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RSSLet's go through the facts, and you'll see what I mean.
Problem #1: YouTube is young, the market is young. YouTube hasn't made a profit yet. It certainly gets a lot of traffic, and it's got advertising; but it's still deeply enmeshed within the "let's just get more eyeballs and wait" stage of the business. What will happen next is still unclear.
YouTube might hit on the magic formula of turning eyeballs into money--as Google has done for itself; and as Google is looking to help YouTube do, by supporting it with advertising. But there are definitely Google ad ventures that don't work out (think Google print); and it's entirely possible that, even with all of Google's help, YouTube still might not live up to its $1.6B expectations.
After all, a lot can happen in online video over the next few years. Microsoft is beginning its own video sharing site, Soapbox. Meanwhile, MySpace still ranks higher than YouTube--at the time of this writing Alexa ranks MySpace as #6 on the web; and YouTube as #10and MySpace offers video. It's even possible that the traditional television networks, which are starting to expand online (ABC.com now delivers complete episodes of "Desperate Housewives" and "Lost"), will also enter ithis newest medium of user-generated video. Think about it: reality TV and televised talent shows aren't all that different from the 15-seconds-of-fame world that YouTube has created on the Internet.
And keep in mind that great empires certainly do fall. MySpace has clearly trumped Friendster in the social networking space, and Google itself pulled ahead of Yahoo, its elder rival. Both Google and Yahoo joined forces to crush Lycos.
And there's always the possibility of something entirely new jumping out of nowhere that changes everything, rendering YouTube passé. YouTube didn't even exist two years ago; who knows what the next two years will bring.
Problem #2: YouTube has 65 Employees. YouTube is still a small business. Google has about 8,000 employees; MySpace, which NewsCorp bought for $580 million, has a workforce of 300. So paying $1.6B for YouTube is placing an awful lot of faith in only 65 people.
Of course, YouTube will need to hire more people if they're to fulfill their new parent company's huge expectations. That shouldn't be hard to do--a job at YouTube probably looks pretty good around now--and Google is certainly waiting in the wings to help out (or to take over) if organizational issues become a problem. But whatever step the YouTube organization takes next, it will certainly need to become a different animal than it has been until now. YouTube has achieved fairytale success as a grassroots-driven startup; but it remains to be seen how it will fare as a billion-dollar player and subsidiary of a Fortune 500 firm.
There are bound to be serious changes in how business gets done, and there might even be changes in the way the youth market reacts to a cool indie site that's gone corporate. Only time will tell whether those changes will be positive or negative.
Problem #3: The legal issues. At the time of this writing, a YouTube search for Billboard-topping artist Justin Timberlake yields 3,084 results. A YouTube search for Kelis, number 50 on the Billboard Pop 100, returns 789 results. There's clearly copyright infringement going on, and YouTube makes it possible. That could mean real legal headaches for both YouTube and Google.
Thus far, Google and YouTube have kept the lawsuits at bay by creating ad-revenue sharing deals with Warner Music Group, CBS, and Sony BMG. Google will also offer technologies that help YouTube prevent illegal filesharing. But either of those acts of appeasement could go sour, especially if the entertainment world feels that Google's anti-piracy technology doesn't go far enough. If the entertainment world's relationship with the two online kings does fizzle, the breakup might not be so friendly.
There's no doubt that YouTube's a valuable company. And Google is certainly on to something in pricing out the competition in a valuable market--which most analysts think is Google's strategy in overpaying for YouTube. But the high price is a huge gamble, and there's a lot of reasons to say that it won't pay off. If the relationship doesn't pan out, it could very well go down as the greatest blunder in Google history.
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For a balenced view, look at: http://www.siliconvalleywatcher.com/mt/archives/2006/10/thoughts_on_goo.php Or my own: http://www.venturebeat.com/contributors/2006/09/21/the-google-test/
I can understand how negative this might affect your business, as it may change the economics of content pricing. But as to deal price, very little of the $1.6B has anything to do with either prior piracy or monetization.
Monetization is the key here you should talk about, as nobody monetizes bandwidth quite as good as Google. To come up with an affirmative for the valuation, take your media pricing model and put in YouTube's content acquisition cost and rate, then take Google's scaling and project out five years. Now, with that number doesn't Google look smart?
One thing I can tell you is all businesses that are not aligned with "Golden Rule" principles fail. What we do to another we do to ourselves. Wake up Google! Wake up WORLD!
As the author of the article, I recognize this piece is contrarian and I have received many passionate responses-- nearly all of the messages I received to my email were positive. The above comments in this blog range from "spot on" to "you're out of your league, rookie"... all of which I very much appreciate. The art of discussion, differing opinions, taking a POV are very much lost these days and I love to see it.
To add light to the Marx quote above... YouTube, MySpace, Facebook, [insert the next 50] were all created from 3 things: 1. Easy to use 2. Amazingly viral 3. Anti-establishment
The minute a "GooTube" user types in an artist's name and gets redirected from the video that is currently there to the copyrighted video, or when the user needs to sit through a 10 second commerical before seeing the video, they will lose both #2 and #3. It is cool to be different right now. The minute facebook added some trasparency to their groups and added more advertising, their were petitions around campuses to ban them.
If I were running Google, would I have done this acquisition? As a public company, hell yeah... I HAVE TO. Boutique acquisitions are for future product lines, revenue streams, R&D. Big acquisitions that aggregate billions of impressions, and only cost me less than 1% of my market cap is a bet I would probably make... rational? I think not... To go through the math of what earnings need to be ar the 60x EBITDA multiple to justify the purchase price... okay, see where you are going and I did the same math myself ( I was a finance guy before becoming an online marketing executive). However, GOOG is trading at 60x only because of their growth rate, not because that is what they are worth today. In a rational market, once that revenue growth rate slows, valuation should come down to realistic levels.
Anyway, its been fun. Thanks for all the comments-- both positive and negative-- all very much appreciated.
Bill Wise www.bill-wise.com
That simple search and find created a SALE of an audio CD. Everyone from all levels will benefit from Googles YouTube. We are not even scratching the surface yet with YouTube.
Now if you want to argue about "RingTones" - that is a subject I would have made a fool of myself- saying there would never be a market for them. I can't for the life of me understand why people actually pay for all these obnoxious ring tones.
Google sure knew what they were doing when they took over the PPC market from Yahoo! I'm sure they didn't play the Ouija Board when they made the decision to purchase YouTube.com. The CEO had to have seen some math in the finances before blessing this recent move. Wouldn't you agree?
Steve Wiideman http://www.top10seotips.com/
Doug http://www.douglaskarr.com
There has been a media frenzy with all sneazer?s envy, doubt, fear, and all range of skepticism about Google?s acquisition of YouTube. The commentaries so far have tackled every angle of the deal except the most important one, the brand value of YouTube. YouTube had created a phenomenal brand apparently spending zero official marketing budget, perhaps in this case, the company?s burn rate is their marketing spending. There are gazillions of video upload utility companies out there, who can barely keep up their dough. YouTube have became the choice of consumers, whoever want to release a video, they do it on YouTube. It is winner takes all market. Other players simply go ash-tray. I think Google-YouTube marriage is totally cool, it even got its cultural fit!
As for the legal issues, while there's plenty to worry about, the large copyright holders, inc. Universal Music Group which threatened to sue YouTube, are all entering into agreements w/them. Google's legal team is also top notch and the fact that they went ahead w/this would suggest that they spent a lot more time reviewing this issue than the CEO of an SEM company. Just a thought here ;-)
I don't understand the argument about the size of the two companies. Is that really a problem? This a small highly-committed, highly motivated group of people and what would they have to gain by fruitless expansion. I think that it's unnecessarily negative (and possibly deliberately controversial) to suggest that as changes happen all the time, acquisitions are "blunders". How would anything happen if everyone had this mindset?
The only point that is certainly true is that legal issues the two are likely to face. On the other hand, Google is used to these legal wranglings and fully expects them I'm sure. It's unlikely they were unaware that they would face massive copyright issues and I guarantee they will either get media players on board or simply remove content. Google need a landmark case to settle the issues surrounding copyrighting (an increasingly outdated idea)once and for all and why not face it over what could be the biggest opportunity for internet development since...well, Google.
If it doesn't pan out, I doubt you could call it a blunder (it won't sink Google) merely a noble failure. How else do you learn wihtout doing this? Caution in a changing landscape doesn't help anyone.
- Yahoo! paid $5b for Broadcast.com, and Broadcast.com had no where near the market penetration, traffic numbers or general "cultural awareness" of YouTube. - Media companies are waking up (see last weeks statements from ABC regarding online content "piracy"). They realize that folks swapping The Daily Show clips (and similar) on YouTube is a measure of the property's success and is absolutely worth whatever imagined losses there may be in the value of advertising/promotion it brings. - Number of employees? Who cares? YouTube is populated with *user* generated content, why do they need a certain number of employees? What would they actually be contributing to the bottom-line? - Legal issues are completely moot. The DMCA protects YouTube/Google from any suits as long as they act responsibly to take down any offending material (which they have a track record of doing). With Google in the picture, there will be no frivolous lawsuits since Google can afford the bill, which will keep the content owners honest (listening, RIAA?). At the same time, Google has singificant repuation and assets to protect, so content owners know that legitimate infringements will be handled quickly. - Do you honestly think MS will have a lot of success with SoapBox? You mean, like they had success taking on MySpace with MSN Spaces (or Blogger or any other social software)? Most of the web audience simply isn't attracted to Microsoft properties. - Don't put too much faith in Alexa rankings when it comes to predicting trends. Alexa rankings are based on numbers gathered by folks who voluntarily participate. I don't know anyone personally who does, and I know there's a huge body of web movers and shakers who do not. Alexa is not a good predictor as it is not used by the leading edge of consumers. - If you think "reality TV and televised talent shows aren't all that different from the 15-seconds-of-fame world that YouTube has created" then you don't deserve to be commenting on this topic. That statement alone shows that you simply DO NOT GET IT!
And as you said, "what will happen next is still unclear." Yes, unclear to us, unclear to you, but do you really think that it is unclear to Google? How pompous to think that just because you (and other online pundits) can't see the opportunity that Google sees it must not be there.
Of course, I would guess that if you *could* see the opportunities that Google sees you'd not be writing a blog for a media research company or doing SEO work...
ER
YouTube certainly has better usage metrics than did Broadcast.
Content owners will eventually get paid/rewarded and the legalities worked out. The distribution channel of YouTube is too big for content owners not to want exposure.
Some might even see a future opportunity for content owners to auction off their videos based on popularity. Paris Hilton could go from rags to riches.
Interesting point of view but my bet is the Google guys will figure it out.
Look, don't take this personally, but...this is the DUMBEST article I've ever read on this subject or any Internet business matter. It's dumb for four primary reasons:
1) The name of the Internet game is eyeballs and acquistion -- all of the major buys last year had huge traffic numbers. YouTube wins.
2) There are NO real legal problems at all. You article tries to introduce what you think is a legal problem, but in so doing just shows how much exposure Justin Timberlake gets on YouTube!
3) YouTube's 65 employee have $10 million behind them already -- and that was before Google.
4) You are trying to INVENT reasons for this deal's failure rather than looking to what Google's gotten in the way of this massive asset.
I do hope you write a better post in the future. I guess MediaPost Communications is interested in "sour graping" anything Web 2.0 -- watch out for Web 3.0 -- and so allowed you to enter this terrible article.
Listen -- or "read" -- up. Try to understand the dynamics of our industry before you look at any deal.
Thanks.