Media 2.Uh-Oh: Intro

There is always hidden meaning to deals - the Google-YouTube deal is no exception. Why YouTube sold is pretty easy - $1.65 billion ain't bad for 20 months work and it would have taken at least $50-100 million from Sequoia Capital, their venture backers, to build the infrastructure and salesforce to build a real company. That's real money.

But what about Google? Why do it?

Google is an amazing beast. Massive growth AND huge 64% EBITDA profit margins from basically one service: serving ads on pages with search results. A $10 billion run rate and $130 billion market capitalization. As Darth Vader might say: impressive.

So why bother buying YouTube? Is this a sign of strength ("we bought them because we can turn anything into gold") or weakness (like, say, Ebay buying Skype as their auction franchise weakens) or desparation (Excite merging with AtHome). It makes a difference. On the surface, this looks like a deal from strength - video is the next frontier on the Internet, blah, blah. But really, did Google want to do it or have to do it?

Despite continued growth, Google has hinted at a few signs of weakness. One is their huge capital spending to build datacenters and servers and bandwidth capacity, dinging their cash flow. I thought the search business scaled with much less investment. Maybe not.

And second, Google actually paid for traffic - $1 billion to Dell over 3 years for a crummy toolbar on Dell PCs. The numbers may work, but it's kind of like Hugh Grant paying for something he would get anyway. There may still be someone in Sheboygen who doesn't know about Google. Is search now such a commodity that Google needs to pay money to keep growing?

Perhaps that is what this deal is foreshadowing. YouTube is a company whose amazing growth from zero to 100 million videos served per day is based on copyright infringement, amateurish video (I get it, don't drink Diet Coke after eating Mentos), their stomach to lose money on each video shown and a hobbled together business model to charge record labels to show music videos (we now know Paris Hilton can't sing).

If Google needed an easy to use technology to upload and then view videos (which they kinda , sorta have with Google Video), they could have paid the same $65 million that Sony paid for Grouper. Nope, we don't need your stinkin' technology, Google is paying $1.65 billion (with a "b") or 1.3% of Google's current value, for a media property. Plain and simple. But what does that even mean?

Maybe it will just be an expensive sandbox to play in. Keep it separate from Google (which they should have done with Google China), and give Chad Hurley enough rope to either keep growing and get a decent shave or hang himself. If the legal battles get ugly (and I agree with Mark Cuban, they will), they can just shut it down one Friday afternoon. But maybe losses over the next three years from YouTube, a wholly owned subsidiary of Google, will be less than the $1 billion they are pissing away paying Dell for traffic. But despite all the attempts and Yahoo's Terry Semels strategizing, real media on the Web is still just a concept.

Who are the next media moguls and to whom do they have to sell their souls for the priviledge? The $165 billion question left unanswered by this deal is: What is media anymore? Can you just slap videos up on the Web and become a younger and more vibrant Rupert Murdoch or Sumner Redstone?

(Fade to Carry Bradshaw typing on her laptop in every dopey episode of Sex and the City.)

Is it Media 2.0 or Media Two Point Uh-oh?

Over the next couple of days, I will churn out some thoughts - channels, layer cakes, slivers, political entrepreneurs, virtual pipes and other gimmicks to try and explain all this - with hand-drawn illustrations to boot. Come back for the next parts, program your Tivos, set your RSS - same Bat Time, same Bat Channel. Read the next part here.

Comments

[Me]

Media= Via + Yhoo... cashflow and content

[Clyde Smith]

"What is media anymore? Can you just slap videos up on the Web and become a younger and more vibrant Rupert Murdoch or Sumner Redstone?"

Interesting question, especially for a blogger.

I'm sympathetic to the angst expressed but, combined with "amateurish video (I get it, don't drink Diet Coke after eating Mentos)", which seems to be the currently most popular dismissive phrase regarding YouTube, you seem to have a pretty elitist take on the YouTube phenomenon.

It reminds me of a journalists' dismissal of blogging as a form of diary keeping.

Of course, in this blog's case, isn't your content creation primarily a form of marketing for your books?

Cause if you defend it as something more, a form of communication, self-expression, etc., then you're veering dangerously close to the motivations of many YouTubers.

This probably sounds like an attack but I'm just pointing out some things I think are worth considering in your post. I look forward to your upcoming "channels, layer cakes, slivers, political entrepreneurs, virtual pipes and other gimmicks."

That's a nice reminder that in a heterogeneous media/business environment, one might best employ heterogeneous means of investigation and analysis.

[Michael Urlocker]

Andy:

Is YouTube worth $1.6 billion? No, because YouTube has no base of paying customers. For all the hype of Web 2.0 and other nonsense, there is no better indicator of a bad business than an absence of paying customers.

As Peter Drucker wrote in 1973: "There is only one valid definition of business purpose: to create a customer."

YouTube has a tremendous potential. We think it could become as important as CNN. And it may become an advertising venue. It offers viewers some things they can't get from mainstream media: Immediacy, drama, relevance, social commentary, universality.

But so far, this is all only potential, no more converted to reality than a four-year-old girl's potential to become a princess. The challenge ahead is for Google to convert a potentially disruptive form of media into a real business.

More on the disruption of mainstream media and the challenges ahead for Google and other mega-acquirors:

http://www.ondisruption.com/my_weblog/media_meltdown/index.html

[howard Lindzon]

I think the exciting story ended. The deal is done. 1 plus 1 in tech rarely equals three so as I posted, Goog should be under distribution now after adding 4 billion the last few days.

Now it gets interesting and Cuban has a chance to be correct.

It is the long-term that matters

[robb Montgomery - CEO]

Google bought the audience - they have the advertising pool and infrastructure to monetize YouTubes Web pages.

Of course neither company went into business to become large media concerns but that is what they keenly decided they had become and are now leveraging their ability to deliver a tightly-focused audience to people who want to pay to be in front of them.

We are in a disruptive time for established mass media. Call it the rise of the niche verticals but developing niche expertise will be critical.

[Frank Ruscica]

Going forward, making big money in media will be inseparable from establishing popular online markets.

[Dave McClure]

seriously, you're holding up Rupert Murdoch and Sumner Redstone as your examples of grownup media? aren't these the guys who brought us Fox & MTV? you sound rather stodgy in your criticism of Google buying YouTube.

why do it? simple. in a little over a year and a half, YouTube has become a top 10 web destination, with tens of millions of users, and is likely the fastest growing website / media property EVER.

beyond the eyeballs, Google has plenty of interest in owning video advertising, and with their existing investments in online ad tools (not to mention a substantial experience in litigation), it's a pretty good match.

YouTube brings tons of users, growth, and video under the Google umbrella. Google consolidates big market share in video, and adds its substantial proprietary advantages in advertising, infrastructure, and legal precedent.

not to mention, it shows maturity that Google is willing to pay for market dominance in a category where its own offering was getting beaten soundly. that's a new behavior for the GOOG, and a good sign of knowing when to "if you can't beat 'em, buy 'em".

for 1% of market cap, they get to own the growing online video market -- a market whose analog equivalent currently spends tens of billions of advertising dollars.

Media 2.uh-oh? not for Google. but perhaps for the existing Madison Ave advertisers, and Yahoo and Microsoft and others, yeah it could be an 'uh-oh'.. as in 'uh-oh', guess we should have tried harder to figure out what the hell we were doing with our acquisition strategy.

- dave mcclure

ps - full disclosure: i used to work with the YouTube founders at PayPal, where we [similarly] beat the crap out of other larger competitors and proved many doubters wrong who thought eBay overpaid for PayPal at $1.5B. in hindsight, it was a steal at 5x the price.

[Yaser Anwar]

With the Youtube acquisition, goog now controls over 50% of the video market, which seems the next array of growth. With Google behind it, Youtube has stronger bargaining power with media companies, hence they will be able to forge mutually beneficial relationships.

[Edegra]

Google bought the audience - they have the advertising pool and infrastructure to monetize YouTubes Web pages.

[Blevins22Freida]

Don't you know that it is the best time to receive the personal loans, which would make your dreams come true.