The rumour that originally surfaced last week about how Google might be close to snapping up YouTube, has now turned out to be true. Google has officially agreed to acquire YouTube, the consumer media company for people to watch and share original videos through a Web experience, for USD 1.65 billion.
For Google, the acquisition of You Tube would thrust it quickly into the emerging market for video advertising, where it has only a tiny foothold compared with Yahoo and various web start-ups, analysts said. "You Tube is valuable in terms of traffic and in the Internet sector this is important just like location is important in real estate," said Sasa Zorovic, an analyst at Oppenheimer.
"You Tube has almost 50 per cent of the online video market and combined with Google Video, they'll have close to 60 per cent of traffic," Zorovic said, adding the USD 1.65 billion price tag was in line with valuations for Internet businesses.
"This is a very good move for Google, strategically, as it opens up to them the possibility to grow in one Internet area where they were not very big, that is video," said Steve Neimeth, portfolio manager for AIG SunAmerica Asset Management.
This venture had struck LeeAnn Prescott, an analyst, as highly unlikely, but it deserves some analysis. Firstly, how does YouTube's traffic compare to Google Video, and what effect did Google's replacing the Froogle link with Google Video have? questioned LeeAnn.
"Rumors are rumors and just that," Cuban had said, a frequent critic of YouTube, claiming the popular online video site will eventually run afoul of US copyright laws, much like the original Napster. In a move that appears to pre-empt the threat of legal action against You Tube, Universal Music Group and Sony BMG said earlier on Monday they signed distribution deals with You Tube, following a similar agreement with Warner Music Group last month.
Google's pursuit of YouTube would underscore the race by established Internet companies to keep pace with the surging popularity of new sites. Google's video site has less than half the users of YouTube, according to Nielsen//NetRatings. YouTube, friend-finder page Facebook.com and news site Digg.com are among operators winning millions of viewers each month.
"They are buying audience,'' said Charlene Li, an analyst at Forrester Research in San Francisco. "It totally makes sense. The biggest problem Google Video has had is that they started with a business plan not a user model."
On the other hand, Josh Bernoff, an analyst at Forrester Research, said a takeover by Google, which already has a video service, would "make a strange sort of sense".
"Google has a weakness in that the community space in the web is becoming more and more important," he said. "They're beginning to lose opportunities to MySpace." Bernoff said Google's engineers could help YouTube build new tools that limit users' ability to upload copyrighted content.
Eric Schmidt, Chief Executive Officer of Google, said "The YouTube team has built an exciting and powerful media platform that complements Google's mission to organize the world's information and make it universally accessible and useful”. And Chad Hurley, CEO and Co-Founder of YouTube said, "Our community has played a vital role in changing the way that people consume media, creating a new clip culture. By joining forces with Google, we can benefit from its global reach and technology leadership to deliver a more comprehensive entertainment experience for our users and to create new opportunities for our partners".
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