of the YouTube vision and ours as well. Next question?

Operator

And we’ll take our next question from Justin Post, Merrill Lynch. Please go ahead?

Q - Justin Post, Merrill Lynch

Hi. Can you talk at all about the revenue share features when you work with content providers? Any economic outlook you can give us on those deals? And just, any idea on what you used to value this acquisition? Were you looking at cash flow returns or any kind of help you can give us on that?

A – Dr. Eric Schmidt

We typically don’t go into the details of the financials of the business deals we’ve been doing. I suspect YouTube has the same policy. In general, the deals are very, very good for the partner and that’s been one of the hallmarks of our deal making. David, do you want to talk about the structure of it?

A – David Drummond

Yes. I think we use – we model this on a more or less synergistic kind of a model. You can imagine that it might be difficult to sort of do this on a standalone basis. We feel that we arrived at a purchase price that’s very fair and reflects the great value that’s been created at YouTube.

Operator

Operator Instructions. We’ll take our next question from Kevin Allison, Financial Times. Please go ahead.

Q - Kevin Allison, Financial Times

Hi guys. I was just wondering, Chad and Eric maybe, if you guys could talk a little bit about the role that copyright played in sort of guiding your discussions about the acquisition and what your plan is for dealing with copyright issues? Aside from just the technical features, what other things are you doing and what steps are you going to take to interact with studios?

A - Chad Hurley

Yes, well you know in terms of guiding our decision, you know, from the beginning we’ve always respected rights-holders’ rights, and we’re going to continue with that mission. What this deal will allow us to do is to focus, to focus on that much more than we ever could before, to have the resources to build the systems, so copyright holders can benefit from our site. That will continue.

A – David Drummond

This is David again – the YouTube vision and the YouTube commitment to enforcing copyrights is very consistent with Google’s. We both rely on the Safe Harbor of the DMCA and take many steps to discourage our users from uploading infringing material. We cooperate with content owners to remove things whenever we find them and when we hear about them. So we think that with some of the deals like the ones you saw this morning, we can take even greater steps to work with content owners to protect their intellectual property rights.

Operator

We’ll take our next question from Daniel Arnell[?], ABC news. Please go ahead.

Q – Daniel Arnell[?], ABC News

I’m wondering what, if anything, users can expect in terms of integration in the short term. I know a lot of people who are certainly using the sites for content, who are wondering kind of what we’re going to be seeing and how quickly?

A - Steve Chen

This is Steve, I mean, as Eric mentioned, just in the last 48 hours we’ve been rushing to create a list of all the potential integration points between Google. It’s difficult to say right now exactly what we’re going to be attacking first, but there’s no shortage of projects in the weeks ahead.

A - Sergey Brin

This is Sergey, from the Google side, I think we care very much about search and as I mentioned to increase the comprehensiveness of search, and we’d certainly want to include YouTube’s videos in that. I think that we’ll also work on the advertising systems, but I think that there’s a great deal more experimentation and trials to be done there, so that might not happen quite as quickly in a user-visible way.

Q – Daniel Arnell[?], ABC News

So Google Video doesn’t go away right away?

A – Dr. Eric Schmidt

No, it doesn’t go away right away or ever. I hope that’s clear. Google Video is a very valuable part of the Google experience and in fact it’s going to become even more integrated with Google overall.

Operator

Operator Instructions We’ll take our next question from Robert Peck, Bear Stearns. Please go ahead.

Q – Victor Anthony, Bear Stearns

Yes, this is actually Victor Anthony in for Robert. I just had a few quick questions. One, we were wondering whether or not there was anything in particular about the MySpace deal, anything that you guys are learning from the MySpace deal that made YouTube more attractive? For example, are there any data mining possibilities that you guys could probably leverage there. Second, as far as the transaction itself, are there any break up fees? What would prevent the transaction from closing? And we understand that there was a bidding war for YouTube – we wanted to know why did YouTube actually end up choosing Google over their other potential bidders?

A – Dr. Eric Schmidt

I’ll take the first question. We certainly have no intention of kind of data mining or what not. I think the general take away that we’ve seen from sites such as MySpace, but you can look at others online, YouTube obviously, Facebook, Orkut in Brazil, I think that you see that there’s a new class of sites that have really developed very quickly, are very successful and are very attractive to users and are obviously delivering a lot of value. I think that’s kind of a next generation of Internet sites and companies and you know, we’re very excited to work with them in all sorts of ways whether it be partnerships or in this case as a merger, compilation[?] relationships and what not. I think it’s just a whole new eco system and we’re excited to be a part of it.

A - David Drummond

On your other questions relating to the closing of the deal, we expect the deal to close in Q4, subject to the normal customary conditions, HSR approval and the like. The deal has been approved by all necessary corporate approvals – in fact, we’ve obtained all necessary corporate approvals of both companies in order to consummate the transaction. As to your last question, it’s really not possible to comment on what other companies might have been thinking. We had a very – it was a very good negotiation process, in which we arrived at a fair deal for both parties.

Operator

We’ll take our next question from Laura Lach[?], Time Magazine. Please go ahead.

Q - Laura Lach[?], Time Magazine

Hi, everyone. This first question is for Chad. Chad, you repeatedly said in interviews and so forth that YouTube isn’t an acquisition target, it’s not for sale. Essentially, what’s changed?

A - Chad Hurley

Well, you know those comments were made because we wanted to remain independent and continue on our mission to build great products for our users. You know by know, working with Google, that’s still the case. We’re going to be able to remain independent and concentrate on building great features for our users. But now we’ll be able to sharpen our focus on building the new media platform and we’ll also combine with Google’s experience and resources to accelerate that. That’s what excites us about this deal and we’re looking forward to the future.

Q - Laura Lach[?], Time Magazine

What’s happening to the YouTube brand, how will that integrate with Google, is there going to be a name change?

A – Dr. Eric Schmidt

Very much no. We have decided that it makes perfect sense to continue YouTube as a brand and as a community and as a separate business operation of Google. We think that the brand has value, we think that end users care a lot about it and we want to preserve that. We think it has great value for end users, for the corporation, for our shareholders and for advertisers. It’s turns out I’m getting a message that we need to finish up. I wanted to thank everybody for taking the time to listen to us. This is the next step in the evolution of the Internet. The Internet started off as a way in which people would communicate and talk to each other, and soon here I am surrounded by all these video cameras and people who are the world’s video experts. It’s a natural next step and one which is very exciting for Google, for YouTube and I think for everyone’s users. So thank you very, very much.

A - Chad Hurley

Thank you, everyone.

Operator

That does conclude today’s presentation, we thank you for your participation and you may disconnect at this time.

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