Internet search leader Google Inc. is in talks to acquire the popular online video site YouTube Inc. for about $1.6 billion in cash and stock, the highest price yet offered for a consumer-generated media site, according to published reports.
According to the newspaper, the talks are at a sensitive stage and could break off. YouTube declined to comment on the report. Google representatives could not immediately be reached.
Mountain View-based Google and San Mateo-based YouTube are still
at a sensitive stage in the discussion, The Wall Street Journal and The New York Times reported on their Web sites, citing unnamed people familiar with the negotiations.
Analysts said a Google acquisition of YouTube would make sense for both companies if the reported talks lead to a deal, especially considering Google’s $10 billion in cash on hand.
"It is damn cheap for a company that already has a global presence," said Trip Chowdhry, an analyst with the San Francisco-based Global Equities Research. "YouTube’s brand identity is no less than Google’s and is no less than Coke’s."
As YouTube’s popularity continues to soar, she said, Google can help make sure the site’s infrastructure can keep pace.
YouTube, which was founded in February 2005 as one of dozens of Internet video start-ups in a garage, has since then exploded in to amazing popularity that now serves 100 million videos daily by letting users share short video clips–both home videos and programming copied off television. YouTube has drawn scrutiny from major media companies for copyrighted television and music videos that users post without owner consent.
While YouTube lately said it had signed a spate of distribution agreements with major record labels, analysts say Google could still be inviting lawsuits with this acquisition.
Hot Property
Rumors of a Google-YouTube deal appeared on the TechCrunch blog of Web start-up powerbroker Michael Arrington, who said such talk was circulating among Silicon Valley venture capitalists after months of speculation that YouTube was an acquisition target.
"YouTube is the hottest property on the Web, one that could be worth much more than $1.6 billion if monetized properly," said RBC analyst Jordan Rohan, adding he had no information on whether YouTube would be acquired. His calculation is based on combining YouTube’s audience and Google’s advertising prowess.
For Google, the acquisition of YouTube 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, Rohan said.
YouTube eclipsed traffic on Google’s video site in February. By July, the number of monthly visitors had grown to about 30.5 million, compared with 9.3 million for Google Video and 5.3 million for Yahoo Inc.’s Yahoo Video, according to Nielsen/NetRatings.
YouTube reports serving about “100 million videos daily” and has drawn scrutiny from major media companies for copyrighted material appearing on its pages without their consent.
Google’s video service lets everyday users post clips, too, and unlike YouTube, Google also gives them the choice of selling video. All YouTube clips are free.
Essentially Google can give less than 2 percent of its market cap and keep this platform out of the hands of everyone from Yahoo to Microsoft to Viacom, said Rohan.
MTV owner Viacom, still hurting after News Corp. elbowed it aside last year to acquire top social networking site MySpace.com, recently dodged questions on whether it had courted YouTube — another of the most popular Web destinations for young people.
"It is a very good company," Viacom Chairman Sumner Redstone said in a TV interview with Charlie Rose.
Rat-Infested Offices
YouTube ranks behind only a handful of other so-called Web 2.0 sites — the new generation of Web sites that rely on user-generated publishing for much of their content. “Social networking sites MySpace and Facebook rank first and second, followed by online encyclopedia Wikipedia, then YouTube,” according to U.S. Web audience data from Hitwise Inc.
The site serves about “32 million visitors monthly” and has about $11.5 million in venture capital financing from Sequoia Capital. A Sequoia spokesman was not available to comment.
YouTube, with a little over 60 employees — twice the staff it had in May — recently moved into "bigger, less rat-infested offices" in San Bruno, south of San Francisco, according to the company’s blog.
YouTube is surging thanks to the increased availability of high-speed Internet connections and gadgets such as camera phones and digital cameras capable of taking video. Most of YouTube offerings are short amateur clips, although professional filmmakers, television networks and even political campaigns have posted materials.
But many of the site’s videos contain copyright material, putting it at odds with big media companies such as Universal Music Group. YouTube immediately removes videos when copyright holders complain, but analysts said the company is still in a precarious legal position.
Earlier this month, Universal Music Group and Sony BMG said they signed distribution deals with YouTube, building on a similar agreement with Warner Music Group last month. “Google also signed similar deals with Warner and Sony BMG.”
YouTube was the subject of merger speculation for most of 2006. Potential buyers included Yahoo and Microsoft Corp. and media giants News Corp., owner of MySpace.com, and MTV owner Viacom Inc.
YouTube has asked for about $1.5 billion during talks with potential suitors in recent weeks, sources familiar with the matter told Reuters.
Microsoft spokeswoman Whitney Burke said her company opted to build its own version of YouTube, which it calls Soapbox. "Microsoft evaluated acquiring this type of technology several months ago, and decided to build our own offering," she said.
Google has previously preempted rivals from striking deals that could threaten its dominance in key Web segments.
Nonetheless, in anticipation of the deal, investors pushed shares of Google up $8.50, or 2 percent, on Nasdaq to a closing price of $429.00 — a level not seen since late April. In extended hours’ trade, Google climbed to $431.55.
"YouTube is phenomenally valuable in terms of traffic and in the Internet sector this is important just like location is important in real estate," Oppenheimer analyst Sasa Zorovic said of combining YouTube with Google’s advertising machinery.
The all-stock deal, expected to close this quarter, was structured to make it tax-free for YouTube shareholders and cheaper for Google than paying cash, company officials said.
The move is a big departure for Google, Citigroup analyst Mark Mahaney noted, with the purchase price almost equal to the total value of what the company has spent on prior mergers. “But the value of combining one of the world’s largest user generated sites with one of world’s largest advertising and computer networks "could be enormous," Mahaney predicted.
Mark Cuban, an Internet investor and the outspoken owner of the Dallas Mavericks basketball team, told the Online News Association in Washington, D.C., that Google would be "crazy" to do a deal because of the legal challenges YouTube faces.
To control rampant copyright infringement on YouTube, Google would be forced to monitor what videos users upload to the site. "Once you have to start monitoring, the whole business changes," Cuban said of the risk to Google.
Cuban sold his pioneering Web radio company Broadcast.com for $5.7 billion to Yahoo at the dot-com era’s height in 1999.
In December, Google agreed to pay $1 billion for a 5 percent stake in Time Warner Inc.’s AOL unit in a deal that expanded their advertising partnership.
The first deal to value one of the new generation of user-participation Web sites at more than $1 billion combines two of the most popular Internet brands: Google, synonymous with Web search and rapid innovation, and YouTube, a Silicon Valley upstart that has spearheaded the video-sharing craze.