News

Google to buy YouTube for $1.65 billion in stock

Ben Charny [MarketWatch]

SAN FRANCISCO - Google Inc. said Monday it agreed to acquire privately held YouTube Inc., the No. 1 Internet video-sharing site on the Web, for $1.65 billion in stock.

The deal, which is by far Google's largest yet, is regarded as a largely defensive one that leapfrogs Google into a leading role in the Internet's burgeoning online-video marketplace while holding its media and Web-portal rivals at bay.

Without any formal marketing in its less than two years on the Web, YouTube now streams 100 million videos daily to an audience estimated at nearly 40 million a day.

The acquisition of YouTube highlights how heavily the likes of Google, Yahoo Inc. and other Internet companies are betting on video as a way to attract bigger numbers of customers and generate more advertising dollars.

Indeed, after reports of talks with YouTube surfaced last Friday, many analysts said they believe Google's competitors will now seek to buy imitators of YouTube in order to keep pace with their rival.

On Monday, the boards of both Google and YouTube approved the terms of the deal, which was announced after the market closed.

Google said YouTube will continue to operate as a separate entity. The deal is expected to close in the fourth quarter.

"Together, we are natural partners to offer a compelling media entertainment service to users, content owners and advertisers," Google Chief Executive Eric Schmidt said in a written statement.

The two companies began negotiating terms about a week ago. Talks accelerated during the weekend after YouTube reportedly received interest from some of Google's biggest competitors.

The deal serves as a rather spectacular coda for YouTube. Headed by 29-year-old Chad Hurley, the maverick company had its debut in February 2005 with a radical new idea: Let users upload digital videos onto the Internet to share with others.

"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," Hurley said in a statement. "I'm confident that with this partnership we'll have the flexibility and resources needed to pursue our goal of building the next-generation platform for serving media worldwide."

Now run by 67 employees in San Mateo, Calif., YouTube has come to symbolize the Web 2.0 generation of Internet startups taking advantage of the advance of high-speed Internet connections into more homes.

YouTube has trounced its rather deep-pocketed rivals, which have tried to match its success. YouTube has a 46.7 percent share of the online video audience, more than twice that of No. 2 MySpace Videos, owned by News Corp., and four times that of No. 3 Google Video, according to Internet business intelligence provider HitWise.

Rounding out the top five are No. 4 Yahoo Video, which has a 5.5 percent market share, and MSN Video, with a 5.28 percent share, according to HitWise.

Shares of Google closed the day trading up 2 percent to $29 a share. Yahoo shares shed 1.7 percent to fall to $25.03. News Corp. shares rose 1 percent to $20.95.

By surging so quickly to No. 1, and building up such a wide margin, YouTube has not only become a well-recognized brand, but also cemented video as a "must have" application for Internet portals.

"Video is emerging as a key application, similar to email and search, that determines why a user or an advertiser chooses one site over another," analyst Anthony Noto of Goldman Sachs Global Investment Research wrote in a research report.

Several analysts said the most important aspect of the YouTube deal is that it lets Google keep YouTube from becoming part of rivals Yahoo and Microsoft, which had expressed interest in buying the firm, analysts said Monday.

"This is Google making sure no one else gets into this space," said Roger Aguinaldo, chief executive of the M&A Advisor newsletter.

"The competition, Yahoo, News Corp. and Microsoft, may be the losers," Trip Chowdhry, Global Equities Research analyst, wrote in a note to clients before the deal was announced.

Also of benefit to Google is how, with a larger audience, it's now in a better position than its rivals to sell online videos, or generate revenue serving up ads next to freely-available videos, the analysts say.

Researchers at eMarketer expect revenue generated by online video to reach $2.5 billion in 2010, up from $350 million this year.

"When combined with Google's advertiser base and targeting expertise, we would expect to see substantial revenue generated from a YouTube-engaged video audience," Susquehanna Financial Group analyst Marianne Wolk wrote in a note Monday.

To be sure, there are plenty of risks for Google. For starters, YouTube right now generates very little, if any, actual revenues, analyst say.

Yet the deal's timing is opportune, taking place just as online video sharing sites are exploring new business models. To do so, many are also trying to clean up their acts by focusing much more intently on ridding their video caches of pirated video that gets uploaded.

The situation has improved so much so that YouTube and other like-minded video providers are now signing distribution deals with major music, television and movie companies.

Just Monday, YouTube said it will begin distributing videos from Universal Music Group and Sony BMG Music Entertainment under a profit-sharing plan. It's also inked a revenue-sharing pact with CBS Corp. to distribute more of its shows online.

Additionally, Google said that later this month it plans to begin distributing thousands of songs from Warner Music Group Corp. and Sony Music Entertainment. The videos, which will be accompanied by ads, will be available for free on the Google Video site.

Yet, Google still faces what some believe will be a potentially enormous legal bill after the purchase closes.

Despite efforts to battle the problem, pirated snippets from TV shows from every major network, and portions of films created by leading movie studios could be found on YouTube on Monday.

___

© 2006, MarketWatch.com Inc. Distributed by McClatchy-Tribune Information Services.

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