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Today we mark the five-year anniversary of Google’s (GOOG) acquisition of YouTube, announced October 9, 2006.

YouTube’s Origins

Akin to eBay’s (EBAY) Pez dispenser myth, YouTube’s early raison d’etre was that Steve Chen, Chad Hurley and Jawed Karim were looking for an easy way to share their Paypal office party video. In fact, the Paypal trio wanted to launch a video version of James Hong’s “Hot or Not.” With the URL registered in May 2005, Jawed posted the first video. From November 2005 to April 2006, former Paypal CFO Roelof Botha — now a VC at Sequoia — invested $11.5M.

Reminding me of Napster on steroids, YouTube grew feverishly.

YouTube Owned Video

iFilm had previously earned one “water cooler moment” in 2004 when it aired a CNN segment of Jon Stewart ripping into “Crossfire”’s hosts.

YouTube leveraged Adobe’s (ADBE) flash technology and Paypal’s embed Pay button to revolutionize video, leading to hyper-distribution.

YouTube crossed over to the mainstream thanks to NBC’s “Lazy Sunday” and Andy Samberg and Chris Parnell’s “digital short.” Did a random user upload the video? Was it an NBC marketing employee? Or, maybe a YouTube staffer? The rest, as they say, is history, as the casualties among YouTube competitors grew: Veoh, Guba, GoFish, Revver, etc. (we considered buying Revver).

In a March 2007 article on the all-time most explosive startups, I picked YouTube as #1 (at that time).

Google Spends Big to Buy YouTube

Google’s own Google Video initiative was promising but flat-lining. Metacafe, DailyMotion and Break Media survived but lacked YouTube’s traction.

On Oct. 3, 2006 I argued that YouTube was profitable.

On October 9 2006 Google paid $1.65 billion in stock to acquire the company. Chen and Hurley celebrated by going to Burger King. Some decried the deal, but Google’s market value immediately rose by $1.65 billion.

YouTube Impact on Content Owners

Much like Facebook today, YouTube sucked traffic and views away. In January 2006, when I launched WatchMojo.com, I found out it was utterly impossible to build a destination — for two reasons:

  • Who do you think wins an SEO contest between YouTube and your site?
  • Who links out or clicks through to another site if you can embed a video on your own site, play the video and keep the traffic?

Unsurprisingly, the number of content producers who maintain their own sites fell from 30% in 2007 to 10% in 2010. You can build an audience outside of YouTube, but you need an offline brand, celebrity cachet, millions in marketing, or content exclusive from YouTube.

Big Media Inertia, Greed

Both NBC Universal and Viacom (VIA.B) have taken turns attacking YouTube in the court of public opinion and through lawsuits. Why didn’t Big Media combine and launch Hulu sooner? The only thing they trust less than Big Tech is one another. Sumner Redstone and Rupert Murdoch fought over MySpace; it’s hard to see them hold hands, launch a YouTube clone and sing kumbaya (Viacom is not a Hulu backer).

Bandwidth Costs vs. Peering

Without a doubt, the business of video is expensive. OVPs such as Brightcove and Ooyala have raised $105 million and $55 million respectively. Ditto DailyMotion and Metacafe. Now with 48 hours of video uploaded every minute — and billions of daily video streams — YouTube’s bandwidth fees are considerable, which has led a myriad of analysts to question the financial wisdom of the deal. But over time, reports revealed that Google benefited from peer arrangements that led to lower hosting costs.

Regardless, Google has managed to generate more and more revenues from YouTube even though Hulu serves more ads off less total inventory.

YouTube Was a Grand Slam

Google acquired Doubleclick in April 2007 — almost half-a-year after it bought YouTube. Before YouTube, Google was a one-trick pony generating all revenues from search advertising. The deal’s logic was that YouTube gave Google an inroad into video advertising, but YouTube’s three bigger benefits remained; it gave Google the #2 search destination after Google.com, massive amounts of display advertising inventory alongside the player, and inventory to serve overlay text ads from Google’s paid search listings.

This is why Google’s acquisition of YouTube has proven to be so rewarding. I’ve had no shortage of suggestions over the years; to their credit, GooTube seems to have implemented some, if not all. As a result, video advertising revenue has finally become a reality.

But, Times May Change

A month after Google bought YouTube, I published an article on the Top 10 Greatest Internet Acquisitions. I omitted Google/YouTube because the ink wasn’t even dry. Previously, Google had paid MySpace parent News Corp. (NWS) $900 million to serve search ads across Fox Interactive Media, after Rupert Murdoch and Ross Levinsohn had agreed to pay $580 million for MySpace parent Intermix. As such, I (oh hindsight) picked MySpace as the best digital media M&A deal of all-time, at the time. For what it’s worth, I did argue immediately that Google had overpaid.

Google’s M&A team has ranked Android as their best deal ever, but with all of the legal issues surrounding it, many would consider YouTube a close second, especially with the moves it has made since the deal to make YouTube a leading platform for advertising.

Source: Google's Acquisition Of YouTube Has Proven Very Rewarding