Google to buy a video leader

Web site YouTube to get $1.65 billion

October 10, 2006|By MarketWatch

SAN FRANCISCO -- Google Inc. said yesterday that it agreed to acquire privately held YouTube Inc., the No. 1 Internet video-sharing site on the Web, for $1.65 billion in stock.

The deal, by far Google's largest, is regarded as a largely defensive one that leapfrogs Google into a leading role in the Internet's burgeoning online-video marketplace while holding its media and Web-portal rivals at bay.

Without any formal marketing in its less than two years on the Web, YouTube now streams 100 million videos daily to an audience estimated at nearly 40 million a day.

The acquisition of YouTube highlights how heavily the likes of Google, Yahoo Inc. and other Internet companies are betting on video as a way to attract bigger numbers of customers and generate more advertising dollars.

Indeed, after reports of talks with YouTube surfaced Friday, many analysts said they believe Google's competitors will now seek to buy imitators of YouTube in order to keep pace with their rival.

Yesterday, the boards of both Google and YouTube approved the terms of the deal, which was announced after the market closed.

Google said YouTube and its 67 employees will continue to operate as a separate entity. The deal is expected to close in the fourth quarter.

The two companies began negotiating terms about a week ago.

The talks accelerated during the weekend after YouTube reportedly received interest from some of Google's biggest competitors.

The deal serves as a rather spectacular coda for YouTube. Headed by 29-year-old Chad Hurley and co-founder Steve Chen, 27, the maverick company had its debut in February 2005 with a radical idea: Let users upload digital videos onto the Internet to share with others.

"By joining forces with Google, we can benefit from its global reach and technology leadership to deliver a more comprehensive entertainment experience for our users and to create new opportunities for our partners," Hurley said in a statement.

`Next generation'

"I'm confident that with this partnership we'll have the flexibility and resources needed to pursue our goal of building the next-generation platform for serving media worldwide."

YouTube has come to symbolize the Web 2.0 generation of Internet startups taking advantage of the advance of high-speed Internet connections into more homes.

YouTube has trounced its rather deep-pocketed rivals, which have tried without much success to match its success.

YouTube has a 46.7 percent share of the online video audience, more than twice that of No. 2 MySpace Videos, owned by News Corp., and four times that of No. 3 Google Video, according to Internet business intelligence provider Hitwise.

Rest of top 5

Rounding out the top five are No. 4 Yahoo Video, which has a 5.5 percent market share, and MSN Video, with a 5.28 per- cent share, according to Hit- wise.

Shares of Google closed the day trading up 2 percent to $429 a share. Yahoo shares shed 1.7 percent to fall to $25.03. News Corp. shares rose 1 percent to $20.95.

By surging so quickly to No. 1, and building up such a wide margin, YouTube has not only become a well-recognized brand, but also cemented video as a "must have" application for Internet portals.

"Video is emerging as a key application, similar to e-mail and search, that determines why a user or an advertiser chooses one site over another," analyst Anthony Noto of Goldman Sachs Global Investment Research wrote in a research report.

Head off rivals

Several analysts said the most important aspect of the YouTube deal is that it lets Google keep YouTube from becoming part of rivals Yahoo and Microsoft Corp., which had expressed interest in buying the firm, analysts said yesterday.

"This is Google making sure no one else gets into this space," said Roger Aguinaldo, chief executive of the M&A Advisor newsletter.

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