Google, Defeated, Buys YouTube

Nate Elliott | October 10, 2006, 03:49 AM

You can read the details elsewhere, but this is a fascinating purchase for Google. Although I've often pointed out that Google can't seem to do well in any market outside of search, this is the first time I've seen them even tactily admit defeat in anything. Google Video and YouTube were launched at the time. Google Video had all the brand recognition and cash and traffic-driving resources you could hope for, and YouTube had none of those -- and yet YouTube has completely dominated Google. And so Google had to buy, at great cost, the market leadership they couldn't generate on their own. The company, of course, won't call it a failure on the part of Google Video -- but to me it certainly looks like one.

I've gotten a lot of questions about whether YouTube is actually worth $1.6 billion, whether Google can hope to make that money back. I'm not a financial analyst, so I'll leave it to others to assess that valuation. But I will point out that YouTube won't be under any pressure to make that money back, at least not any time soon. Paid search is a wildly successful business for Google that throws off lots of profits, and allows them to invest in new ideas like this. (Again, they're a one-trick pony, but it's one hell of a good trick.) Because of that, Google don't have to push hard to find revenues in their secondary businesses. Both Google and YouTube have said they don't like in-stream ads (advertisers' preferred form of online video advertising), so it seems likely (if willful, and wasteful) that they'll be turning down most of their potential revenue. But Google's and YouTube's experiments in finding new ad models for online video may prove useful for the industry in the long run, as we view in-stream ads as something of a stepping-stone to help acclimate large marketers to online advertising -- and any successful new online ad model represents a positive development. In any case, online video advertising is a much smaller business than search advertising -- video ads will be about a $1.25 billion market in the US in 2011, while paid search will be nearly 10 times bigger.

Those are my two big thoughts on the deal -- Card and Laszlo have posted comments worth reading as well. JupiterResearch clients can also read two very recent reports on the topic -- Online Video Advertising: Leveraging the YouTube Effect, and Online Video Audience: Serving Heavy Viewers While Growing the Audience Beyond Them.