Dot-Com Boom Echoed in Deal to Buy YouTube
By ANDREW ROSS SORKIN
Published: October 10, 2006
A profitless Web site started by three 20-somethings after a late-night dinner party is sold for more than a billion dollars, instantly turning dozens of its employees into paper millionaires. It sounds like a tale from the late 1990’s dot-com bubble, but it happened yesterday.
Google, the online search behemoth, agreed yesterday to pay $1.65 billion in stock for the Web site that came out of that party — YouTube, the video-sharing phenomenon that is the darling of an Internet resurgence known as Web 2.0.
YouTube had been coveted by virtually every big media and technology company, as they seek to tap into a generation of consumers who are viewing 100 million short videos on the site every day. Google is expected to try to make money from YouTube by integrating the site with its search technology and search-based advertising program.
But the purchase price has also invited comparisons to the mind-boggling valuations that were once given to dozens of Silicon Valley companies a decade ago. Like YouTube, those companies were once the Next Big Thing, but some soon folded.
Google, with a market value of $132 billion, can clearly afford to take a gamble with YouTube, but the question remains: How to put a price tag on an unproven business?
“If you believe it’s the future of television, it’s clearly worth $1.6 billion,” Steven A. Ballmer, Microsoft’s chief executive, said of YouTube. “If you believe something else, you could write down maybe it’s not worth much at all.”
In a conference call to announce the transaction yesterday, there were eerie echoes of the late 1990’s boom time. There was no mention of what measures Google used to arrive at the price it agreed to pay. At one point, Google’s vice president, David Drummond, gave a cryptic explanation: “We modeled this on a more or less synergistic kind of model. You can imagine this would be hard to do on a stand-alone basis.”
The price tag Google paid may simply have been the cost of beating its rivals — Yahoo, Viacom and the News Corporation — to take control of the most sought-after Web site of the moment. It was also perhaps the only price that two YouTube founders, Chad Hurley, 29, and Steven Chen, 28, and their big venture capital backer, Sequoia Capital Partners, were willing to accept, given that they most likely could have continued as an independent company. A third YouTube founder, Jawed Karim, left the company to pursue an advanced degree at Stanford.
The deal came together in a matter of days. After rebuffing a series of other overtures, YouTube’s founders decided to have lunch on Wednesday with Google’s co-founder, Larry Page, and its chief executive, Eric E. Schmidt. The idea of a deal had been broached a few days earlier. The setting was classic Silicon Valley start-up: a booth at Denny’s near YouTube’s headquarters in San Bruno, Calif. The Google executives threw out an offer of $1.6 billion and autonomy to continue running the business.
That set off a marathon of meetings and conference calls over the next two days, which kicked into even higher gear on Friday, when news of the talks began to circulate, putting pressure on Google to sign a deal before a rival bid emerged. In fact, the News Corporation sent a letter to YouTube seeking to start talks but never received a response.
“The Google-YouTube deal has to feel a little like the 1990’s, but it isn’t,” said Dmitry Shapiro, chief executive of Veoh, a YouTube competitor that is backed by Time Warner and Michael D. Eisner, the former chairman of Disney. Arguing that online video represents an entirely new medium, he said, “If you knew then what you know now and you had the chance to acquire Amazon or eBay — which weren’t making any money either — you would have bought them.”
Of course, YouTube has also been compared to Napster, whose music-sharing service was eventually shuttered after a series of lawsuits. While YouTube has made some deals with content providers, including one yesterday with CBS, its users have uploaded millions of copyrighted clips, leading some to question whether Google is inheriting a legal minefield. YouTube has said it is different from the old Napster service because it removes content when a copyright holder complains.
Only a writer in search of an analogy would compare You Tube to a dot bomb. Because it was an up and running concern, but was going to be integrated into a major company at some point, Time Warner, NewsCorp, even Microsoft or Apple. Like Konfabulator, now Yaho0 widgets, it wasn't the kind of company which could survive on it's own.
But, the content companies have finally learned something.You Tube, like Napster, was a bag of potential. But a massive lawsuit would have come up with a bag of air, legal costs and no money. However, making a Google-You Tube deal possible means they get paid. They can't sue Google broke and they don't want the Ying Lung video collective starting up, way beyond the reach of the law. So they made a deal possible.
This is just the start. I would bet that within a year, You Tube has mp4 downloadable files. Why? The content companies are sick of being owned by Apple. You want to sell your video, there's only one market, and that's Apple. Which means they can set the price to serve their needs. CBS has innertube, which fills the niche between iTunes and You Tube. But that's insanely expensive to maintain. Much cheaper to let Google supply the technology and the content come from elsewhere.
Mark Cuban was screaming that YouTube was copyright violation. Of course he would, being the owner of an HD service. But money makes copyright violations go away. You don't think record companies regret like hell letting Apple dominate the pay market with iTunes. When they tried to pressure a hike in prices or variable pricing, Jobs just laughed at them.
It is completely in their interest to break Apple's dominance of downloadable content. Don't be surprised to see YouTube expanded into audio content as well. Because this could turn into the challenge to iTunes. People can't be stupid forever. Digital content is the wave of the future and by swamping Napster, in the end, they screwed themselves. ITunes is a fraction of the digital download market. Napster could have allowed greater access and more money than Apple is giving up. It took over 20 years for Apple to stop trying to beat Windows and work with it.
It took the content companies half that time to realize the world has changed. At least some of them.
posted by Steve @ 12:14:00 AM