Is YouTube Worth $1.6 Billion to Google? Why Not.

Ah, the luxury of having a $125 billion market cap.  While analysts fret about whether YouTube is really worth $1.6 billion--or whether, as Mark Cuban put it a while back, anyone who buys YouTube is "a moron"--Google can shrug its massive shoulders and say, "Whatever."  And then it can go out and buy the leading online video brand by giving up a mere 15% of its cash mountain or 1% of its equity.

Will this be a smart bet?  Who knows?  Will Google have overpaid?  Who cares?  Right now, for Google, $1.6 billion is chump change. (A fact that reveals yet another debilitating advantage Google now has over Yahoo!, et al: a market-capitalization five times as big.)

And one thing's for certain...regardless of what happens, Google's trading away 1% of itself to buy YouTube can only prove 1/10th as moronic as Yahoo!'s late-90s decision to trade away 10% of itself (my recollection) to buy, among others, broadcast.com.  (Of course, as a regular reader and Mark Cuban pointed out, the YouTube risk is legal risk, not business risk.  And legal risk can be unlimited).

Comments

[Victor]

first

[Victor]

And yes Henry, you're precisely correct. 1.6B is chump change to become the dominant player in online video. But Cuban does have a point, YouTube is a huge lawsuit waiting to happen and the only reason it hasn't is because they have no money. Once they're in the google fold, watch the lawsuits fly.

[Thomas M Thurston]

If you think Youtube is hot..here's theee force in China www.Cool8.tv

[R.Stepen Pooley CEO Cool8.tv]

I agree....... but I think I am biased

[walt]

first what?

Good articles in latest Forbes on GOOG and Youtube.

Every person who logs onto the internet is looking for something.
Google really doesn't care what you are looking for. They just want to connect you wherever you go with advertising.
Yahoo, MSFT, AOL provides content in hopes that their content is what you are looking for.

>> As Google reaches for a billion dimes, it is fostering an industry of a billion little businesses and developers. Google has scooped up more than 50 tiny software firms that have created various online applications: calendars, social networks, maps, blogs, photo sharing and word processing. Google doesn't charge for any of these services, and few of them rank number one or two or even three in their categories, but they expand Google's inventory of advertising space. And, by opening up select bits of these programs to outside software developers, Google Chief Schmidt thinks he can create a monster new computer industry, with Google at its core. "The number one goal is to build the most powerful platform to build these new businesses," Schmidt says. "This area will be as rich as what we saw in PCs." <<

[Jeff Schrock]

While GOOG's cash hoard is a tempting target for copyright holders, there is also no guarantee copyright holders would prevail in any, as yet unfiled, suit. The DMCA is an excellent shield. And GOOG is a stronger legal opponent than Youtube by itself. And if old media loses, they risk open season on their content. So I could easily see a settlement / rapproachment with GOOG as a parent company. And for GOOG the oppt'y to lock up the video category (over $90Bln in annual offline spending today) is probably worth $1+ Bln in cash + legal liabilities.

[King Troll]

Caught me off guard Victor you fucker.

Off Topic, i'm opening 2 new stores for the rest of 2006. My gross margins are up to 39% from 35% and I have my cash flow issues almost in check now! ZERO DEBT bros. Within 7 years you all will be buying shares in my company. Watch.

[Jim Larrison]

The sad thing is Google had a chance to really take the market with their own innovation and technology. They really crapped the bed and again are left buying good technology, that they already tried to develop but failed.

Good thing they had so much money.

[sufiy]

Sorry Henry, If I can disagree here: I can see this move of Google to buy YouTube as act of desperation to diversify from one stream revenue business which is slowing down with click fraud and slowing economy on one side and finally sobering thoughts of founders on all crap products they announced which are not working and/or not wanted by anyone on another. I can imaging that after a big battle inside and clear understanding that all very expensive R&D are not bringing NEW PRODUCTS WHICH ARE ADDING to revenue and bottom line they were pushed to make a move which suppose to bring new dimension and advertisement space for monetisation efforts. Will it save GOOGLE from falling short of expectations – I doubt it. Apart from copyright issues fully described by Mark Cuban and others from business point of view this acquisition is wrong at the wrong point in time: YouTube is just a place where people are unloading their video content - it is real “LONG TAIL” staff, 99% of it will be seen just by creator and five other guys maximum. In order to monetise this audience media it will take ages and maybe never be profitable. If I would like to see news I will go to news portal, I will use good video search engine for lectures or similar CONTENT. Apart from hype this 1.6 billion investment will not bring any even middle term (1-3 years) google size meaningful revenues. So we have now very interesting point of Google business development cycle which will be reflected in earnings this and next quarter: no new working ideas from inside, all released products are not material in sense of revenue, strategy is to move into video space and buy out time but there is no clear business idea apart from proposal to advertisers: now we will put your add on every video download (99% is how I am cool dancing or baking or nice place in Zumbaramba). On the margin compression side we will have slowing growth of revenue due to click fraud recognition and slowing economy (not only YAHOO! disease), increasing Capex (now with not clear picture whether any of these investments are actually working) and expense related to options from 1st and 2nd q around 151 mil, so Free Cash flow will be way below any sustainable multiple to the current stock price.

Regards,

http://sufiy.blogspot.com/

[TallTroll]

As usual, I find it amusing watching people who don't seem to have any clear grasp of online marketing talking about perhaps the most savvy online outfit in existence.

>> it is real “LONG TAIL” staff, 99% of it will be seen just by creator and five other guys maximum

So? What's your point? Around half of the queries handled by search engines on a daily basis are unique. The long tail is where the margin is - are you saying that owning a chunk of that tail is going to HURT Google? Madness

>> Apart from hype this 1.6 billion investment will not bring any even middle term (1-3 years) google size meaningful revenues.

Again, so? What's your point? Google couldn't care less if YouTube never even breaks even. They didn't buy it for the revenue, they bought it for the data. Yahoo collects 30Tb (that's terabytes) of user data every day. They can use that data to improve their search product, or start going after direct commerce with their users.

In case you hadn't noticed, Google come from a different background to Yahoo, and don't have the same levels of user interaction - YouTube goes a fair way to correcting that situation. Good buy, I think

[sufiy]

Hi TallTroll,

This is exactly what I am talking about: if you have noticed 80% of money are still made on few hundreds key adwords on google (apart from pure click fraud). Just try to search something really unique: you will hardly get any ads!

And your second comment is like from 2000: who cares what this investment in 1.6 billion will bring in return money wise? In 2000 we needed eyeballs now we need data? Have you calculated how much does it cost to aquire unique visitors to YouTube if this deal happen.

But no offence and thank you for responce.

Regards,

Sufiy.

[sufiy]

Dear Henry,

It will be very interesting to get estimation how Google, Yahoo and internet advertisers were affected generally by collapse of online gaming companies:

http://www.theherald.co.uk/business/71399.html

I can only speculate that they have spent heavily on advertisement online.

http://sufiy.blogspot.com/

Regards,

[TallTroll]

>> And your second comment is like from 2000

LOL, dead wrong. User data is looking increasingly likely to be the next incremental step change in how organic SERPs are generated. Google are behind the curve on this compared to both Yahoo and MSN, because of their technical heritage. It's only comparatively recently that they started interacting with users through an account, so their temporal depth of data is too shallow. Acquiring YouTube, and the recent MySpace deal give them access to huge quantities of user behaviour data.

With the $900m over 3 years guaranteed in the MySpace ad deal, that's a total of $2.5 bn committed to getting this user data - still think it's a bit 2000?

To put the importance of the data in perspective, cast your mind back to when AltaVista was the top SE. They had a full-text indexing engine, and the quality of their results were starting to suffer from spam.

Then along came a new search engine, with new method of calculating results - Google. Googles results were so clearly suyperior, that they supplanted AV very quickly. They are TERRIFIED that someone else (Y! or MSN, mainly) could do it to them, if they don't keep up in the Information Arms Race. The revenue is secondary : this is about staying alive, and $2.5 bn is a cheap price to continue living for them.

Picking up another point, I'm still not convinced that click fraud is really a huge issue yet. It will be, but as PPC is still the most efficient method of spending an ad budget, inefficiences within PPC are masked.

To take an example, I hve worked with a UK based mortgage company. Their CPA via "traditional" media is around £2000. They shifted part of their budget to a "digital agency", who did a very poor job of setting up their PPC account, and saw a decrease in CPA to £700. They then shifted the spend to a specialist PPC agency, who further decreased the CPA to £400.

I *know* there was click fraud in the £400 number - I spent some time documenting it, and claiming the costs back from the PPC providers, and I also know that some of what was paid came from fraudulent clicks, but since the £400 is just 20% of the "traditional media" CPA, it doesn't make sense to pursue that too hard... yet.

[sufiy]

Hi TallTroll,

I value your opinion: you have put effort into it.

I am looking on all this from investment perspective. Don't you think that with 32 mil unique customers to pay usd50 per head/data entry point is too much?

You are right that there is "Information Arms Race" and like in every tough competition companies are pushed into wrong investment decisions as they found themselves at the peak of business cycle. This is how bubbles are created: they are acting like "...revenue is secondary" it is important to survive and they are increasing capacity just before the period of economic contraction. Here we have very questionable deal even from the point of investment utilisation/increasing capacity: I can not see any middle term substantial revenue for Google from YouTube conbination. We will see this point in coming earnings release from Google I think we will witness further FCF contraction and stock price will drop accordingly. I will try to estimate full earnings for 2006 based on latest PWC report (note growth in online advertising is slowing dramatically in coming years)

http://sufiy.blogspot.com/

Regards,

[Mr Wave Theory]

I read Mark's blog posting Some Thoughts on Youtube and Google and I disagree with Mark's view. Mark believes that Google (Nasdaq GOOG) would be moronic to buy YouTube. I say they would be moronic not to buy.

There is only one #1 player in any given market as Internet entrepreneurs and investors have discovered with the outsized valuation given to Google. Leaders like MySpace and YouTube deserve significant premiums because they not only are synonymous with the product being delivered (MySpace/social networking, YouTube/video sharing, Google/search), but users gravitate towards those services because of their reputation. It takes no convincing to get a user to try MySpace, YouTube, or Google because chances are someone they know already uses it - and recommends it.

An advertising deal with YouTube would solidify Google as a #1 in video ads, but a buyout would solidify Google as the leader in Web 2.0 video.

Pop Quiz (Multiple Choice). Select the best answer below.
If you were Google, what do you want to be when you grow up? Do you want to be

* A) WPP Group Plc (selling advertising) (Nasdaq WPPGY)?
* B) Viacom, Inc. (broadcasting content) (Nasdaq VIAB)?
* C) Comcast Corporation (the leader in cable television, content and delivery) (Nasdaq CMCSA)?

The correct answer is ...

[sufiy]

As promised I tried to model Google earnings into rest of 2006 according to PWC report: situation even worst then I have expected - Google will miss if all trends in spending the same and pls note that rev growth was just 9% q2/q1 and I have put according to market share q3/q2 rev growth +12.5% and q4/q3 +17%! Thy can play with expense of 151 mil related to options unexpensed in q1 and q2, but then in q4 will be total disaster. If I apply rev growth of 10%, R&D freezed, Sales A&G at 2nd q level Google is still missing below 2nd q:

http://photos1.blogger.com/blogger/2373/2953/1600/scan0012.0.jpg

http://sufiy.blogspot.com/

Regards,

[as]

It is not just about financials. Even if this is chump change for Google there is only so much focus that top management can give to any business and consuming YouTube's technology, tech systems, supplier contracts, personnel, and as many folks have commented their lawsuits seems like a big distraction for a company that already seems streched thin into many different areas.

[Moses]

All - This comment interaction is as good as it gets in the blog world: Informative, controversial opinions from informed people. Congrats to Henry for drawing an audience of this caliber and thanks to those of you who posted.

[walt]

I think most people (here included) have little grasp of the youtube phenomenon.

If you want to find a video clip where will you go????

Find a video clip of Bill Buckner's infamous 1986 World Series error. Google it for 21700 results and you'll end up at youtube if you want to view the video. You don't Google to find videoclips; you youtube to find videoclips.

>>July 27th, 2006

YouTube Visitors Watch 100 Million Videos a Day · MarketingVOX
Leading online video site YouTube announced Sunday that more than 100 million videos per day are being watched on the site, reports Reuters. The site now accounts for 29 percent of the U.S. multimedia entertainment market, according to the latest data from Hitwise - and 60 percent of all videos watched online, according to the company.<<

Try to wrap your mind around 100 million views per day.
And youtube is just getting warmed up!

http://www.forbes.com/forbes/2006/1016/100a.html

[KING TROLL]

Google snaps up YouTube for $1.65B By MICHAEL LIEDTKE, AP Business Writer
1 minute ago

SAN FRANCISCO - Google Inc. snapped up YouTube Inc. for $1.65 billion Monday in deal that catapults the Internet search leader to a leading role in the online video revolution.

[an_observer]

1.65B in stock, even smarter! We can guess which class of stocks... However, I have to agree that legal risks are material + daunting to comprehend.

Some lawyers will make a career out of Google YouTube. Big studio could sue. TV producers could sue. Any manufactures or trademark holders whose products occur in popular clips could sue. Advertisers could sue. Advertisers' competitors could sue. People who supply the video could sue each other over traffic. Other video sharing sites could sue over identical clips.

My prediction: Google YouTube will be a decent revenue generators during the first few years of rapid growth, but only during those years when lawyers are busy seeking jackpot lawsuits capable of setting precedence. After few rounds of that, earnings from this venture will be severely compromised.

$1.65 billions... about right to break even.

[AdMan]

100 million viewings a day equals 36 billion viewings per year. If Google sells 0.5 cent of advertising for each one, it's $180m a year. And what if they get 2 cents? The yearly revenue would be almost half the purchase price for the company. Sure content providers will end up getting a lot of this, but there are almost no other costs except bandwidth, which will decrease with integration into G:s infrastructure.

A 3-second smartly targeted vignette before each video might be enough. Sure this will turn away some people, but maybe Google can compensate by improving the resolution of the videos or something.

[walt]

"36 billion viewings per year. If Google sells 0.5 cent of advertising for each one, it's $180m a year."

Maybe I'm missing something. Isn't that $1.8B a year? More than Goog paid for youtube!

"Sure content providers will end up getting a lot of this"

Only copyrighted material would be subject to sharing any ad rev.
Which is a very good reason for copyright owners to work deals with gootube.

[gjg]

walt,
with all due respect, you did miss something.
36 billion impression x $0.005/ impression = $180 million per year.
adman calculated correctly.

[webwhiz]

Here is my take. I think the main motive behind the acquisition is more towards video ad revenue rather than information accessibility. However, they had to pay a really high price for that along with many loopholes such as legal liability from copyright holders that could wipe out YouTube from existence like Napster. Another issue, is that copyright law is quite vague in terms of online interpretations and that could play a major role in Google’s legal liability. So, I would suggest that Google and YouTube spend some real time and money trying to convince these copyright holders to establish partnerships with them as they have with Universal and Sony. On another front, they are going to also motivate yahoo and microsoft to start advancing in their video services as well as possible acquisitions. If this becomes succesful, yahoo and msn are going to feel the pain of not taking action of acquiring youtube. Well, it is really the choices and the actions we take that really determine the success. Lets wait and see.