Second thoughts on YouTube

So, Google bought YouTube in an all-stock transaction. Did not see that coming. In fact if you look back at my last post on the subject, I ruled Google out because it already had  Google Video of its own that seemed a competitor to YouTube. Still, I wasn’t the only one who got it wrong.

So, what of the substantative issues: copyright infringement and potential revenue? Well, it seems that YouTube were already on the way to solving part one of that conundrum, as their recent content agreements have shown. As part of these agreements, ostensibly to put up promotional videos, YouTube has promised to “quickly” develop technology that will search out and identify copyright material, but not to take it down. Instead, what is planned is that YouTube will identify, for example, a video with a Warner Music soundtrack and beside that video, place a Google ad. The ad revenue would then be shared with the copyright owner.

A neat solution to a seemingly intractable problem: YouTube stays in operation, the videos stay up and the copyright owners share in the revenue. Part of the deal is also a “don’t sue us” agreement. If YouTube can do enough of these deals, the copyright problem goes away.

Otherwise, Google is no stranger to copyright litigation and will fight the suits the way they always have. Some have speculated that the reason YouTube will be kept as a separate entity is to keep the suits in YouTube leaving Google untouced.

So, now the deal’s done, what changes? Not a lot really. Chad Hurley and Steve Chen are America’s newest paper millionaires. Since the deal was all-stock they will have to wait to cash out as there is usually a waiting period for these kind of deals. For Google, the $1.65 billion in stock to be issued seems to be handily covered by the short term rise in their stock price after the deal was announced. A rise that added $6 billion to their market capitalization over the week. A handy premium on the deal and one that arguably could be already “in the black”!

So, with 20/20 hindsight do I want to rethink the problems I had with anyone purchasing YouTube? Given that Google CEO Eric Schmidt is not stupid it’s only reasonable that I try and see the value that he sees in the deal. Particularly since with that much money Google could have purchased the New York Times with arguably more valuable advertising real estate and more visitors (if not more page views). In the linked article Susan Mernit puts forward the arguments why Google did not buy the New York Times.

My first thoughts were that $1.65 billion was a lot to pay for, basically, a platform to put ads on, because after all Google is an advertising company. It is a lot of money to pay for an advertising platform, but with law suits in a “manageable” position Google may actually turn an operating (as opposed to stock) profit on this deal. When you consider that the three major networks bring in $5-6 billion a year in advertising revenue each there’s a lot of advertising dollars around. A lot of those dollars are going to leak from network television to the Internet and frankly Google has the majority of Internet advertising dollars sewn up.

What’s also important to note is that YouTube has almost zero cost of content, although heavy bandwidth bills and about 65 on staff. YouTube’s content is created by visitors to the site or by the networks themselves, which is why the advertising revenue sharing deals noted above are so crucial to YouTube’s survival. It is plausible that sufficient advertising revenue will come in over the next five years to justify diluting the stock by $1.65 billion worth of shares. (Ironically, the increase in share value this week will reduce the number of shares that are issued to fund the deal as the deal was predicated on the dollar value, not number of shares.)

Getting in bed with Google’s bandwidth deals will lower YouTube’s overall cost of delivery (when existing agreements run out).

So, while I’m still uncertain about the wisdom of the deal, it’s not totally crazy.

It will have very little impact in the distribution of commercial video. Google retains their own Google Video play, complete with commercial video for sale in that store. Although it’s not well regarded maybe they can learn a few tricks from the YouTube folk. YouTube will still be a place to be seen, or to have your video seen and where a viral hit can get you massive exposure, such as people like Judson Laipply (now viewed over 5 million times) or David Lehr who I interviewed on Creative Planet’s Digital Production BuZZ back in April 2006. Getting a break out hit is a definite career builder.

Despite being the new “waitress discovered in a coffee shop” for producers and performers, YouTube has little to offer people who produce video professionally, or who have any hope of repaying investors (beyond posting a trailer, which should be mandatory).  The real developments in that arena are yet to come.

So, on the balance, I still think $1.65 billion, even if it’s only stock, is a lot to pay for a loss-making, two year old (not quite) startup, it seems Eric Schmidt may only be smoking the cheap stuff and not really wacked out!

Now the talk is Yahoo buying FaceBook for $2 billion!

Send a Message