Google Gambles on Web Video

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By Sara Kehaulani Goo
Washington Post Staff Writer
Tuesday, October 10, 2006

Google said yesterday that it will acquire Internet video phenomenon YouTube for $1.65 billion in stock, a deal that leaves the search giant betting on the future of online video as well as tackling some of the risks that come with managing a site built by a homegrown audience.

The deal, which Google called "the next step in the evolution of the Internet," is reminiscent of the late 1990s, when Web companies judged their success by the buzz they created more than by immediate profits. This time, YouTube, an as-yet-unprofitable Silicon Valley start-up with two founders in their twenties, grew a huge audience at a pace outdone only by MySpace.com.

In less than a year, YouTube attracted more than 72 million unique monthly visitors by allowing users to share short homemade video clips. Through word of mouth, the site became an instant Internet phenomenon, providing a huge library of entertaining videos and giving a voice to budding Internet stars every week.

"There's a new class of sites that have really developed very quickly, are very successful and very attractive to users and are obviously delivering value," Sergey Brin, a Google co-founder, said in a conference call. "It's kind of a next generation of Internet sites and companies. . . . It's a whole new ecosystem, and we're excited to be a part of it."

Behind the buzz of the high-priced deal come a number of gambles, including a large amount of copyrighted material on the site that attracted both viewers who shared the videos and lawyers who cried foul on behalf of the copyright holders. Clips of popular shows such as "South Park," "The Daily Show with Jon Stewart" and "Laguna Beach" can be found on the site.

Also a factor is the fickleness of YouTube's online audience, which could migrate elsewhere or become turned off by the large amount of corporate advertising making its way onto the site. A year after online star MySpace.com, a social networking site, was acquired by News Corp. for $580 million, the core audience has shifted from teenagers to people in their thirties.

"The game back in the 1990s to 2001 was to attract as many eyeballs as possible. That hasn't changed," said Tim Bajarin, a longtime technology consultant and futurist with Creative Strategies. "The big difference today is the social network. One of the most powerful methods for spreading information is word of mouth, and the incredible explosion of that use, from spreading information and inviting people, especially within this young age group, is one huge difference."

Several analysts said they were surprised by the nature and price of YouTube's sale, which equates to about $22 per visitor, according to senior analyst Brian Haven of Forrester Research. That's a substantial jump from the roughly $10 per visitor in the MySpace acquisition. College-oriented networking site Facebook, which has about 14.7 million visitors monthly, has been said to be in acquisition talks with Yahoo for $1 billion -- about $67 per visitor.

Haven judged the YouTube price to be "a little high," but said "online video is really exploding. There's a lot of profit for it in the future."

Some analysts had cautioned Google not to purchase YouTube out of concern that online audiences could shift if they didn't like how a site was evolving. Earlier this year, several thousand members of social networking site Tribe.net left to start another site in protest of new restrictions put in place by new management.

"We would be cautions about [Google] paying up to buy a hot video site like Youtube.com because hot sites may fetch bubble-like valuations, and what is a fad today may be forgotten by next year," wrote Guzman & Co. analyst Phil Remek in a research note earlier this year.

After MySpace was acquired by News Corp., the Web site attracted more media companies, music labels and movie studios, which built their own pages as members of the group. But that gave the site a more corporate feel. Before the acquisition, teenagers made up 25 percent of the membership. Today, only 12 percent of the site's members are teens, according to ComScore Networks Inc.

Today, people over age 35 dominate, making up 40 percent of the membership. Overall, MySpace has gained 34 million members in the past year, according to ComScore.

MySpace "got a lot more people in the older age bracket, but not at the expense of losing people in the younger bracket. The buying power of the older people probably exceeds the younger people, so for advertisers, it's a positive," said Gian Fulgoni, chairman of ComScore. "It might turn out that News Corp. got a heck of a deal."

Google said it planned to keep YouTube separate from its own video site, though it would leverage Google search and other technology to enhance YouTube. Google declined to answer questions about how quickly it expected to earn profit from YouTube.

YouTube has received $11.5 million in venture funding from Sequoia Capital and is estimated to be spending at least $2 million monthly to operate the content-rich site. Sequoia owns roughly 30 percent of YouTube, according to the Associated Press. Google also will inherit a copyright-infringement lawsuit filed against YouTube by a journalist who operates the Los Angeles News Service. YouTube has been able to prevent more lawsuits by negotiating with media companies to provide their content on the site in revenue-sharing deals. So far, the site has announced deals with NBC Universal and Warner Music Group. Yesterday, deals were announced with Sony BMG, CBS and Universal Music Group.

Greg Kostello, a former executive at Mp3.com, which was sued for copyright infringement over its music content years ago, said YouTube has not been hit by more lawsuits because it has had few assets. "If you sue them [before they are acquired], you're not going to get much," Kostello said.

YouTube said yesterday that it is developing a technology that will scan keywords and audio in the uploaded clips for potential copyright infringements. YouTube and Google left open the possibility that the site could become more commercial. YouTube chief executive Chad Hurley said he planned to introduce new advertising platforms and ways to integrate search and advertising technologies into the video clips. But he was noncommittal when asked if he would allow "pre-roll" advertisements to run before certain videos begin playing, a move counter to YouTube's current policy.

"We're going to be exploring a lot of options," he said. Google's advertising technologies "present a good experience that benefits our users' experience and helps partners monetize their content."

But it could also upset members, who react when they feel that the site is heading in the wrong direction, such as what happened when rapper and hip-hop mogul Sean "P. Diddy" Combs was featured in a video.

Shortly after, member Lisa Donovan created her own video that mimicked the rap star's video clip.

"YouTube is very much a community. There's a community voice, and there's a group of people very protective of their space. They were turned off by P. Diddy. It was so apparent they were just being advertised to," Donovan said. "That's what you expect on TV."

Like it or not, though, this sort of site is attractive to larger companies.

For Google, the YouTube acquisition boosts its traction in the online video space, where it hasn't had much success. Google's own video site has consistently lagged behind YouTube. With more than 100 million videos being viewed on YouTube daily, it attracts about four times more traffic than Google Video, according to Hitwise.


© 2006 The Washington Post Company

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