Google's deal to acquire YouTube for $1.65 billion gives the Internet search and advertising leader a dominant position in the nascent market for Internet video. If the deal closes—and turns out to be a success—it could put intense pressure on Google's (GOOG) rivals in the media and Internet sectors.
YouTube generates 100 million video streams a day, which makes it the leader in the online video market. Combining that content with Google's technical expertise, which helps users navigate a vast world of online choices, could yield potent results. "Melding YouTube's content with Google technology and prowess can create a whole new business," says investment banker Ken Marlin, managing partner of Marlin & Associates, a media- and technology-focused investment bank.
The combined power of Google and YouTube could become a magnet for Internet advertising revenue. Such revenue is expected to hit $15 billion domestically this year and $25 billion by 2010, according to investment banker Jay MacDonald of media banker DeSilva & Phillips. Video-based advertising is expected to reach $640 million this year and $1.5 billion in 2009, according to eMarketer (see BusinessWeek.com, 10/2/06, "Why Online Video Sites Are Hot Targets").
INVESTORS APPROVE. The early reaction to the deal suggests that investors believe Google has a decent chance of dominating the video-driven growth in online advertising. Google shares soared $8.50, or 2%, to $429 Oct. 9, before the sale was formally announced. Since speculation over the deal was reported last week, Google's market cap has increased more than enough to cover the cost of the deal.
Investor optimism was boosted by a separate, earlier announcement from YouTube. The Silicon Valley company, which is just 19 months old, said it had reached commercial agreements with Sony BMG, Universal, and CBS (CBS).
Google's media and Internet rivals will, of course, be watching closely and may be forced to respond. Here's how the Google-YouTube deal is likely to affect them:
Microsoft: The software giant considers Google a top rival and a threat. Google already challenges Microsoft (MSFT) by creating free online software applications that compete with Microsoft's spreadsheet software and other products. Microsoft's MSN site competes with Google in search, advertising, video, and online media, and Microsoft reportedly had an interest in buying YouTube.
Microsoft CEO Steve Ballmer, meeting with BusinessWeek editors Oct. 9, said Google could emerge from the YouTube deal an even stronger rival. If Google can work out a good advertising model with YouTube, he said, it makes Google a stronger competitor to Microsoft. It will have a larger share of the growing online ad market, and can use the cash to create more products like the free online spreadsheet software, calendars, and word processors it already offers. But Ballmer says Microsoft has a long-term strategy, not to mention a history of coming from behind to overtake rivals such as Netscape (TWX), the early leader in the browser market. "We're very long-term. We've got a stick-to-it-iveness, a tenaciousness that I would argue is unmatched," he said.
Microsoft has several options. It can continue to try to build MSN as a rival to popular sites such as YouTube. It could also borrow a play from Google and combine its technological prowess in a deal with a content company. While Microsoft's employees can match Google in terms of technical brain power, it will be tough to find a company that can match YouTube's cultural appeal and power on the Web. One possible target could be Yahoo!, which is suddenly looking like a laggard in the world of online media. But Yahoo retains a vast base of users and remains a powerful force on the Web.
Yahoo: The Google-YouTube deal could put more pressure on Yahoo (YHOO) to complete an acquisition of social networking powerhouse FaceBook. The companies have been at odds over price. Earlier this year, FaceBook's founders wanted as much as $2 billion for their startup. While the asking price may have appeared absurd at the time, a price north of $1 billion might be more achievable now that Google and YouTube have settled at $1.65 billion, bankers say. If Yahoo can build up its social networking capabilities by acquiring a company such as FaceBook, it might boost its own chances of a deal with a partner like Microsoft.
Time Warner: The media empire's AOL unit appeared to have an early lead in online video last year, when its Webcast of the Live 8 benefit concerts was a major success. It hasn't been able to land an encore, though (see BusinessWeek.com, 8/14/06, "Carl Icahn Increases Time Warner Stake"). It could boost its share of online video by acquiring a startup. It already has a stake in Veoh, a peer-to-peer online video destination that uses members' computing power instead of central servers. "People approach us periodically. We could be acquired," Veoh CEO Dmitry Shapiro said.
News Corp.: Thanks to its acquisition of social networking leader MySpace last year for $580 million, News Corp. (NWS) is well positioned in the market for online video. MySpace has a thriving share of the online video market and is serving as a distribution vehicle for video entertainment from News Corp.'s Fox unit (see BusinessWeek.com, 9/18/06, "Murdoch to Bid Satellite Goodbye").
But there is one aspect of the Google-YouTube deal that could raise questions for News Corp. MySpace has a search deal with Google that will bring in at least $900 million. The YouTube deal could be a sign that Google is interested in competing more seriously with MySpace. Google management said on a conference call Monday that it was particularly drawn to the social networking aspects of YouTube's video platform.
Viacom: Having recently dismissed former CEO Tom Freston, in part for having failed to acquire MySpace, the owner of the MTV franchise is now under more pressure than ever to hold onto its core demographic of younger users. So far, Viacom (VIA.B) has resisted the idea of doing a large me-too acquisition in the social networking arena, focusing its efforts instead on smaller deals such as its acquisition of IFILM. That strategy could still end up looking smart if Viacom can quietly build a profitable business. And if its rivals end up running into trouble with their headline-grabbing deals, it could end up looking very smart indeed.
Rosenbush is a senior writer for BusinessWeek.com in New York
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