Chaf's Digital Brain

Tuesday, October 10, 2006

Google & YouTube - Six reasons why this deal makes sense

1.65 billion dollars. Thats how much Google just spent to acquire YouTube.

When it comes to buzz in the blogosphere, this is a perfect storm. People already obsess over Google. People already obsess over YouTube's traffic/inability to make money. And then came the rumor (first by TechCrunch) - Google was in talks to buy YouTube. Bloggers went nuts. Everyone threw their self-important weight, talking about what a horrible deal this was for Google (whilst a fantastic deal for YouTube). And then it happened. What appears to be a most bizarre marriage finally took place.

I do want to take a moment to pause here and give Michael Arrington (TechCrunch) his deserved kudos. I may not agree with a lot of what he says, but he beat everyone to the punch, including the venerable big boys like the New York Times. I guess he can take some satisfaction in leaving them behind.

When I first saw the deal announced, a range of emotions swirled inside me. Firstly was jealousy. I have to admit - 1.65 billion dollars for a site bleeding money? (and without a real plan of making some) I would take that any day. Then came confusion - why would Google do this? They just placed Google Video on their frontpage - wasn't this a way of saying 'we lose?' Plunking down 1.65 billion dollars for YouTube?! And then finally - enlightenment!

Perhaps not real englightenment, but an understanding that Google may be smarter than all of us

Let me share my zen on why this makes sense for Google:

Propensity to fight. It is not hard to argue that YouTube owes a lot of its success to copyrighted videos. SNL's Lazy Sunday was the first big viral splash (I myself saw it first on YouTube). This lead to other massive viral hits. Even at this moment it is easy to go through the site and find TV episodes uploaded part by part. But if there is anyone on the internet who ignores copyright, it has to be Google. Just look at their core search feature of caching. I have no desire to go into the legality of it all, but Google has been sued quite a few times because of it, and Google has swatted them away like flies. The entire ongoing saga of indexing book contents. Again - Google is being sued left and right for infringment. Still, Google ignores them (while charging ahead). In turn, it goes ahead and subpoenas Yahoo and Microsoft. Why not drag the other two into this? Their image search. Their keyword (read: trademark) based advertising. I could go on and on, but Google, if looked upon as a person, has a very headstrong personality. If anyone is prepared for lawsuits, its Google.
The next frontier: video ads. While Yahoo and MSN may make noise about Oventure and AdCenter respectively, AdWords is the king of textual keyword based ads. Yet a juicy new frontier awaits - video. YouTube did prove one thing - people like viewing videos online. Even taking out all the copyright material out of YouTube, a lot of legitimate videos are quite popular. Instead of waiting around to see if there is market for video (which should command *far higher* prices than text links), Google has opted to take the bull by the horn. While Google may never directly put video ads on its core products, it now has one of the largest inventories of video on the internet. was a massive testbed for AdWords before it was distributed to publishers small and big. Consider YouTube as a massive testbed for Video AdWords before distributed to publishers small and big. (Note: I do understand that you cannot directly compare text-ad inventory and video-ad inventory, but the analogy serves as a useful example regardless).
Competitive knowledge. Where Google totally smacks Yahoo and Microsoft around is in data. There is no doubht in my mind that the next stage of search engine algorithms will involve user analysis. Why do you think Google Analytics is free? Because Google loves you? No way - they are tracking user behaviour to find out which sites are quality and which are not. A quick example: two sites (Site A and Site B) rank equally inside the Google algo for keyword 'blue widgets'. Using analytics, Google knows that Site B gets far more clicks from other sites, and also has 3x the stickyness when compared to Site B. Which site do you think should rank higher? Yahoo has tried to rectify this lag in user knowledge by acquiring sites like Flickr and Delicious, but only time will tell if the data will be useful. Quick aside: I make a bold claim here that StumbleUpon will soon be courted by the big three - again, easy insight into what users like (and dislike). Back to the point - who was using Google as one of their primary ad inventory sellers? YouTube. So every single Adsense impression that Google delivered, Google also stored that information on their own servers. Many months later with billions of pageviews served, Google has a mountain of data to analyze. Yahoo and Microsoft? Sorry champs, out of luck. Even without YouTube explicitly providing statistics, Google already knew the most popular videos, the top referrers, and so forth. They have information no one else (including you and I) have access to.
Liked brand. Internet users may be fickle, but Yahoo, Microsoft, and Ask are all learning a hard lesson in consumer loyalty. All that money they are spending on getting more traffic to their search engines? Talk about failure. YouTube is a brand liked by many many people. Google+YouTube = fanaticism. Yahoo got a lot of goodwill out of purchasing Flickr and Delicious. The jury is still out if that goodwill will translate into money, but it can still be a force to reckon with.
Defensive move (while sticking it to them). Google continues to jab at Yahoo and Microsoft, and they have nothing to respond with. Microsoft gets Facebook, Google gets MySpace (but take the hype with a grain of salt. Even then, MySpace is still far larger than Facebook). And now this - Google gets YouTube, Microsoft gets a deal with Blinkx. Say it with me - "Blinkx who?"
Stock. Not a single dollar was directly transferred to YouTube. Considering that Google's stock is ridiculously high already, why not? While more real than Kevin Rose's 60 million, the value of the deal could easily decrease quite a bit.
In the end, this deal is about potential. In a worst case situation, the YouTube acquisition is a horrible failure. Lets even say Google blows 2 billion dollars on the site. So what? They make more than that in a year. But the upside? Billions and billions of advertising dollars. And the possibility of pulling the rug from under Yahoo and Microsoft (again) can't hurt.

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