Google, video rival in talks

Hot Web site YouTube may fetch $1.6 billion

October 07, 2006|By New York Times News Service

YouTube, the popular video-sharing Web site that has yet to celebrate its first anniversary or its first profit, is quickly becoming the must-have prize for media and technology giants.

Google is in discussions to acquire YouTube for $1.6 billion, people involved in the talks said yesterday. While the talks are in the early stages, and may fall apart, the size of Google's offer may push YouTube closer to a deal.

Other companies have also expressed interest and could swoop in with a higher offer. Microsoft, Yahoo, Viacom and the News Corp., among others, have all visited YouTube's headquarters in San Mateo, Calif., in recent months to inquire about buying the company.

The frenzied hunt to acquire the next hot Internet property - MySpace last year and now YouTube - has become reminiscent of the first Internet boom, as companies bid up prices of sites whose ability to generate profits is the subject of much debate.

A deal for YouTube would be the crowning moment for a property that emerged as a cultural phenomenon almost immediately after it officially began last December.

Its site, which delivers more than 100 million video clips a day, allows users to share a broad array of offerings from news clips to home movies to spoofs - sometimes funny but often simply crude - created by ordinary users.

Almost single-handedly, YouTube has both popularized the sharing of videos and empowered wannabe movie makers around the world.

The site also is facing possible legal challenges over the unauthorized posting and sharing of videos. Yet a number of media companies would rather embrace YouTube as a partner, rather than treat it as a pariah, as was the case with the music-sharing service Napster.

If YouTube agrees to a deal, it would be a sudden change of heart. Chad Hurley, one of the company's founders, has said that he preferred to stay independent. "We're not even thinking about being acquired or going public," he told The New York Times last month.

A spokesman for Google declined to comment. A spokeswoman for YouTube did not return calls for comment.

YouTube's meteoric rise has made it one of the most closely watched of the new generation of Internet companies created since the technology bust of 2000 and the fallow period that followed. The millions of people who visit YouTube each day make it a valuable property, though it has yet to turn a profit.

Rumors of YouTube's talks with Google first appeared yesterday on TechCrunch, a Web site about Internet startups. The $1.6 billion price tag, while seemingly rich for so young a company, makes sense, research analysts said.

"That's expensive but not unreasonable," said Charlene Li, an analyst with Forrester Research. Li estimated that the company has about 50 million users worldwide, which works out to a purchase price of about $32 a user.

The deal would make sense from the perspective of both companies, Li and others said. Google's own fledgling offering, Google Video, remains a relatively small player.

Despite Google's broad reach as an Internet search service and its well-known brand name, Google Video has only a 10 percent market share, according to Hitwise, which monitors Web traffic. YouTube has a 46 percent share, and MySpace has 23 percent.

"YouTube figured out what Google and Yahoo and Microsoft and all the others in the marketplace didn't," Li said. "It's not about the video. It's about creating a community around the video."

A link-up with Google might also carry benefits for YouTube as it tries to clear up its legal picture. Google and its lawyers are already dealing with similar questions involving copyrighted works.

"Who is in a better position to develop that technology," Li wrote in a blog entry posted yesterday. "Sixty burnt-out people at YouTube or the legendary technical minds at Google?"

Hurley and Steve Chen started YouTube after the two struggled to share videos of a dinner party in January 2005.

In a sense, YouTube is the classic Silicon Valley startup. The pair, working out of a garage and still in their 20s, went on to secure $3.5 million in venture capital from Sequoia Capital, one of the two venture firms that invested in Google when it was a small, relatively anonymous company.

The recent takeover frenzy is being fueled in part by News Corp.'s acquisition of MySpace, a social networking site immensely popular among teenagers. Rupert Murdoch's company bought MySpace last year for $580 million in cash, and it is now worth as much as $2 billion by some analysts' estimates.

Yahoo, meanwhile, is in negotiations to buy Facebook, a social networking site originally aimed at college students, for more than $1 billion, according to people involved in those talks.

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