Why Google's YouTube bet will pay off bigtime

Why Google's YouTube bet will pay off bigtime

Summary: Google's acquisition of YouTube for $1.65bn stunned many in Silicon Valley.

TOPICS: Google

Google's acquisition of YouTube for $1.65bn stunned many in Silicon Valley.

Some thought it was way too much to pay for a startup with hardly anything in revenues and it indicates a bubble mentality.

While others took it as good news because it would boost the valuation of other startups in the same or related markets.

Those opinions would be true if this was 1999, Google is essentially building a proprietary Internet with efficiencies that the current Internet cannot hope to match. but it's not.  In 1999 we didn't have these massive computing platforms, such as Google, Yahoo, AOL, EBay, Amazon,  etc.

One way to look at this deal is to say that YouTube acquired the most efficient and powerful computing platform on the planet. GOOG can offer YouTube instant economies of scale that would have taken it years to build.

In addition, Google has a business model that can monetize YouTube much better, and more quickly than anybody else. If YouTube had an IPO today, it would take it a long time to become a large thriving business, fighting off many similar competitors along the way.

GOOG can monetize YouTube far better and far more quickly than anybody else. Therefore YouTube's valuation is likely on the low side considering the revenues Google can make from this acquisition.

This also means that the valuations of similar businesses are not boosted by this deal, because suddenly, there is an 8,000 lb gorilla in the room. And it is taking all the oxygen out of the room.

In 1999, the Internet was still a level playing field, all the big Internet players were still relatively small, you could build competing businesses and take on the leaders and win. In 2006 this is not the case.

So what if you have a better search technology today? Google can monetize it better than you can, you would partner with it or sell out to it.

What the Google/YouTube deal represents is the bet that scale on the Internet will win every time. That if you can aggregate the largest number of users, the largest number of applications, the largest number of advertisers, you will win each time.

And today, there really is no "rule of three" in the market, the notion that the "big three" as in car makers, and in other industries, become the dominant monetizers and everyone else grabs the scraps.

The Internet is all about scale, where scale is rewarded. There is no reason for anyone but the largest, most efficient Internet company to dominate Internet markets.

Google is essentially building a proprietary Internet with efficiencies that the current Internet cannot hope to match. The Internet is a patchwork quilt of old and new systems and networks.

The "GooGnet" is a modern network made from the most cost efficient and effective systems and networks ever built.

Google's engineers are already influencing and changing the architecture of computer systems at Sun Microsystems and Hewlett-Packard, of microprocessor designs at Intel, and influencing similar developments at hundreds of other companies.

Google is spending hundreds of millions of dollars per quarter and it will soon become the world's largest computer systems buyer as it builds out its platform.

And the more the GooGnet is loaded with massive applications such as YouTube, the faster Google can scale and dominate.

Over time, there will not be a number two, or a number three competitor in Google's markets. There will be many small companies living off the margins, in niche markets - making decent livings but nothing blockbuster.

That's why Google has its motto - "Do no evil" because with such scale it could do tremendous harm.

But will it be doing good? It doesn't need to "do"  anything, it will be essentially neutral, just as the Internet itself is a neutral entity in any ethical and moral sense.

- - -

So what about things like copyright problems on YouTube? It's not a problem because Google will sort it out in the same way its news aggregator Google News sorts it out: if you don't want to be in Google News, tell the company and it will remove you. And it will also remove any traffic that Google is sending to you.

With Google News, the news sites have become dependent on nearly half of their traffic coming from Google. It has become a distribution platform for them and they could not survive without it.

That's what will happen with "YouTube powered by Google," it becomes the distribution platform for the emerging world of IP TV.

I had an interesting chat recently with William Jolitz, a Silicon Valley veteran about this topic. He notes that it costs about $1 per minute to deliver TV content to a viewer as compared with 5 cents per minute via a service such as YouTube.

Those are powerful numbers, a 20 to 1 cost advantage is huge. It's a huge competitive advantage. And Mr Jolitz knows the value of a broadband driven business model, see: "The Google Test" on VentureBeat.

Topic: Google

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  • Wrong.

    The copyright issue Google faces with Youtube will not be solved by 'just removing the offending content.' We are talking about major programming swimming around Youtube, and Google is going to have to answer for it in court... I am totally convinced of it. No Safe Harbor for Google on this one... they are screwed.

  • $1/minute??

    This is ridiculous. Obviously the TV stations aren't paying $1/minute/viewer just to broadcast television. Their revenue is only a tiny fraction of that.
  • You're kidding, right?

    YouTube is barely a year old and it's worth 1.65 Billion? I guess this would only make sense to a search engine company that somehow is worth 131 Billion... What happens to this investment when, next year, the new hot video property comes onto the scene? Or will Google just keep buying up over-hyped products with its inflated stock?
  • Horrible mess

    Youtube is a horrific purchase for Google, especially at the price they paid. Bad move, bad concept, bad market.

  • Just Watch

    I think that Google is on the right track-It's now up to marketing and price.
  • Most are missing the salient point

    This has NOTHING to do with the technology or other specifics of YouTube, and EVERYTHING to do with user-driven internet dynamics. Or, in short, the "There can be only one" phenomena.

    There's no question Google couldn't deliver a video site as good or better than YouTube. In fact, they did. The problem was with the user-driven dynamic. Precisely the same thing that drove eBay to not only be the top auction site, but awfully close to the ONLY auction site worth dealing with. I'm going to put my videos where I can maximize eyeballs (and I have: I'm "hazydave" on YouTube). As long as it's free, I'm going to deal with site #1, and not worry too much about dealing with anyone who's not getting at least 50% of that #1 site's traction. Why bother?

    The simple fact is, there were many differnet video sites online -- I used to watch whole films over serious broadband, while overseas, 6+ years back. But no one delivered anything remotely like the YouTube environment... in fact, while video quality was often better back then, it was hard to find content. YouTube were the first guys to do it this way, right, and that's what Google bought.

    They have a serious problem: copyrights. I just found out today there's a 6 minute excerpt from a film of mine up on YouTube. Worse yet, the guy who put it there has twice the hits I have :-) Thing is, while that's a big-ass problem, it's a problem for anyone working in this space. If Google can solve this for GoogleVideo, they an solve this for YouTube. If they can't, they can't solve it anywhere. I think, ultimately, YouTube, Google, and content providers will work to get it all legal, or at least legalish, and do that without destroying the magnet that YouTube has become.

    • Teen eyeballs are twitchy


      You're basically making the argument that Google bought eyeballs -- which was the modus operandi (sp?) back in the dot com boom days for crazy deals like this one. The problem is that the demo that drives adoption of these technologies have zero brand loyalty. Remember Friendster? They'll junp to the next shiny new thing as soon as it's available.

      The copyright problems are only another potential headache for whoever buys into a "user content" driven property.
  • Agreed. Here's why: Shona Brown.

    Agreed. It is very strategic: http://breakoutperformance.blogspot.com/2006/10/google-youtube-shona-brown-and-galaxy.html


  • It'd be more fun as to why we shouldn't let North Korea buy it...


    In seriousness, google made a mistake. The costs to improve bandwidth will not be pretty. The costs to make all the media label pansy babies happy will be even higher. And most importantly, youtube was not even remotely worth $1.65 [i]BILLION[/i].

    Why they couldn't set up their own alternative from scratch, I do not know. It'd be cheaper and more effective, with the rules and contracts laid down from the start. Google is more known in the first place.
  • $1.29 a click in today's dollar

    If 1% of the [b]70 million Videos[/b] that are served daily click on a Google served advertisement, this would result in [b]700,000 daily click-through[/b] or [b]255 million click-through in a year[/b] (without accounting for any new growth). And if you take a [b]five year period[/b], it would cost Google [b]$1.29 a click[/b] in today's dollar. Or to put it another way, Google must create new revenue of [b]$329 million a year[/b] without making any profits (assuming it sells ads at $1.29 a click). A steep price to pay for a Video click? Only time will tell as to how big the new YouTube Video Service becomes under the auspices of Google and whether it will serve a few hundred million videos daily, and how Google will be able to cash in on its investment and eventually make this a $1 Billion business.
  • Googletube

    Google knew that youtube will make a lot of monney. But had to refuse the offer.

    " Keith Knutsson "
  • Is Google Competent?(tech)

    google's foray into Youtube is an absolute immature move but with an ulterior motive.

    Google might have the experts to evaluate and design startegic move.(if they think this is strategic).

    But they have overlooked couple of intricate and subtle but hardcore facts which is blatantly observed by the fraternity who are aware of this technology (ie: the move behind accquiring YOUTUBE) that this an abosoulute black hat hacking by google.

    I am not a pro microsoft guy either. Microsoft has already done the
    damage by numbing the creativity of the programmers and making the end user a computer iliterate.

    Google is going to use this media to create a mass of another set of dumb users distracting them from their core competency.

    I can vouch for the fact that google is not competent in media streaming.

    let google develop couple of media streams where the inputs are numeric data.

    Example: can they stream a FEA Simulation in its NATIVE format and make it view/play back across platforms?

    Can they bypass buferring on demand?

    the above posting of mine is absolutley data driven.

    if needed i would surely put across the "why" and the "why not" facts.

    still to continue

  • Youtube and Panasonic

    As i had mentioned in my previous post,about the capability of youtube generating streaming video. They have started a beta version for streaming video where there is no buffering involved. the beta version is absolutely pathetic although the benifit of doubt can be in favour of youtube since it is a beta version.

    The most humiliating factor and absolutely immature again with ulterior motive is the "unbelivable video" contest which is a joint attempt by google and panasonic.

    This contest is open only for USA residents. Creativity is beyond boundries and these guys are making a mistake which would repel people across the globe apart from USA.

    When google and panasonic can have there official presence in India and across the globe, why restrict this contest to USA alone?

    DO they have the guts to open up this contest for everyone across the globe ? or does this involve any jurisdriction problem?

    I do not find any jurisdriction or legal problems because of google and panasonic's presence officially across the globe.

    if google or panasonic happen to read this comment, would they be in position to validate why not across the globe.?

    they should not shyaway with an answer as in like it is thie organization's policy. If yes why the policy should be clearly justified.

    hope these guys understand what they are missing out.? we call the internet a global village where these guys are colonial cousins with adivide and rule policy.