Google YouTube Purchase a Shift in Strategy

Google moved from purchasing small, emerging companies to swallowing an established giant when it announced Monday that it is buying YouTube for $1.65 billion in stock. The deal marries the Internet's most prominent search engine with its most prominent video-sharing Web site.

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Now, the rumors about Google buying YouTube were true. The Internet's number one search company will buy the number one video sharing site for more than $1.5 billion in stock.

YouTube will remain, will retain, much of its independent identity, including its name and its own corporate offices. NPR's Wendy Kaufman reports.

WENDY KAUFMAN: YouTube is a classic Silicon Valley success story: young men in their 20s working out of a garage, turning an idea into a billion dollar proposition in less than two years.

In the early days, the site featured many videos of one of the founder's cats. Today, it's the undisputed leader in a huge and growing market. Experts say the social networking features of YouTube are far better than those on rival video sites.

An estimated 35 million Americans visit YouTube, with another 15 million worldwide, and the number is growing rapidly. Josh Bernoff, an analyst with Forrester Research, says Google wants to ensure that it, not a competitor, controls that space and the advertising dollars that go with it.

Mr. JOSH BERNOFF (Analyst, Forrester Research): If people are, you know, looking at a hip-hop video, then they might be interested in certain kinds of ads. If people are looking at a rock climbing video, they might be interested in a different kind of advertising. So, for Google, this is not so much an opportunity to get new users as it is an opportunity to get the users that they have to spend a whole lot more time on the site and see a whole lot more ads, and a whole lot more customized ads.

KAUFMAN: If ads are more meaningful, people will buy more stuff, so the thinking goes. And Google will make more money.

Many experts, including Andrew Metrick, of the University of Pennsylvania's Wharton School, suggest that even at the hefty price of $1.65 billion stock, the deal makes sense for Google.

Mr. ANDREW METRICK (University of Pennsylvania's Wharton School): I should say, for the record, I'm generally, you know, I'm not an excited about growth kind of a guy. Despite the fact that I teach venture capital, a lot of the investments make me nervous. But I think we do understand market leaders in social networking now.

KAUFMAN: It's generally agreed that Rupert Murdoch's News Corp got a bargain when it bought MySpace, the largest social networking site, for less than $600 million. Suitors are reportedly wooing its rival, Facebook, for more than twice that amount.

Still, there are pitfalls in the acquisition. Last week, dot com billionaire and investor Mark Cuban said, quote, only a moron would buy YouTube. He warned the company would be sued into oblivion because of copyright violations. Although much of the material on YouTube comes from users, it often contains music, film, or video content that is protected.

But yesterday Google and YouTube signed revenue sharing deals with major content providers, including Universal Music, Warner Music, Sony BMG Music, and CBS. The deals might signal the willingness of those companies to partner with Google and YouTube rather than sue them. On the other hand, Google's deep pockets could be an attractive target for copyright litigation.

Other potential pitfalls? Wharton's Andrew Metrick says, in wrapping up advertising to generate revenue, YouTube and Google run the risk of spoiling what has made YouTube so popular.

Mr. METRICK: Once you throw advertising at people, you annoy them. Right? If you force people to look at advertising before every video, they may go elsewhere. So you have to be careful about it. Now Google has figured out a way to do that. So they have stuff along the sides, where people pay by the search. So, YouTube has to be smart about this.

KAUFMAN: But so far, at least, the creators and venture capital investors in YouTube have shown their Internet acumen. And today, they're smiling all the way to the bank.

Wendy Kaufman, NPR News.

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