Video revolution? Google and YouTube

Internet search leader Google Inc. purchased YouTube Inc. for $1.65 billion US. (YouTube.com/Associated Press)

After they signed a deal that priced their internet startup at $1.65 billion US, YouTube founders Chad Hurley and Steve Chen took a camera and made a video, then uploaded it on YouTube.

The deal that gave the popular video sharing website to Google was noted with praise, awe — and a healthy dose of criticism.

Take this warning from Mark Cuban, the billionaire who sold Broadcast.com to Yahoo for more than $5 billion in 1999 before the dot-com bubble burst:

"Would Google be crazy to buy YouTube. No doubt about it. 'Moronic' would be an understatement of a lifetime," he wrote last week as the rumours of the deal were circulating on the internet.

Hurley saw it in a different light in the video posting: "Two kings have gotten together," he said, smiling. "The king of search and the king of video have gotten together."

Actually, when it comes to video, YouTube isn't quite yet the king, although now that it's combining with Google Video, it's definitely a contender to the throne.

What they are saying about the YouTube deal:

'Ownership of video traffic would help Google capture a bigger portion of advertising revenues from video content distribution deals.' Merrill Lynch's Justin Post, before the deal was announced

'In acquiring YouTube, Google has, in one fell swoop, increased their number of video streams — and potential ad revenue from streaming — tenfold.' Gian Fulgoni, comScore chairman

'After trying to compete with YouTube, Google has finally decided it was more prudent to buy them, vs. build a viable competitor.' Robert Peck, Bear Stearns.

'The American Dream. Two computer geeks just wanted a way to send videos to each other over the net, and a couple of years later they're richer than they ever thought possible. Just goes to prove … no idea is ever too small, or too stupid. :).' A YouTube user in one of the thousands of comments posted on YouTube following the Google deal

Of course, along with Cuban are those who are heralding the purchase as something more than a big dot-com buy. They see it as a hint of where media is consumed and how to make money out of it.

"We buy Google's view that we are entering an 'internet video revolution' — and with Monday's announcements, Google just improved its weak position in the social networking area," Mary Meeker, an analyst with Morgan Stanley, said in a research note after the deal was announced.

The top players

Yahoo and MySpace.com are the top video streamers in the United States, with each seeing about 38 million videos played in July 2006, according to comScore. YouTube came in third place with about 30.5 million streams — but now it can add Google's own video offerings of seven million streams.

That same study said that three out of every five users in the United States streamed or downloaded video.

In July 2006, the report notes, users downloaded more than 7.2 billion videos, or about 67 videos a person. Put another way, the average internet user plays two videos a day.

In Canada, there isn't a clear picture about online video use, but it's estimated that 68 per cent of all Canadians go online on their own time.

A Statistics Canada survey says 12 per cent of users downloaded or watched TV or a movie. And the majority of Canadians use high-speed connections, which is crucial to getting delivery of such large content.

YouTube story

The story of Hurley and Chen is yet another modern rags to riches story. The two men started their site in February 2005 with a good idea – providing a website that would allow people to upload videos.

As of July 2006, 17 months after it started, YouTube had grabbed a unique audience of 12.8 million users in the United States. It now streams 100 million videos a day and it is estimated that it has 72.1 million users, according to comScore.

YouTube's popularity stems from its community approach to video sharing. The site features just about anything for anyone. Its Top 10 all-time list of videos viewed include a six-minute clip of a man dancing to clips of music (he's now a celebrity), a unidentified guitarist playing Pachelbel's Canon in D (he's since been identified), a music video and a clip from the movie Napoleon Dynamite.

But the latter two items and similar streams have some analysts and doubters, like Cuban, casting a wary eye at the Google deal.

They say it has opened the door to countless lawsuits over materials owned by major entertainment companies. The videos in question? Among them, TV shows, music videos and movies.

"It will be interesting to see what happens next and what happens in the copyright world," Cuban wrote in his blog as the deal was announced. "I still think Google lawyers will be a busy, busy bunch."

Copyright

So far, YouTube has made the moves to address copyright concerns. In September 2006, it signed a deal with Warner Music to use music videos and programming in exchange for revenue from ads. And just before the Google announcement, YouTube signed partner deals with Sony, Universal Music and CBS. With three major music labels now on board, YouTube now has 73 per cent of the world's music market share.

Google also announced two deals with two recording companies, Warner Music and Sony, allowing its users to watch videos and interviews with artists. The content would be available free and served along with Google's advertising. Some music videos would be downloadable for a price.

"While the recent content deals allay many of our concerns about copyright issues, we believe Google's deeper pockets may attract some legal challenges," Imran Khan of J. P. Morgan said in a research note.

He says YouTube could be able to make revenues of $146-million in 2007.

What about the bubble?

So is $1.65-billion too much for the company? During the dot-com heyday, internet companies were purchasing rivals for hefty price tags. The big acquisitions include Netscape (bought by AOL for $4.2-billion in 1998), Broadcast.com (bought by Yahoo for $5.7-billion in 1999) and GeoCities (bought by Yahoo for $3.6-billion in 1999).

Since then, the spending has largely slowed, but there have been a few big purchases in recent years. EBay bought Skype, a peer-to-peer internet phone network in 2005 for $2.6 billion while New Corp. purchased MySpace in the summer of 2006 for $580-million.

Google, which was worth $130 billion in market capitalization in September 2006, opted not to use the almost $10 billion it has in cash to buy YouTube. Instead, it did it with stock. And if there's another way to quantify the purchase, $1.65 billion divided by 72 million users equals about $22 a head.

Which is something not lost on the now very-rich YouTube founders in their video posting.

Said Chen: "Thanks to every one of you guys that have been contributing to YouTube, the community. We wouldn't be anywhere close to where we are without the help of this community. Thanks a lot."