Boom Echoed in Deal to Buy YouTube
Web site started by three 20-somethings after a late-night dinner party is
sold for more than a billion dollars, instantly turning dozens of its employees
into paper millionaires. It sounds like a tale from the late 1990s dot-com
bubble, but it happened yesterday.
online search behemoth, agreed yesterday to pay $1.65 billion in stock for
the Web site that came out of that party YouTube, the video-sharing
phenomenon that is the darling of an Internet resurgence known as Web 2.0.
been coveted by virtually every big media and technology company, as they
seek to tap into a generation of consumers who are viewing 100 million short
videos on the site every day. Google is expected to try to make money from
YouTube by integrating the site with its search technology and search-based
But the purchase
price has also invited comparisons to the mind-boggling valuations that were
once given to dozens of Silicon Valley companies a decade ago. Like YouTube,
those companies were once the Next Big Thing, but some soon folded.
a market value of $132 billion, can clearly afford to take a gamble with YouTube,
but the question remains: How to put a price tag on an unproven business?
believe its the future of television, its clearly worth $1.6 billion,
Steven A. Ballmer, Microsofts chief executive, said of YouTube. If
you believe something else, you could write down maybe its not worth
much at all.
In a conference
call to announce the transaction yesterday, there were eerie echoes of the
late 1990s boom time. There was no mention of what measures Google used
to arrive at the price it agreed to pay. At one point, Googles vice
president, David Drummond, gave a cryptic explanation: We modeled this
on a more or less synergistic kind of model. You can imagine this would be
hard to do on a stand-alone basis.
The price tag
Google paid may simply have been the cost of beating its rivals Yahoo,
Viacom and the News Corporation to take control of the most sought-after
Web site of the moment. It was also perhaps the only price that two YouTube
founders, Chad Hurley, 29, and Steven Chen, 28, and their big venture capital
backer, Sequoia Capital Partners, were willing to accept, given that they
most likely could have continued as an independent company. A third YouTube
founder, Jawed Karim, left the company to pursue an advanced degree at Stanford.
The deal came
together in a matter of days. After rebuffing a series of other overtures,
YouTubes founders decided to have lunch on Wednesday with Googles
co-founder, Larry Page, and its chief executive, Eric E. Schmidt. The idea
of a deal had been broached a few days earlier. The setting was classic Silicon
Valley start-up: a booth at Dennys near YouTubes headquarters
in San Bruno, Calif. The Google executives threw out an offer of $1.6 billion
and autonomy to continue running the business.
That set off
a marathon of meetings and conference calls over the next two days, which
kicked into even higher gear on Friday, when news of the talks began to circulate,
putting pressure on Google to sign a deal before a rival bid emerged. In fact,
the News Corporation sent a letter to YouTube seeking to start talks but never
received a response.
deal has to feel a little like the 1990s, but it isnt, said
Dmitry Shapiro, chief executive of Veoh, a YouTube competitor that is backed
by Time Warner and Michael D. Eisner, the former chairman of Disney. Arguing
that online video represents an entirely new medium, he said, If you
knew then what you know now and you had the chance to acquire Amazon or eBay
which werent making any money either you would have bought
Of course, YouTube
has also been compared to Napster, whose music-sharing service was eventually
shuttered after a series of lawsuits. While YouTube has made some deals with
content providers, including one yesterday with CBS, its users have uploaded
millions of copyrighted clips, leading some to question whether Google is
inheriting a legal minefield. YouTube has said it is different from the old
Napster service because it removes content when a copyright holder complains.
are some issues with YouTube, Sumner M. Redstone, chairman of Viacom,
said last week on The Charlie Rose Show. They use other
peoples products, he said, alluding to pirated video. The
only way they avoid litigation now is they stop doing it if you call them.
who founded Broadcast.com, an early audio and video site that was bought by
Yahoo, is even more skeptical of Googles legal position, writing on
his blog: I still think Google lawyers will be a busy, busy bunch. I
dont think you can sue Google into oblivion, but as others have mentioned,
if Google gets nailed one single time for copyright violation, there are going
to be more shareholder lawsuits than Doans has pills to go with the
pile-on copyright suits that follow.
Yet the deal
with Google was announced hours after YouTube disclosed deals with entertainment
companies that appeared to reduce the risk that it would become mired in copyright
YouTube is Googles
first big acquisition after making a series of much smaller deals for companies,
including Pyra Labs, creator of Blogger. Google now joins the Internets
establishment Yahoo, eBay and Amazon.com, among others which
have all made giant acquisitions to expand their businesses beyond their traditional
But those companies
have had mixed results. Yahoo paid $3.6 billion in 1999 for Geocities, a company
that allowed users to create their own Web sites; today, MySpace, a social
networking site bought by Rupert Murdochs News Corporation last year
for only $580 million, far eclipses it. EBay, on the other hand, acquired
PayPal, a rapidly growing start-up that lets people make payments via e-mail,
for $1.5 billion in 2002. It now represents more than a third of eBays
pursuing big acquisitions, Google has been known for plowing money into research
and development, spending $483.98 million last year, an increase of more than
114 percent over the previous year.
of the YouTube acquisition will probably lie in embedding video advertising
into the clips that millions of people watch everyday from their computers.
So far, YouTubes management has been reluctant to include advertising
within clips, for fear of alienating users.
Mr. Hurley, one of YouTubes founders, appeared more open to experimenting,
saying that he was even considering testing whats known as a pre-roll
a 15-second ad before a clip something he had long derided as
potentially ruining the user experience.
While more marketers
have been eager to advertise against online video, some big consumer companies
have been reluctant to fully embrace advertising against user-generated content
because it is difficult to differentiate good content from offensive material.
YouTube has created an assortment of tools for users and content creators
to police its site.
it had struck accords to license content from two of the four major music
conglomerates the Universal Music Group and Sony BMG Music Entertainment
and the CBS television network in exchange for a percentage of YouTubes
YouTube is also
expected to use new technology to identify copyrighted material that users
have uploaded to the site without permission, and to share ad revenue with
media companies that own the video or music content. (YouTube made a similar
pact with the Warner Music Group last month, and had a previous advertising
deal with NBC in June).
The deals reflect
how media companies are rethinking the distribution of their entertainment
The deal with
Universal, the worlds biggest music corporation, drew particular attention
because the company had said it was contemplating a lawsuit against YouTube
over copyright issues.
the president of Inside Digital Media, said the new arrangements represented
a strong endorsement that the major media companies are going to see
YouTube as a legitimate business partner.
Mr. Leigh said
that also suggested a rethinking of the approach the companies took to Napster.
It shows that very important, erstwhile reluctant media companies have
got religion, he said.
alliances also came the same day that Google announced separate deals to license
music videos from Sony BMG and Warner.
Under the terms
of the deal, YouTube, which has about 60 employees, will retain much of its
identity and will keep its name and its office in San Bruno, more than 25
miles from Googles headquarters in Mountain View.
was announced after the stock market closed. Earlier, Google shares rose 2
percent, to $429, after DealBook, a Web log published by nytimes.com, reported
that a deal would be announced at the end of the market day.
a UBS analyst, wrote in a note to investors. The price tag of about
$1.6 billion is difficult to justify on a spreadsheet and may be somewhat
of a throwback to the days of paying for eyeballs and page views, but this
is a strategic bet that Google would be placing for a long-term objective:
to be the technology and distribution partner for content owners and publishers.