YouTube & Google

Well, it's official. Does any business pundit, media personality, or publication not have an opinion on this recent tie-up?

Probably not. So here's mine.

I think the most unique value I can add to assess Google's purchase, for $1.65B of stock, of YouTube, is to suggest that the value to Google of YouTube is a binary proposition. Either the online ad business is stable and continuing to grow, does not collapse as Net Bubble II, and YouTube is a smart move, or, we are living amidst the second internet bubble, it will "pop," and Google's purchase of a profitless online company with virtually no proprietary content, will look silly.

I doubt the result will be anything in between.

The CNBC pundits, and their guests, pretty much shake out into the two camps you'd expect.

On one hand, you have those who (correctly, I believe) see this as Google paying $1.65B to deny Microsoft, Amazon, Yahoo, News Corp, TimeWarner, Comcast, et.al., the hottest, largest video content destination in the online world at present.

Given Google's current $130B market capitalization, YouTube cost barely over 1% of their value. And latter's stock rose $4 yesterday, on the acquisition news, or roughly $1.2B. Yes, if you're waggish, you can say, "look, the damn thing almost paid for itself in one day!"

But, seriously, if we are all drinking the Kool-Aid, this deal made sense. It is Google's wise use of its almost untouchable market value to pay up for a unique online asset, and also deny it to any potential competitor. Very shrewd. Very aggressive, using one of their unique advantages, the ability to fund large acquisitions, and outspend, outmaneuver, any would-be challengers to Google's ability to blanket everything online with ads.

In a way, it meshes with my thoughts about Google from last year, as well as earlier this summer, found here. Basically, Google's leaders know they can no longer re-Google their own firm. They are simply already to large. But they do own market value. And they have made so much money, that they can literally afford to begin to spread that largesse around, forward, to new challengers who might unravel Google's carefully-sewn blanketing of the online market for ads and searches. By not being too greedy, and seeing their incredible market cap as a piggy bank sort of found in the brush, to be shared with deserving other innovators, Google may well extend and expand its market dominance for some time to come.

On the other hand, many analysts note that YouTube has no profits. It is a total hedge purchase by Google, and will never justify its price.

As I noted up in the early paragraphs of this post, I think it's an either/or sort of situation. Either Google, in general, is valuable, and, thus, by extension, so is YouTube. Or it's a blip, another AOL, and when it dissolves in one, huge online bubble-burst, YouTube will look like a foolish move.

By the way, in that regard, consider this, if you will. YouTube has fewer than 70 employees. Suppose the two founders only keep half of the $1.65B in stock, and give the rest, net of Sequoia Capital's 30%, to their employees. With $825MM left, Google's value could plummet by 99%, and the founders would still enjoy a payoff of $8.25MM, or over $4MM apiece. Is that so bad for a year's hard work and a little imagination?

However, back to the pessimistic view. Back in the late '90s, when clicks were supposed to replace bricks (and mortar), the items in question were physical goods. Online pet stores, etc, could not, in the end, sustain sufficient sales volumes to justify their market values.

Now, however, the material in question is entertainment. Digital entertainment, to be specific. It's all over the place, so finding one place where millions of people concentrate to find and view the digital video entertainment is extremely valuable.

Nevermind CNBC's Bob Griffith's inane question, something like 'couldn't I start a video website with $1.65B?' Sure he could, and so could I, and so could you.

But it wouldn't be YouTube, now, would it? It might look the same, but if people don't put up their video content, you're just not "there."

True, YouTube owns virtually none of the content it hosts. Now...wait a minute...let me think.... That reminds me of....eBay! They don't own the merchandise they intermediate, either, do they? Their best days might be over, but they, too, had a good run at the top, when online auction was a fresh business model.

I think the bottom line this time is that the acquisition of YouTube by Google, in the competitive context of today's online digital content business, is a cheap defensive tactic, and perhaps a profitable offensive strategy, as well. Old media is going to have to continue to use new media as its distribution channel onto the internet. They just don't have the mindset to invent or grow their own YouTube, Bob Griffith's opinion notwithstanding.