Why Google's YouTube bet will pay off bigtime

Google's acquisition of YouTube for $1.65bn stunned many in Silicon Valley.
Written by Tom Foremski, Contributor

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.

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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.

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