Google Buys YouTube. Now What?

The media had been buzzing with rumors for at least a week when Google finally announced on October 9 that it was purchasing online video sharing site YouTube. Analysts’ observations about the deal have ranged from “it’s brilliant” to “it’s the worst thing Google could possibly do.” Keep reading to find out what all of the buzz is about.

First, let me go over the details of the deal itself. Google agreed to pay $1.65 billion in stock for YouTube. The all-stock nature of the deal makes the transaction tax-free for YouTube’s shareholders. Google is going to issue the number of shares required to complete the deal based on the 30-day average closing price of the search engine’s stock two trading days prior to the close of the purchase. The deal is supposed to close in the fourth quarter of this year.
Just because Google will now own YouTube doesn’t mean it will be swallowed. YouTube just moved into new offices at San Bruno, CA, and it’s going to stay there. What’s more, all 67 of its employees, including founders Chad Hurley and Steve Chen, get to keep their jobs. YouTube will keep its brand identity.
Wall Street apparently loves the deal. Google’s stock rose $8.50 a share, or two percent, to a closing price of $429. If you do the math, you’ll see Google gained enough just from that rise in its stock price to pay for the deal and then some. That would be interesting enough on its own, but the fact is, there were plenty of deals in the air when this one hit the press – and a good thing, too, as I’ll explain in a bit.
As if one deal wasn’t enough, on the same day YouTube also announced deals with Universal and Sony BMG to legally put music videos from these companies on its site, as well as a deal covering news and sports from CBS. CBS and Sony BMG will share advertising revenue with YouTube. This is in addition to NBC’s agreement with YouTube a few months ago to promote shows from the TV network’s fall schedule, and Time Warner’s agreement with YouTube in mid-September to distribute Warner Music Group’s library of music videos.
Is your head spinning yet? Or are you simply wondering why Google purchased a company that Mark Cuban very publicly stated it would be “a moron” to buy? Well, there’s a lot of ground and many angles to cover, so let’s start by looking at some of the advantages of this deal.

If Google’s decision to purchase YouTube is a bad one, then it’s not the only big company with bad judgment. The rumor mill says that YouTube has had several other suitors over the past few months, including Microsoft, Yahoo, News Corp. (owners of MySpace), and more. It’s the price that Google paid that has many analysts shaking their heads. It reminds far too many of us of the boom days shortly before the dot-com bubble burst. Could this be a sign that we’re in the middle of another bubble just waiting to explode?

Then again, it really is hard to calculate the value of such a young technology upstart. Indeed, at least one venture capitalist has likened such an analysis to basically a crap shoot. Google saw significant synergies between itself and YouTube, which it believes meant the video sharing site was worth $1.65 billion in stock. Eric Schmidt and Google co-founder Sergey Brin have both said that YouTube’s founders and company remind them of Google itself just a few short years ago.
So if they share a vision, what does that vision look like? Well, for openers, imagine searching Google for help with a “plumbing toilet flusher” and finding a how-to video on YouTube. Or how about doing research for a vacation to Hawaii and finding some home videos taken by tourists and posted online? Those are just some of the possibilities.

Looking at the bigger picture, does this mean that online video is the wave of the future? Certainly many other online video companies hope this will inspire a shopping spree. Mary Hodder, CEO of Dabble, a site that functions as a sort of TV guide for Internet video, notes that the deal “causes people to look at our value, and who has what video where. All of a sudden lots of people who didn’t get Dabble are popping us and realizing the value we provide with search and social discovery.” Meanwhile, Schmidt insists that this is the next step in the evolution of the Internet. If Google can make it pay while dodging copyright lawsuits, he just might be right.

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