Google Buys YouTube. Now What?

The media had been buzzing with rumors for at least a week when Google finally announced on October 9 that it was purchasing online video sharing site YouTube. Analysts’ observations about the deal have ranged from “it’s brilliant” to “it’s the worst thing Google could possibly do.” Keep reading to find out what all of the buzz is about.

First, let me go over the details of the deal itself. Google agreed to pay $1.65 billion in stock for YouTube. The all-stock nature of the deal makes the transaction tax-free for YouTube’s shareholders. Google is going to issue the number of shares required to complete the deal based on the 30-day average closing price of the search engine’s stock two trading days prior to the close of the purchase. The deal is supposed to close in the fourth quarter of this year.

Just because Google will now own YouTube doesn’t mean it will be swallowed. YouTube just moved into new offices at San Bruno, CA, and it’s going to stay there. What’s more, all 67 of its employees, including founders Chad Hurley and Steve Chen, get to keep their jobs. YouTube will keep its brand identity.

Wall Street apparently loves the deal. Google’s stock rose $8.50 a share, or two percent, to a closing price of $429. If you do the math, you’ll see Google gained enough just from that rise in its stock price to pay for the deal and then some. That would be interesting enough on its own, but the fact is, there were plenty of deals in the air when this one hit the press – and a good thing, too, as I’ll explain in a bit.

As if one deal wasn’t enough, on the same day YouTube also announced deals with Universal and Sony BMG to legally put music videos from these companies on its site, as well as a deal covering news and sports from CBS. CBS and Sony BMG will share advertising revenue with YouTube. This is in addition to NBC’s agreement with YouTube a few months ago to promote shows from the TV network’s fall schedule, and Time Warner’s agreement with YouTube in mid-September to distribute Warner Music Group’s library of music videos.

Is your head spinning yet? Or are you simply wondering why Google purchased a company that Mark Cuban very publicly stated it would be “a moron” to buy? Well, there’s a lot of ground and many angles to cover, so let’s start by looking at some of the advantages of this deal.

When YouTube was launched less than two years ago, it’s doubtful that its founders dreamed it would become this big and popular this fast. It makes 100 million videos available every day, and 65,000 new videos are added daily. It boasts 20 million unique visitors every month. It ranks fourth among Web 2.0 sites, right behind MySpace, Facebook, and Wikipedia. YouTube accounts for more than 46 percent of the video on the Internet.

These points hint at what made Google willing to spend several times what it spent on its last 15 purchases of companies combined. YouTube has a tremendous library of videos, which can only benefit from Google’s search technology. YouTube also has a ton of eyeballs viewing those videos. The company has far more traction in this area of user-created content than Google does with its own Google Video, though “Google Video doesn’t go away ever – I want to make that clear,” insists Eric Schmidt, Google CEO.

Indeed, it’s worth noting that “You’ve got more video being viewed on YouTube than you do on some cable channels,” according to Ian Schafer, CEO of marketing firm Deep Focus. That all but suggests the classic TV model: show content, and make money by selling advertisements around the content. Google may be all about search, but it is advertising revenue that pays its bills. With that kind of audience, Google’s purchase of YouTube means that the search engine becomes the dominant player in the online video space, increasing its reach; it also enables the company to give its advertisers another avenue. This fits in nicely with the fact that Google recently began offering video ads. Broadband connections have become common enough to support a wide audience for online video. And with online video’s increasing popularity, one could hardly picture a better time for Google to purchase YouTube.

And what does YouTube get out of it? Nothing short of the resources and expertise of one of the brainiest, savviest, richest technology companies around. The first step, of course, is marrying the power of Google’s search engine algorithms to YouTube’s video library. That is sure to please YouTube’s audience. YouTube also gains instant credibility after being purchased by Google, which will help it in any future deals it makes. Even now, Google and YouTube are working together to improve the copyright protection on YouTube’s site…which brings us to the potential downside of the deal.

Let’s look at some of the most viewed videos on YouTube. They include clips of Ted Turner, an episode of South Park, a clip from a political debate between two Congressmen, and other material that is under copyright – and, one assumes, not copyrighted by the people who uploaded them to YouTube. This is not unusual; for example, when the “Lazy Sunday” video from Saturday Night Live was uploaded to YouTube, NBC demanded that it be pulled, which it was. YouTube hasn’t attracted more lawsuits in part because of its size and finances; a copyright holder suing the company would be more likely to shut it down than receive a significant monetary settlement. With Google’s deep pockets in the picture, that might change.

For its part, YouTube believes it is protected by Section 512 of the Digital Millennium Copyright of 1998. That section states that hosting companies are not legally liable for copyright violations so long as they respond quickly to formal notices from copyright owners and remove the offending material, something which YouTube has always done. But it is questionable whether YouTube meets all four conditions to qualify for this “safe harbor.” They include the following:

  • The copyrighted material must “reside” on the hosting service.
  • The material must be stored “at the direction of a user.”
  • The hosting service must not be “aware of facts or circumstances from which infringing activity is apparent.”
  • The hosting company must not “receive a financial benefit directly attributable to the infringing activity.”

If we consider that Google may shortly start running ads on YouTube (and that YouTube has already been running ads on its site), the online video hosting company is in danger of not meeting the fourth condition required to earn protection under Section 512’s safe harbor. By the way, copyright is not like a trademark; if you don’t defend a trademark, you can lose your rights to it, but if you’re a movie producer (for example) you can allow a clip from one of your movies to play on YouTube for a while and then demand that it be taken down.

Now there are a number of ways one can approach the copyright issue. If we look at the example of the music industry, they didn’t even want fans to be able to record their products for personal use. Just look at how they initially reacted to MP3s, and how the RIAA still reacts to anyone they suspect of using peer-to-peer networks to download songs. The movie industry is just as strict; does anyone remember the lawsuits surrounding VCRs? Then again, there is the example of the gaming industry, which encourages users to create and publish mods for popular games. So where is the video industry going to line up? That is the big question, and that is the issue Google must be prepared to deal with as it enjoys its new acquisition.

If Google’s decision to purchase YouTube is a bad one, then it’s not the only big company with bad judgment. The rumor mill says that YouTube has had several other suitors over the past few months, including Microsoft, Yahoo, News Corp. (owners of MySpace), and more. It’s the price that Google paid that has many analysts shaking their heads. It reminds far too many of us of the boom days shortly before the dot-com bubble burst. Could this be a sign that we’re in the middle of another bubble just waiting to explode?

Then again, it really is hard to calculate the value of such a young technology upstart. Indeed, at least one venture capitalist has likened such an analysis to basically a crap shoot. Google saw significant synergies between itself and YouTube, which it believes meant the video sharing site was worth $1.65 billion in stock. Eric Schmidt and Google co-founder Sergey Brin have both said that YouTube’s founders and company remind them of Google itself just a few short years ago.

So if they share a vision, what does that vision look like? Well, for openers, imagine searching Google for help with a “plumbing toilet flusher” and finding a how-to video on YouTube. Or how about doing research for a vacation to Hawaii and finding some home videos taken by tourists and posted online? Those are just some of the possibilities.

Looking at the bigger picture, does this mean that online video is the wave of the future? Certainly many other online video companies hope this will inspire a shopping spree. Mary Hodder, CEO of Dabble, a site that functions as a sort of TV guide for Internet video, notes that the deal “causes people to look at our value, and who has what video where. All of a sudden lots of people who didn’t get Dabble are popping us and realizing the value we provide with search and social discovery.” Meanwhile, Schmidt insists that this is the next step in the evolution of the Internet. If Google can make it pay while dodging copyright lawsuits, he just might be right.

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