Why It Make Sense For Google To Buy YouTube

Google Inc. said today it’s buying No. 1 Internet video sharing Web site YouTube Inc. for $1.65 billion in stock. While most of the market thinks this move is largely a defensive one, there are many good reasons outside of defense for this buy out.

If You Can’t Beat Them, Buy Them

YouTube is the number one video sharing site on the net, with 42% of the market. By comparison, Google Video is just a little pea boat next to an aircraft carrier. Sure, Google has the technology and the resources for build a YouTube clone but the one thing they do not have is the YouTube traffic, and the traffic is really the key behind this purchase.

Another thing to keep in mind is this deal doesn’t cost Google any cash – it’s a 100% stock transaction. That leaves $10 billion in the bank to battle all those potential copyright lawsuits. Speaking of copyrights.

What A Great Way To Show Off Your New Copyright Technology

Google is no newbie when it comes to dealing with copyright violations. They have been involved in a few big ones and have come out of it smelling like a rose each time. The number one threat to YouTube has always been the possibility that they will be sued out of existence because of users uploading copyrighted videos. The theory is YouTube hasn’t been sued yet because they have no money. However, if a buyer with a big bank account came along, watch the lawsuits fly. This argument doesn’t hold much water. Google has tons of copyrighted materials on Google Video. Google has tons of cash. Where are the lawsuits?

With the signing of three separate content deals with the major labels (plus one with Warner Music Group in mid-September), the threat of lawsuits from the majors become less and less. Instead of suing, it looks like they are joining. The YouTube purchase will also serve as a great platform to show off the new Google technology that detects copyrighted materials in videos.

Learning From MySpace

Google had to pay $900 million to sell advertising on MySpace. That is more than what News Corp paid for the entire site. Why rent space when you can own it?

Google already knows how much they can make from YouTube. Since they supply AdSense advertising for the site, they have a very good idea of its income potential. A site the size of YouTube would take 80% to 90% share of ad revenues. Now that share goes back to Google. Google could have used this to help finance the deal but since this is an all-stock transaction, it’s money in the bank.

Blocking Out Microsoft

There was a rumor that Microsoft was working on a $600 million deal with YouTube to supply advertising. That deal, if there really was one, is now dead in the water.

Showing Mark Cuban Who The Real Moron Is

Mark Cuban said anyone who buys YouTube is a moron. This coming from a man who also said, “Somebody puts up something really good and you get, what, 60,000 viewers?” In his latest blog entry, Mr. Cuban no longer calls Google a moron – he calls them crazy. Maybe he is getting ready to pin the moron label on himself for thinking his Benefactor would be a hit.

27 thoughts on “Why It Make Sense For Google To Buy YouTube”

  1. Jawad Shuaib says:

    Google is crazy. Has anyone ever clicked on Goooogle ads displayed on YouTube? They are never relevant because the videos don’t present much text content for the ads to work.

    Yes, Google did not have the stats that YouTube did, but Google has all the resources in the world to get the masses. If you look at Google Videos, it seems like Google didn’t put all its energy into it. Take a look at Google Video Upload application…I could code a better application in 30 minutes. I don’t understand what went through their head when designing Google Video GUI. It sucks.

    I would be all for this deal if Google atleast tried its best to make it out on their own. But they didn’t. I love Google, but this is one crazy deal. $1.6 Billion? like, come on.

    1. RAnk Arena says:

      Well if you can do the code in 30 minutes then do it and stop whining.

  2. Tom says:

    Google had to pay $900 million to sell advertising on MySpace. That is more than what News Corp paid for the site.


    Not more, but close.

  3. Tom says:

    Google had to pay $900 million to sell advertising on MySpace. That is more than what News Corp paid for the site.


    Not quite, but close enough.

  4. Nabeel says:

    Now would youtube still operate i.e. would everything be under google video or does google plan to keep youtube separate? I hope this will enable the private video category in Google Video


  5. Dan Raine says:

    Buying YouTube makes a lot of sense for Google especially when you consider their massive fiber network which would dramatically reduce the effective operational costs of running the service.

    But, I do think copyright may be a big issue for them not as an individual company, but in terms of them making financially sound decisions for their shareholders. 😉

    Long term it will be interesting how this plays out in a court of law. But I do know that there are a lot of people waiting to strike should a deal be made.

    YouTube would be the largest aquisition to date and would put the company in a high risk situation, and from what I know, the financial benefits are long term only, but at the end of the day that is what Google has always been about…

    Take something that works, make it x times better, monetize what they are doing after the fact.

    Ok, Google can no longer take the startup attitude, but even as a large company they do still have that pioneering spirit… and are willing to take risks.

    $1.6B is a lot of stock trade and in the end is probably too high, I personally think there will be a decent cash/stock split for probably less than the market expects, backed by umpteen long term option vs revenue clauses.

    In the end Google want’s YouTube but may not be willing to sacrifice enough to get them. The owners (of YouTube) know they have the chips stacked in their favour. But Google also does not like playing the MSN vs Google game and would rather innovate than be coerced into a deal not ideally suited to them.

    Sergey and Larry still have a significant influence over the decision making processes that happens (and good on them), but my only concern is that Google is getting sooooo big that they can no longer create but have to play catch-up all the time.

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  7. Dan Raine says:

    Smack me up and call me a bitch… I just heared on the grapevine that Google just bought YouTube for 1.65 Billion…. I am sure there will be a media release soon.


  8. John Chow says:

    Hey bitch! That press release was the frist link on my post. 🙂

  9. Dan Raine says:

    Ouch, bitch slap taken…


  10. Rezwan says:

    I saw somewhere that Myspace beat Youtube as no.1 video sharing website.

  11. Dan Raine says:

    That will teach me to read posts in full lol… Interesting though, I think we should run a sweepstake on how long it will take them to ‘integrate’ YouTube into Google Video…

    Yes they said they will keep it as a seperate brand but I am sure there are plenty of poeple behinds the scenes waiting to take a borg approach lol 🙂

  12. Tick Tock says:

    Dan Raine:

    It’s not that Google can’t innovate. You have to understand that Google’s primary focus is on the search market. They are pouring all their resources into Google Search. Everything else is a side project just to stay “innovative” and competitive. Google can’t always rely on search to lead the pack. It has to diversify its portfolio to remain competitive in the future.

    Believe it or not, a lot of companies prefer to make acqusitions than creating something scratch. Think about it like this: all projects within Google are startup companies in the making. If projects are successful, they become divisions. It’s intrapreneurship rather than entrepreneurship.

    Google finally has the resources to buyout all the major startup companies and build its portfolio with solid products and services, and it’s doing exactly that.

    You will see innovation happen on the search side of things, but not necessairly on other ends. Moreover, Google recently said internally that it wants all product teams to boost current services rather than come up with new concepts. It’s not that Google isn’t innovative, it’s just conducting business very creatively that’s quite efficient, although expensive at first.

    Look at MySpace. Everybody said MySpace was a dumb buyout on News Corp.’s part, but they just signed a $900 million deal with Google and will make back their investment.

    It’s easier to criticize companies sitting on this end, but do you really think a company like Google (market cap $100 billion) is dumb enough to put $1.65 billion for a startup without doing a cost/benefit analysis.

  13. John Chow says:

    MySpace is YouTube’s biggest source of traffic but YouTube is the #1 video sharing site.

  14. Dan Raine says:

    It will be interesting how the whole Rupert Murdoch (New corp) relationship plays out… he got MySpace at such a bargain… But now is in a real good power position…

  15. Dan Raine says:

    (News Corp)… geez my keyboard is playing silly buggers…


  16. Dan Raine says:

    I think Fox has a lot of power here, I do think their numbers (60-70% of YouTube traffic comes from MySpace) are a little high however, but even so it does give them a bargaining position… but it is not one they will ever go down… But they may take the legal high road at some point with the copyrighted material.


  17. Dan Raine says:

    In answer to Tick Tock:

    I agree with your points, inovation or expansion through aquisition is very important to Google at the moment.

    My point was that they do, do a good job of making ‘good things’ better. Hell I hardly know anyone who uses Hotmail anymore…

    I do disagree with your point on ‘You will see innovation happen on the search side of things, but not necessairly on other ends’

    They buy a lot of small companies (take writely.com for example), short term they are only going to get folded into the Google brand, but long term I think they will take these to the next level.

    In the not too distant future we will see mainstream
    distributed apps. Not in the Zoho way, but in the sense that people will use a Google OS, they will log into their Google Desktop, They will ‘launch’ and not just ‘go to’ Google Mail.

  18. Gene q says:

    They probably could have purchased two video sites for that price. Veoh and Revvers would have been a cool combo. People would visit a site by google regardless of who had owned it before.

  19. Peter Haimes says:

    My friends who are not tech savvy and rarely use the interent have become hooked on You Tube they wouldn’t have a clue about Google Video or any other video service for that matter. Google would of had a hard time competing with You Tube so I guess buying them out and maintaining the seperate identity aswell as market domination is a good thing.

  20. Peter Haimes says:

    PS. Mark Cuban is a knob!

  21. Dustin says:

    I agree with you… except for “A site the size of YouTube would take 80% to 90% share of ad revenues.”

    There’s no way they’ll get 80% of ad revenues. Content owners would be insane to make that deal.

  22. Uh… I don’t see anything on that list that correlates and justifies the 1.6 billion that Google ‘burned’ to buy YouTube.

    Does this means money isn’t relevant anymore?

    One cannot get 1.6 billion from ‘eye-balls’ only you know…

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