Google Spends $1.65 Billion for YouTube

    by Mark Glaser
    October 10, 2006

    It’s deja vu all over again as an unprofitable Internet startup, barely 19 months old, was bought for $1.65 billion yesterday. But the startup in question, video-sharing phenomenon YouTube, is not just any startup looking to cash in on hype. YouTube is the eyeball catcher of all eyeball catchers, racking up 100 million-plus videos watched per day, and has become a brand that has broken through to the mainstream, to the non-technical masses, to our grandparents and little kids.

    And yet… how do we put a value on what YouTube has done and accomplished in its short history? By all accounts, the site is spending more and more each month to pay for the huge bandwidth necessary to serve up that many videos. And despite the flurry of deals with mainstream media companies, YouTube still hasn’t clarified how it will make money in a certain way. And the Catch 22 is that it can’t make money without intruding on the sacred user experience — meaning ads inserted before clips show or in ways that would actually get people’s attention. A banner ad here or a text ad there isn’t going to generate much money when people are focused intently on the video that plays.

    So when brash entrepreneur Mark Cuban said recently at the Online News Association conference that Google would be “crazy, crazy, crazy” to pay so much for YouTube, you have to take him seriously. Besides, he was the one who sold his startup Broadcast.com to Yahoo for $5 billion-plus in 1999, so he knows all about craziness in the dot-com universe.


    I can’t say with any certainty what will happen with this marriage made in Silicon Valley startup heaven, but I can lay out what I see as the potential upsides and downsides of such a deal. Unlike the ridiculously conflicted “analysts” who gave their thumbs-up on GoogTube to the Wall Street Journal recently, I have no stake in Google or YouTube except as an interested observer and frequent site visitor.

    Why Buying YouTube Is Crazy

    > Most people who criticize YouTube believe they are a lawsuit away from going under. That’s a bit of an oversimplification of the situation, but it’s true that the legal situation around all the copyright violations that happen on YouTube is unclear. Sure, the site takes down violating videos when it finds them, but they also generally pop right back up somewhere else on the site.


    > YouTube is losing money, and there’s no obvious way it will make money at the moment. This is Google’s bet that it can figure this problem out and make it work without alienating viewers and participants. The search kingpin has said it won’t run ads before videos, and that’s perhaps the most proven way to make money from online videos.

    > The video quality is poor at YouTube and it’s hard to find good content there without watching a lot of crud first. This is the “empty calories” problem at YouTube, where you watch many, many bad videos for every good one you find.

    > The Internet can be a very transient place for content, and it would be just as easy for another pair of twentysomethings to start an even better version of YouTube in their garage and upend the site.

    Why Buying YouTube Is Genius

    > Even in its short history, YouTube now has the brand recognition and momentum and notoriety to be THE place for video online. Just to have all that video in one place to index will be worthwhile for Google, which has the stated goal of becoming the main reference place for all information in the world.

    > Right as the deal was announced, Google and YouTube announced major licensing deals with Universal Music, Sony BMG Music and CBS Corp. This possibly defangs the lawsuit threat from Universal, which had made noise about copyright violations at YouTube. Plus, Google already has a legal team together to deal with its controversial Google Print project and attacks on Google News.

    > Google has built the premier search engine and the paid search advertising structure, where relevant ads are served up next to “natural” search results, thanks to its huge staff of super-geniuses. If these brainiacs can figure out how to monetize search results, why can’t they figure out how to make money on viral video?

    > Google is content neutral. If a media company such as News Corp. or Viacom, or even an aggregator such as Yahoo, had bought YouTube, there would be questions about how it promotes different videos and sorts and tracks and pulls them down. With Google, there are less questions about content decisions because Google is viewed as being a more pure computer-generated aggregator and not a site with human editorial decisions being made.

    What do you think? Was this a crazy deal that harks back to the bad old dot-com boom daze? Or is this a perfect Web 2.0 marriage that will pay dividends for all involved parties? If you use YouTube regularly, are you worried about the Google buyout or happy about it? Please share your thoughts in the comments below.

    [GoogTube graphic from PaidContent.]

    Tagged: business business models google video youtube
    • Ben

      True, YouTube’s video quality may be dirt poor, but I’ve always found Google’s video player to load slowly and perform erratically. Perhaps I’m alons on this complaint, but I’d say in order for this deal to be a winner it would be nice to see higher quality videos, that load and play smoothly on both YouTube and Google.

      As to what I think about the deal? The same sentiments I have for the speculation that MySpace might someday be worth 15 billion; consumers of the Internet, especially of the viral video Internet are fickle. To be spending so much on an idea, or a system of users is ridiculous. I haven’t checked lately, but I’m sure that with the advent of spam mail, splogs (spam blogs), video spam can’t be too far behind. Once that happens it’s only a matter of time before users start looking for a newer, better site than YouTube, one that’s spam free. Of course, by then Google may have already rung the site dry of all it’s marketing potential.

    • Jay

      Its hard for me to image this fun but frivolous site being worth $1.65 billion. Then again, advertising is a bazillion-dollar industry, and Im sure Google is betting squarely on YouTube being yet another place to bring eyeballs to in order to view and/or click on more advertisements. I agree with the previous poster that web consumers are very fickle, but if you believe that video on the web is something that people will keep coming back to then this just might end up being validated someday, with its ability to sell ads being priority #1.

    • hammer

      I know a guy that sold his network of rural cable subscribers for 1.2 billion. He is now bankrupt, the bank took his home. The value of the subscribers changed quickly and so did the value of the stock. As Google and YouTube have witnessed the quickly changing landscape, it can change the other way….

    • Again a very good post Mark. I am totally with you on the quality issue of YouTube and all other videosharing sites. The industry might be there in 2-3 years, or sooner or later. The only thing we know is that we haven’t seen a good business model there yet.

      This is something that I have been speaking about a long time now. We need structure into these community-driven content sites. We need some filtering of the content or at least create the ability for the user to do so on request. I have written several blogs about the same and frequently discussed the issue. Not surprisingly the business managers often don’t see this as a problem as you keep the users there longer and thus yiou can show more ads to them. :)

      I just hope that we can get some sanity in the whole user-contributed content market and that we don’t make the mistake of over commercialize it.

    • YouTube has many ways to make money, and they’re all obvious to everyone.

      Pioneers must machete their way through the thickets of frustration, confusion, skepticism, and find the promised land.

      All that needs to be done is to focus on what people want. YouTube fans want fast access to relevant content, videos that are up their alley.

      This is the main problem, as you stated: difficulty finding quality content video. But that also makes it fun, learning how to get to that content.

      Paid subscription channels is one way to monetize and satisfy an audience need. I’d pay a few bucks a month to have an inside track to high quality, human indexed, human reviewed experimental music videos, for example.

      I do a free Avant Garde Music TV show on my Vaspers blog.

      I seek and find video by John Cage, Tangerine Dream, Caroliner Rainbow, Incredible String Band, Terry Riley, etc., and tack on links to Barnes & Noble music store and Amazon free music mp3 downloads, to help my audience find more of this music to buy, or find free legal music online.

      So YouTube can look to mashups, new apps, licensing, deals with record labels and net labels for exclusive rights to display music videos from them…

      ././. and why does no one mention the fact that YouTube OWNS THE RIGHTS to all that is uploaded?

      They can find stars like Lisa Nova, Paul Vato, AShotOfInnerFuel, Hope is Emo and turn them into sitcom, premium TV channel, video film distribution, or Hollywood movie stars.

      YouTube OWNS ALL THE CONTENT that is genuine original material, without copyright violations. They could put together “Best Of”.

      “Best of YouTube Homegrown Comedy” or “Best of YouTube Original Music Videos” or more targeted suites of content, hand picked and user tested for entertainment value.

    • P.S. I forgot to add: “…and sell CDs and DVDs of these YouTube Best Ofs”.

      Also: my friends and I see these old punk rock and new wave band videos, like PIL, The Slits, Siousxie and the Banshees, Adam Ant, Kraftwerk, etc. and we wish we could get these YouTube videos on DVD somehow, to keep forever and watch on things other than a PC or Mac.

      DVDs of this content could be sold physically or as paid dls, where you dl the video selections that are formated for PC/Mac DVD burning.

      That would be a dream come true, or if you could EVEN BETTER: compile the video selections yourself!

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