Google to buy YouTube 'ad traffic'?

Dodge puts forth a four prong “Acquisition versus Exclusive Deals” analysis:

In the technology business many times it is better to do a strategic partnership that allows joint selling and revenue splits that benefit both companies, rather than a full blown acquisition. Why? Many reasons that apply to all technology acquisitions, not just YouTube.

Two of Dodge's points are particularly salient:

1. Flexibility to do another deal with an even hotter company that may emerge. What happens if YouTube falls out of favor and another hot company emerges? Google would be stuck with YouTube...and couldn't really compete with itself.
2. Risk is minimized. Anytime you do a technology acquisition there is legal risk for things like patent infringement, copyright lawsuits, antitrust suits, employee lawsuits, etc. Revenue deals provide all the benefits with none of the lawsuit risks.

Dodge is spot on. Why? Google is inordinately profitable due to its inordinately self-centered approach to transacting with other companies. The Google way or the highway stance is what has yielded Google $122 billion in market cap.

Dodge juxtaposes the Google-YouTube prospects to the Google-MySpace deal:

Google makes money selling advertisements on web traffic, not just search results pages. All they want from YouTube is traffic so they can sell more ads. They can get that with an exclusive advertising deal with some guaranteed minimums, just like they did with MySpace. Why should they buy YouTube and take on the lawsuit risk?

Google’s deal with MySpace, in fact, is inaccurately portrayed by the media as a $900 million “done deal” for MySpace. The joint Google-MySpace announcement, however, indicates that the $900 million MySpace revenue share of Google ad sales on FIM properties is a contingent guarantee, not an irrevocable one:

The agreement calls for Google to power web, vertical and site specific search for MySpace.com and the majority of Fox Interactive Media properties….Under the terms of the agreement, Google will be obligated to make guaranteed minimum revenue share payments to Fox Interactive Media of $900 million based on Fox achieving certain traffic and other commitments.

The Google-MySpace deal is risk-free to Google; Google gets exclusive advertising rights to the hottest and largest social networking property on the Web without handing over any apparent upfront bounty to MySpace for that privilege.

Google makes sure it is always in the guaranteed winner's circle in acqusitions as well. Google shrewdly negotiated a contingent payout scheme with dMarc Broadcasting. The Google acquisition of dMarc is pegged at $1.14 billion but Google bought the company for only 10% down:

Under the terms of the merger agreement, Google will acquire all of the outstanding equity interests in dMarc, a privately held company, for total up-front consideration of $102 million in cash. In addition, Google will be obligated to make additional contingent cash payments from time to time if certain product integration, net revenue and advertising inventory targets are met over the next three years. The maximum amount of potential contingent payments is $1.136 billion over the next three years. Since these contingent payments are based on the achievement of performance targets, actual payments may be substantially lower.