Google’s lightning-quick acquisition of online video pioneer YouTube once again demonstrated the Internet search leader’s penchant for pouncing on golden opportunities that leave its rivals scrambling to catch up.
Google Inc.’s $1.65 billion deal to buy video entertainment site YouTube Inc., announced lately, has raised the bar for other major Internet players to strike quickly as confidence in the sector grows and valuations rise, industry insiders said.
To an outsider YouTube is a fledgling company, which is less than two years old and as far as anyone knows has yet to make a penny in profit.
Yahoo Inc. is under pressure to clinch a deal to acquire Facebook.com, the No. 2 U.S. social networking site, to recapture momentum from Google after that company struck a deal to buy YouTube, analysts said.
“This is the next step in the evolution of the Internet.” That is how Google’s chief executive officer Eric Schmidt summed up the significance of his company’s deal to pay $1.65 billion to acquire web video phenomena YouTube.
A Yahoo acquisition of Facebook, the dominant hangout for college-age students, could approach $1 billion. Industry sources have previously said the pairs have held talks although it is unsure what stage these are currently at.
We think Yahoo is being out-executed by Google in terms of innovation, financials and partnerships/acquisitions, Scott Kessler, an analyst with S&P’s Equity Research Services, wrote in a note to clients.
Perhaps no Google competitor has fallen behind in recent months as much as Yahoo Inc. – an Internet icon battling perceptions that it has lost its competitive edge, even as it continues to attract the largest audience on the web.
Beyond YouTube, Facebook and top social networking site MySpace.com, which was acquired a year ago by News Corp., there are precious few companies of scale yet to emerge in the market for consumer generated media firms.
“During the summer, Google formed an advertising alliance with News Corp.’s MySpace.com,” a social-networking site that is challenging Yahoo as the Internet’s most viewed site. Just as important, Google has continued to widen its lead in the lucrative search market – the main reason investors think the company is worth $130 billion after just eight years in business.
“It is a feeding frenzy,” said Wharton marketing Professor Peter Fader, who said that besides Google/YouTube and potential Yahoo/Facebook tie-ups there “will be all kinds of other buyers and sellers emerging out of the woodwork.”
Dot-Com Comparisons
However, Schmidt is known as one of the canniest guys around Silicon Valley, having guided Google to a market capitalization of $132 billion while keeping everyone’s feet on the ground at the legendary Googleplex.
When Schmidt and Google’s co-founders Sergey Brin and Larry Page became convinced that YouTube represented a paradigm shift on the media landscape, they jumped at the opportunity as though the good old days of the dotcom boom were back.
And in a sense they are, except that this time the exuberance is slightly less irrational than in the late 1990s.
Fader worries that prices will ramp up quickly, inviting easy comparisons to the 1999-2000 dot-com boom and crash.
"For the most part the dot-com craze has settled down. But this is the one remaining Wild West area…. if too many firms rush in and pay too much money for some of these community oriented sites it could hurt everyone, just as things burst in 2000."
Josh Bernoff, vice president Forrester Research, was also concerned about companies overpaying.
"What is going to happen is some other companies are going to buy these second-tier video sharing sites, and they will be some of the worst deals ever made. Companies like Viacom and Yahoo will look at what is left. They will overpay.
The Google triumvirate first made an offer for YouTube just last week, when they met YouTube’s founders Chad Hurley and Steve Chen – both in their 20s – at a modest diner in Silicon Valley.
Within days a deal had been hammered out, making the young duo the latest multimillionaire heroes of the web revolution. It also put Google in a prime position to emerge as the most important media company of the 21st century.
"Mass media – the grand media trend of the 20th century – is becoming personal media," noted Kevin Maney, a tech commentator for USA Today. "The Internet is making it possible for people to find and consume any song, TV program, video or movie anytime they want."
Yahoo chairman Terry Semel has repeatedly described the Sunnyvale-based company as being well positioned to capitalize on the entertainment and advertising industries’ continuing migration to the Internet. To be sure, Yahoo is making plenty of money – a $324 million profit on revenue of $3.1 billion through the first half of this year.
But Internet observers are convinced that Yahoo will have to do something dramatic to get Wall Street and web surfers excited about the company again. The conventional thinking is that Yahoo will step up its efforts to buy Facebook.com, the second most popular social-networking site behind MySpace.
Yahoo reportedly has been talking to Palo Alto-based Facebook for at least three months and has offered as much as $1 billion for the site. Those protracted negotiations have made Yahoo look somewhat indecisive, particularly since Google was able to close its deal with YouTube in one week.
“Yahoo really needs to get this deal done now,” said Chris Winfield, who runs the search marketing firm 10e20. “They have to jump in there and make a splash.”
If Yahoo is able to snap up Facebook, it will need to do a better job taking advantage of that service than it has with some of its other recent acquisitions, said Dmitry Shapiro, chief executive of Veoh Networks, another online video service.
Not just Yahoo, but Microsoft Corp. also needs to move quickly in the social networking space as content sites are being consolidated. Sources close to the company say the software giant believes it can build competing properties themselves rather than be forced to overpay for hot companies.
How fast is this trend growing? Almost too fast to count; YouTube launched in the summer of 2005, and by January 2006 had 9.5 million unique visitors, according to ComScore. In August, that had grown to 72 million a month. To those users, YouTube is streaming more than 100 million videos a day.
The continued growth of broadband will accelerate this trend even further, yielding a bonanza for Google as it uses its sophisticated algorithms to insert brief ads that are relevant to the individual viewer.
Yahoo spokeswoman Joanna Stevens declined to comment on the status of any talks between her company and Facebook. "We do not comment on rumors and speculation," she said. Facebook were not immediately available for comment.
Perhaps the biggest risk facing Google is getting sued for the frequent copyright violations that crop up on YouTube’s site. Most analysts, though, seem to believe Google has the technological know-how to detect copyright violations before they appear on the site.
Meanwhile, YouTube’s users also will have to become more accustomed to seeing ads on the site. Hurley and Chen already were moving in that direction as they tried to make money on their own, but the marketing push seems likely to accelerate now that the Internet’s advertising leader has paid such a lofty price for the service.
Hurley and Chen certainly sounded optimistic about YouTube’s outlook in a video posted after the Google deal was announced. "The king of search and the king of video have gotten together," Hurley said. "We are going to have it our way."
As YouTube screens out more copyright-protected content, it stands to lose some of the video that has made it so appealing, critics say.
The quality of the match is paramount, say analysts.
Fader sees the Google/YouTube deal as unique, as it involves "iconic" players as well as being able to generate synergies superior to "just adding another asset to the corporate portfolio".
“While both fine companies,” neither Yahoo nor Facebook “is nearly as dominant or unique in the minds of its customers as both a Google and YouTube,” he said.
“But if you really understand what all of us are working on, we are creating a new medium called Internet Television and that medium will be as compelling and as valuable as the medium of the web itself.”