Google had better be careful with its content costs
Following up on yesterday's posting about Google's impending dominance in the British media market, another story appeared in the Financial Times Thursday evening reporting that Google is in negotiations with media companies to make upfront payments to Viacom, Time Warner, NBC Universal and News Corp, "among others," for the right to distribute their video on YouTube.
Apparently, the buy-off of some of these companies in the form of a $50 million YouTube windfall from stock distributed to these companiesNo exclusive content deal will make sense to Hollywood. after Google agreed to acquire the company only whetted the appetites of Hollywood's attorneys. Hmm. Sharks. Blood in the water. What else can you expect when you put these things together?
A major reason Yahoo has suffered by comparison to the Google in recent years is that it has had to spend a lot more on content to get a smaller return than Google. But video content is incredibly fungible and will be distributed through every channel the producers can manage to earn money.
No exclusive content deal will make sense to Hollywood, because they can make money from an ad-supported download channel, like YouTube is poised to be, just as easily as they can through a fee-based download channel, such as iTunes.
Yet Google is apparently earnestly engaged in negotiations with media companies to pay for content in advance. Like the MySpace deal earlier this year, in which Google guaranteed News Corp. $900 million over three years for the right to place AdSense ads on the social networking site.
Let's speculate for a moment. If Google has to provide similar guarantees, in the $300 million range for each of the major networks and $100 million to the smaller nets, such as A&E, to avoid suits when YouTube users upload content from these companies, its content costs would rise precipitously.
Suddenly, Yahoo's relatively restrained investments in content will seem reasonable, because Yahoo, too, will have access to this content. And, the intellectual property dam having been broken by Google, which pays a premium, the cost of network content will plunge. Only Google is going to shoulder these costs.
That may be Google's historical mark, releasing the floodgate of content. And it may make Google's the biggest ad network in the world, as it is about to become in Britain, but in the short term the company may see a substantial decline in its margins. I actually think that's perfectly okay, since the result will be years worth of growth.
Investors may have a different idea, because they'll be looking at the Google's returns relative to those companies that follow it into the Web video age. For the first few years, until those initial agreements with media companies expire, could be tougher than Google expects, even if they are rolling in ad revenue.