Google is snapping up YouTube for US$1.65 billion in a deal that catapults the Internet search leader to a starring role in the online video revolution.
Google Inc., the leading Web search engine, bought hot young video-sharing website YouTube in a 1.65 billion dollar stock deal that the companies proclaimed was a natural for the evolving Internet, the company’s largest acquisition in its eight-year history.
The all-stock deal announced unites one of the Internet’s marquee companies with one of its rapidly rising stars. It came just hours after YouTube unveiled three agreements with media companies in an apparent bid to escape the threat of copyright-infringement lawsuits.
The acquisition married Google’s online search prowess with a video-sharing website renowned for devotees but not revenues.
With Google’s technology and search leadership we will have the resources to take our services to the next level, YouTube co-founder Steven Chen said during a telephone press conference with Google executives. "We believe this is just the beginning."
Sparing No Expense
Google is expected to use the social networking site to earn up to £800,000 each month serving its own advertising next to videos as they play, thus garnering revenue.
The deal was reportedly developed in less than a week, and is a massive sum for a company with just 67 employees that was founded only 19 months ago.
The price makes YouTube, a still-unprofitable startup, by far the most expensive purchase made by Google during its eight-year history.
Although some cynics have questioned YouTube’s staying power, Google is betting that the popular Web site will provide it an increasingly lucrative marketing hub as more viewers and advertisers migrate from television to the Internet.
“We are natural partners to offer a compelling media entertainment service to users, content owners and advertisers,” said Eric Schmidt, Google’s chief executive officer.
"The YouTube team has built an exciting and powerful media platform that complements Googles mission to organize the world’s information and make it universally accessible and useful", Schmidt said in a statement.
YouTube soared to an Internet icon after its launch from a garage in Feburary 2005. The company claims that more than 100 million videos are watched daily by visitors to the free website, which features a content ranging from silly home videos to snippets of Hollywood films, television shows and concerts.
Copyright Concerns
Google said that it was drawn to YouTube because it was the clear market leader and had put together a "remarkable team" in a short time.
We think one of the keys to comprehensive search experience will be video, said Google co-founder Sergey Brin. "On the whole it is hard for me to imagine a better fit with another company. YouTube really reminds me of Google just a few short years ago."
While most videos posted on YouTube are homemade, the site also features volumes of copyrighted material — a problem that has caused some critics to predict the startup eventually would be sued into oblivion, much like the once-popular music-sharing site Napster.
“It will be interesting to see what happens next and what happens in the copyright world,” outspoken billionaire investor Mark Cuban wrote in a fresh weblog entry titled “I still think Google is crazy.”
“I still think Google lawyers will be a busy, busy bunch.”
But YouTube’s co-founders Chad Hurley and Steve Chen, 27, have spent months cozying up with major media executives in an effort to convince them that YouTube could help them make more money by helping them connect with the growing number of people who spend most of their free time on the Internet.
Cuban has referred publicly to YouTube as a lawsuit magnet because users freely upload digitized videos, television shows and other copyrighted material.
Keeping the Pressure On
While Google has been hauling away huge profits from the booming search market, it has not been able to become a major player in online video.
"This deal looks pretty compelling for Google," Standard & Poor’s analyst Scott Kessler said. "Google has been doing a lot of things right, but they are not sitting on their laurels."
That should change now, predicted Forrester Research analyst Charlene Li. "This gives Google the video play they have been looking for and gives them a great opportunity to redefine how advertising is done," she said.
Google’s YouTube coup may intensify the pressure on Yahoo to make its own splash by buying Facebook.com, the Internet’s second most popular social-networking site. “Yahoo has reportedly offered as much as $1 billion for Palo Alto, Calif.-based Facebook during months of sporadic talks.”
"Yahoo really needs to step up and do something," said Roger Aguinaldo, an investment banker who also publishes a deal making newsletter called "The M&A Advisor." "They are becoming less relevant and looking less innovative with each passing day."
Moving Up
In Silicon Valley tradition, YouTube was launched on its meteoric rise from a garage. In its first foray seeking external funds, the company raised 3.5 million dollars from Sequoia Capital in November 2005. In the newest deal, though, Google will pay for YouTube with shares of its own high-flying stock.
For Google, the acquisition of YouTube, the company’s largest, would thrust the Web search leader quickly into the emerging market for video advertising, where it has only a tiny foothold compared with Yahoo Inc. and various Web start-ups.
Analysts said the acquisition will build on Google’s strategy to add more content to attract advertisers. “By purchasing YouTube, Google would be able to apply its proven prowess for generating revenue through online advertising.”
“YouTube is phenomenally valuable in terms of traffic and in the Internet sector this is important, just as location is important in real estate,” Reuters quoted Sasa Zorovic, an analyst at Oppenheimer, as saying.
YouTube’s worldwide audience was 72.1 million by August, up from 2.8 million a year earlier, according to comScore Media Metrix.
Some cynics have questioned YouTube’s staying power because of copyright concerns.
YouTube’s conciliatory approach with major media has recently yielded several licensing and promotional agreements that have eased some of the copyright concerns while providing the company with some financial breathing room until it becomes profitable.
Just a few hours before the deal, Universal Music Group and Sony BMG said they had signed distribution deals with YouTube, following a similar agreement with Warner Music Group last month. Google also said that it had signed similar deals with Warner and Sony BMG.
The truce with Universal represented a particularly significant breakthrough because the world’s largest record company had threatened to sue YouTube for copyright infringement less than a month ago.
Li and Kessler expect even more media companies will be lining up to do business with YouTube now that Google owns it.
“It is going to be like: You can either fight us or you can make money with us,” Li predicted.
Selling to Mountain View, Calif.-based Google will give YouTube more technological muscle and advertising know-how, as well as generate a staggering windfall for a 67-employee company that was running on credit card debt just 20 months ago.
Since Hurley and Chen founded the company in February 2005, YouTube has blossomed into a cultural touchstone that shows more than 100 million video clips per day. The video library is eclectic, featuring everything from teenagers goofing off in their rooms to William Shatner singing "Rocket Man" during a 1970s TV show. The clips are submitted by users.
By joining forces with Google, we can benefit from its global reach and technology leadership to deliver a more comprehensive entertainment experience for our users and to create new opportunities for our partners, remarked YouTube CEO and co-founder Chad Hurley.
YouTube will continue to retain its brand, as well as all 67 employees, including co-founders Chad Hurley and Steve Chen. The deal, expected to close before the end of the year, combines two of the most popular Internet brands: Google, synonymous with Web search and rapid innovation, and YouTube, a leader in the new generation of user-participation Web sites.
“I’m confident that with this partnership we will have the flexibility and resources needed to pursue our goal of building the next-generation platform for serving media worldwide,” said Hurley, YouTube’s 29-year-old CEO.
Google and YouTube engineers already have dozens of ideas for handling ads, searches and videos, according to Google chief executive Eric Schmidt.
Most people believe that this is just the beginning of a video Internet revolution, Schmidt said. "I think there is a whole new ecosystem and we are expecting to be a part of it."
"Our community has played a vital role in changing the way that people consume media, creating a new clip culture," Hurley said.
YouTube will continue to operate independently with its headquarters in San Bruno, California, after the acquisition is complete, according to Google.
Several other suitors, including Microsoft, Yahoo and News Corp., reportedly have discussed a possible YouTube purchase in recent weeks.