Google-YouTube deal expands broadband nation

Google-YouTube deal expands broadband nation

CHICAGO -- The new-media paradigm of on-demand, downloaded, streamed and shared digital video is the powerful catalyst behind the Google-YouTube deal, which will become a growth driver for all content players smart enough to heed the call.

Google's $1.65 billion acquisition of YouTube underscores the importance of interactive video even to an Internet juggernaut whose statistical mastery of word search and human behavior has sputtered through the image business from maps to video clips to stock photos and mash-ups. YouTube is the expensive jump-start Google needs to continue pioneering a broadband nation, pursuing its mission to "organize the world's information," and take video aggregation, creation and sharing to the next level.

Google will do for Internet video what it has done for the printed word: provide consumers with the level of findability, access and function that powers future interactive media economics. Google's disjointed approach to video so far lacks YouTube's semblance of community and social networking -- an essential for Web success these days -- among engaged users who advertisers are eager to mine. Google (the most expensive media company with a $130 billion market capitalization) is like the Greek oracle to which a universe of Internet users flock for answers, but it's still not a place where they're invited to congregate to share ideas, observations, video and sound files.

As long as Google can become adept at the science of social networking, the YouTube acquisition -- initially valued by Forrester Research at about $32 for each of its 50 million users worldwide -- will pay off handsomely. Google is buying YouTube's online critical mass with 46% of the market share, compared with Google's 11% and MySpace's 21%. Google is betting that such user traffic is not only sustainable but also potentially explosive for anyone who can figure out how to monetize online video.

Mark Cuban and Bill Gates have been vocal about YouTube's flagrant copyright infringement being the biggest obstacle to a deal at any price. YouTube's defense so far has been removing copyrighted video and music from its site when content producers request in the absence of permission and limiting use to short-length (generally two-minute) videos.

But clearly, Google has the video hand to build on its existing user copyright agreements with content producers and leverage the power of its branded search service to mute copyright concerns. (So much for Cuban's recent declaration that anyone who spends more than $1 billion on YouTube is a "moron.")

In fact, legitimizing the uploading and downloading of copyrighted video for individual user use would be a huge accomplishment for all media and entertainment companies eager to transform an estimated $60 billion in annual piracy losses into user-generated revenue.

It was no coincidence that early Monday, YouTube announced a string of strategic partnerships with Sony BMG, CBS Corp. and Vivendi's Universal Music Group (its most vocal detractor) allowing use of their video in user-generated content and avoiding costly and protracted legal action. Google on Monday also announced new ad-supported video streams free to consumers with Warner Music and Sony BMG in a reported 75%-85% revenue split with content owners, which could become the template for an online video Google-YouTube effort.

Google CEO Eric Schmidt appeared to speak for both his company and YouTube on the sensitive issue Monday. "This is just the beginning of an Internet video revolution in which copyrights will be respected," he said.

Content producers and distributors need a formula for converting 100 million daily streams into a solid revenue source, and Google's technical engineers and algorithmic geniuses might be able to make that happen. The power of a Google-YouTube combination to effect change will certainly alter the balance digital movie distribution and free, pirated content as well as the attention of television networks and film studios to streaming and downloadable options as rivals to television and the boxoffice.

YouTube commands 34 million unique users daily, surpassing most TV shows and opening-weekend movie ticket sales. And where consumers go, so go advertisers. As more video viewing and video sharing moves online, a Google-YouTube combination could provide the engine to advance the mechanics and metrics needed to develop online transactions, not only with content providers but also with advertisers and other service providers.

Google's willingness to invest its rich stock, which closed up $8.50 to $429 on Monday, or any of its $11 billion cash horde to acquire and develop YouTube's distribution base, technology and function has to be fueled partly by the notion that digital on-demand streaming, downloading and uploading will become the principal means for selling and transmitting video in the future.

Consequently, a Google-YouTube deal will have a deep and broad ripple effect among all media players as the ultimate testing ground and launchpad on which the Internet, Hollywood and Madison Avenue meet.

It will pressure Yahoo! to do a reported $1 billion deal with Facebook, the social networking site of college and high school students created by a 22-year-old Harvard undergrad. The fact that Yahoo! walked away from YouTube acquisition talks as recently as last week explains Google's intensified weekend negotiations to get the YouTube deal done before other media giants began counterbidding.

To be sure, Google is paying top dollar for YouTube according to Merrill Lynch, which estimates that Google will be paying 25 times YouTube's potential 2009 net income.

So, the deal will boost the value of such other viral video services as, Revver and even as Yahoo!, Microsoft and others scramble to secure their own online video partnerships at what likely will be record high prices. (Gone is any chance of another cheap deal like News Corp.'s $580 million purchase of MySpace, now worth $2 billion by some analyst estimates.)

In the race among leading Web video providers, a Google-YouTube union merges two of the top 10 players and rivals top-ranked MySpace, where News Corp. will now be racing to beat Google to the video punch even though Google recently signed to do exclusive search and keyword sales for MySpace's 56 million users, guaranteeing a minimum $900 million return over three years.

A Google-YouTube deal also will influence the development of video and interactive advertising. Google's AdSense and other advertising technology will bring a new level of credibility to video advertising, which is expected to jump from a $350 million business to a $2.5 billion business by 2010, according to eMarketer. Jupiter Research, which more conservatively estimates online video ad spending will grow from $251 million in 2005 to $1.3 billion in 2011, says most marketers will pay for TV-style streaming ads from their online rather than from their TV ad budgets, though there is potentially big promotional benefit from posting their digitized ad on video-sharing sites.

Merrill Lynch analyst Justin Post estimates Google's share of global Internet advertising will grow 27% this year and 36% next year. Post also says Google has the opportunity to create $10 billion in new value launching video-related products in traditional media, advertising, e-commerce and software, which will lift the Internet business in general.

Ultimately and most importantly, a Google-YouTube deal is more opportunity than risk because it is about building a better infrastructure to service the needs and interests of online users who appear to be a step ahead of the industries that serve them. That's why, at least for now, you most likely will not see a Google or a Yahoo! or a Microsoft buying a major content provider because they understand that their job is building better platforms and mechanisms for moving content, communications and money on the Internet. And if they do their job well, the smart content providers will learn how to get part of the action.