Oct 9, 2006
Google buys YouTube
I didn’t think they’d do it: the world’s largest cash machine bought the world’s most most popular, legally dubious, and possibly un-profitable site ever. Not since my employer, AOL, bought Time Warner for about $160b have we seen such silliness (granted, YouTube just sold for 100x less than the aforementioned example). Anyone who thought we weren’t in a bubble, well, sorry. We’re in a bubble. In case you didn’t notice, yes, I (still) agree with Marc Cuban’s assessment.
Feast your eyes on this.
I'm an editor and technology critic in the midst of founding a new web startup: 
I did! I am win!
Technically YouTube sold for 100x less than TimeWarner, not 10x :). Google did a billion dollar deal with Fox over MySpace very recently. I’m guessing they did the math and found it to be cheaper to buy YouTube outright instead of doing a similar deal in a few months.
It might not be a huge money maker in the near future, but has potential for huge revenue. Enough potential to lay a few chips on at least.
Woops, a few multiples off there! Fixed, thx.
Yes, and Google did a billion dollar deal with AOL, as well — another foolish move. Either way, just because YouTube is at the top of its vertical and has captured a huge worldwide audience doesn’t mean they’re worth $1.65b. Do the math! If YouTube profited $50m per year — and they’re definitely nowhere near that level — it would take Google 32 years to turn a profit on it. The simple fact is this was a defensive buy, they didn’t want to lose another interesting business to the Yahoo acquisition machine.
I dunno – I imagine the unarguably smart folk at Google don’t pull the trigger on a $1.65b deal without doing a little math of their own. I’m no business-type-guy, but to me the concept of buying a company that you don’t think is going to make money to prevent your competition from buying a company that you don’t think is going to make money seems counter productive at best.
Considering Yahoo balked at offering Facebook the billion plus they’re holding out for, I don’t really see them coughing up for YouTube, either. And Microsoft is already rolling out their own YouTube clone, complete with Live branding. Neither of them seemed like suitors, unless I’m totally wrong (which has happened before).
The way I see it, Google knows Google Video was half-assed and that practically nobody uses it, and they know exactly what kind of traffic YouTube sees. The only way Google can hope to compete with iTunes in the online video market is with a brand like YouTube. Soon they’ll start selling TV episodes through it, and maybe even movies, in addition to loading it up with their contextual ads.
But, as I mentioned, I’m often wrong.
We’ll see, but if they can pull a Fox and grow YouTube over the next year (a la MySpace) it will look like a genius move. Right now they are already at 100m video streams per day. That’s 36,500,000,000 streams per year with no growth. At a relatively modest $10 CPM that’s $365M in revenue annually. After some revenue shares with the big media companies I think $10CPM is fairly easy–they make way more than that on SERPs currently. Obviously it could go either way, but the update is huge. Even with modest growth they could be in serious green within a few years.
Currently Wallstreet is valuing Google at 62x annual earnings. The are definitely expecting some growth, but even the future P/E is sitting at 41x. Sometimes the public market values companies a lot higher than they would go for privately–actually this is almost always the case.
Your numbers are way off. 36,500,000,000 streams does not equal 36,500,000,000 page views — remember, YT does allow foreign streams with no advertising (and I’ve been told that a “stream” doesn’t necessarily mean it’s completed, it also means the video was loaded). Even still, they’re definitely nowhere near a $10 CPM. A YT page is lucky if it has any ads, and those it does have are typically AdSense — which obviously aren’t notoriously good performers. Combine that with the fact that they’re running an incredibly low margin business by typical site standards (indiscriminately streaming video millions of times daily ain’t cheap) and you have a recipe for difficulty in turning around an investment. Could YT have been profitable alone? That was the question of the second half of this year. Can it turn a profit after costing Google $1.6 billion? I sincerely doubt it.
Well video ads are in stream… So it doesn’t really matter if they are at the main site or not. There are a lot of page views on YT that aren’t streaming videos, but I’m just talking video advertisements. Not all the videos could be monetized, but again those figures didn’t count in any growth. I’m guessing they will make it an opt-in program at first, sort of like how AdSense works on Blogger. YT obviously isn’t minting cash today, that’s why they sold out, but no one was making billions off of SERPs before Google either.
Google will try to monetize the traffic at a scale YouTube couldn’t do alone. Or more simply, they aren’t making a $10CPM now, but they could with Google. The last time I ran the number Google was making a ridiculous CPM rate on SERPs, something above $50 (they have really good CTRs, remember that while your ad may only get clicked on 2-3% of the time, there are usually several ads on the page and all those clicks count for G). Ad sales is tough when it involves billions of impressions but that’s one of the areas Google excels in.
where the hell did AOL get $160 billion dollars from