Google betting YouTube will turn into next Google
SAN FRANCISCO (AP) – Google’s executives say they love YouTube because they see a lot of the Internet search leader’s DNA in the online video phenom.
After committing Monday to buy YouTube for $1.65 billion, Google must now hope that the 20-month-old startup doesn’t morph into the next Napster – a disruptive innovator buried in a legal avalanche triggered by rampant copyright infringement.
Although most analysts believe Google’s ownership will lessen the chances that media companies will attack YouTube, the legal threats still could spoil the biggest acquisition in Google’s eight-year history.
“There are still some huge risks that Google could be stuck with some very expensive lawsuits,” warned Forrester Research analyst Josh Bernoff said.
But here’s a more likely scenario envisioned by Bernoff and other analysts: Google’s engineering prowess helps YouTube do a better job of flagging copyright violations before they appear on its Web site. At the same time, more media companies and advertisers are likely to want to work with YouTube now that it’s aligned with the Internet’s most profitable company.
“It’s going to be like, ‘You can either fight us or you can make money with us,'” predicted Charlene Li, another analyst for Forrester Research.
The all-stock deal announced Monday came just a few hours after YouTube unveiled three separate agreements with media companies to counter the threat of copyright-infringement lawsuits.
Although some cynics have questioned YouTube’s staying power, Google is betting that the popular video-sharing site will provide it an increasingly lucrative marketing hub as more viewers and advertisers migrate from television to the Internet.
“This is the next step in the evolution of the Internet,” Google Chief Executive Officer Eric Schmidt said during a conference call Monday.
YouTube will continue to retain its brand, its new headquarters in San Bruno and all 67 employees, including co-founders Chad Hurley and Steve Chen – the twentysomething buddies who decided to start the company because they couldn’t find an easier way to share video taken at a dinner party.
While YouTube remains independent, Google will continue to run a less popular video service on its own site.
The deal is expected to close before the end of the year.
“We are excited to have the resources to move faster than ever before,” Hurley, YouTube’s 29-year-old CEO, said during a Monday interview.
Schmidt thinks so highly of Hurley and Chen, 28, that he likens them to Google’s now 33-year-old co-founders, Sergey Brin and Larry Page.
Brin sees the similarities too. “It’s hard to imagine a better fit with another company,” Brin said during Monday’s conference call. “This really reminds me of Google just a few short years ago.”
The two companies even share a common financial bond: Sequoia Capital, an early Google investor that owns a roughly 30 percent stake in YouTube. Menlo Park-based Sequoia remains a major Google shareholder and retains a seat on the company’s board – factors that might have helped the deal come together after just a week of negotiation.
Several other suitors, including Microsoft Corp., Yahoo Inc. and News Corp., reportedly had mulled a possible YouTube purchase in recent weeks.
“This deal looks pretty compelling for Google,” said Standard & Poor’s analyst Scott Kessler. “Google has been doing a lot of things right, but they are not sitting on their laurels.”
Google’s YouTube coup may intensify the pressure on Yahoo to make its own splash by buying Facebook.com, the Internet’s second most popular social-networking site. Yahoo has reportedly offered as much as $1 billion for Palo Alto-based Facebook during months of sporadic talks.
“Yahoo really needs to step up and do something,” said Roger Aguinaldo, an investment banker who also publishes a dealmaking newsletter called the M&A Advisor. “They are becoming less relevant and looking less innovative with each passing day.”
While Google has been hauling away huge profits from the booming search market, it hasn’t been able to win a starring role in online video.
That should change now that Google has bought a service that serves up more than 100 million videos per day, Li said. “This gives Google the video play they have been looking for and gives them a great opportunity to redefine how advertising is done.”
Investors applauded the possible acquisition as Google shares climbed $8.50 to close at $429 on the Nasdaq Stock Market, then added another $2 in extended trading.
While most videos posted on YouTube are homemade, the site also features volumes of copyrighted material – a problem that has caused some critics to predict the startup would meet a Napster-like fate.
But Hurley and Chen have spent months cozying up with major media executives in an effort to convince them that YouTube could help them make more money by helping them connect with the growing number of people who spend most of their free time on the Internet.
As its negotiations with Google headed toward fruition, YouTube on Monday announced new partnerships with Universal Music Group, CBS Corp. and Sony BMG Music Entertainment. Those alliances followed a similar arrangement announced last month with Warner Music Group Inc.
The truce with Universal represented a particularly significant breakthrough because the world’s largest record company had threatened to sue YouTube for copyright infringement less than a month ago.
Selling to Mountain View-based Google will give YouTube more technological muscle and advertising know-how, as well as generate a staggering windfall for a company that was running on credit card debt just 20 months ago.
To conserve money as it subsisted on $11.5 million in venture capital, YouTube had been based in an austere office above a San Mateo pizzeria until its Monday move into more spacious quarters in a neighboring city.
Since the company started in Hurley’s garage in February 2005, YouTube has blossomed into a cultural touchstone with an eclectic video library that everything from teenagers goofing off in their rooms to William Shatner singing “Rocket Man” during a 1970s TV show. Most clips are submitted by users.
YouTube’s worldwide audience stood at 72.1 million by August, up from 2.8 million a year earlier, according to comScore Media Metrix.