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Google Bets Big on Videos

The $1.65-billion deal for upstart YouTube allows the search giant to expand in a hot sector.
By Chris Gaither and Dawn C. Chmielewski, Times Staff Writers
October 10, 2006

SAN FRANCISCO — In agreeing to pay $1.65 billion to acquire YouTube Inc., Google Inc. on Monday raised a new round of questions about the ever-increasing values for Internet properties that might offer a foothold in the frenzied world of digital media.

Launched in a Menlo Park, Calif., garage less than two years ago, YouTube has become the Web's most visited repository of amateur videos that include light saber fights and karaoke sessions. Google's decision to shell out big bucks for the company will keep it out of the clutches of Yahoo Inc., News Corp., Viacom Inc. and other big-media suitors. The steep price harks back to the go-go days of the late 1990s, when Internet values ballooned and eventually popped.

"It's scary," said Josh Bernoff, an analyst with Forrester Research. "I don't know if it's about the bubble or not, but it certainly gives you a little pause to see numbers of this magnitude being spread around."

The deal is by far the largest acquisition in Google's eight-year history and marks a strategic departure for the search giant. Google, which prefers to fill gaps in its product line through small acquisitions, spent nearly as much for YouTube as it has on every other company it's ever bought combined.

Major media companies have coveted YouTube's 30 million monthly visitors. The question is whether Google, the world's biggest broker of Internet advertising, can turn that traffic into dollar signs. YouTube has struggled to find a business model to capitalize on the more than 100 million videos it streams each day.

Many analysts said Google's technical might, deep pockets and relationships with hundreds of thousands of advertisers could give YouTube the resources it needs to blossom — much as MySpace.com has done since News Corp. bought the social networking site in July 2005.

"It's a bet, but it's probably a bet worth taking," said UBS Investment Research analyst Ben Schachter.

Google closed the all-stock deal after only a week of intense negotiations with YouTube's twentysomething founders Chad Hurley and Steve Chen, who formed the company after they grew frustrated by their inability to share video taken at a dinner party with friends.

Google shares shot up $8.50, or 2%, to close at $429 after word leaked out about the pending deal.

For Google, buying YouTube would strengthen its position as the middleman for an entertainment industry eager to make money online. But it also increases Google's exposure to potential lawsuits over copyrighted videos, which are tough to keep off services such as YouTube.

Legal concerns were a likely reason that, before Google announced the acquisition Monday, YouTube unveiled licensing deals with the world's two largest music labels, Universal Music Group and Sony BMG Music Entertainment, as well as with CBS Corp. The deals clear the way for music videos, television news, sports clips and entertainment programs to be distributed free on YouTube in exchange for a share of whatever advertising revenue may follow.

The deal with Universal silenced one of YouTube's most vocal critics, Universal Music Chairman and Chief Executive Doug Morris, who last month described the site as among a group of "copyright infringers" that "owe us tens of millions of dollars." He issued a brief statement Monday saying YouTube "is providing a new and exciting opportunity for music lovers around the world to interact with our content."

The timing of the announcements could hardly have been coincidental, said Lawrence Iser, a copyright lawyer with Kinsella Weitzman Iser Kump & Aldisert in Santa Monica. He concluded that it probably was a precondition of a deal with Google.

"It seems to me that Google said to YouTube, 'You need to make great headway in getting your licensing ship in order,' " Iser said.

Google executives said they would let YouTube operate as a separate entity, overseen by Hurley and Chen from new offices in San Bruno, Calif. YouTube moved Monday from cramped offices above a pizza parlor in San Mateo, Calif.

"Nothing's going to change," an exhausted-sounding Hurley said in an interview with The Times. "That's what excited us about the opportunity to work with Google. We have the ability to now stay independent, to continue with our vision, to concentrate on our community and our partners."

Hurley, 29, said YouTube had recently received $11.5 million in venture capital funding, but he would not reveal the company's revenue or whether it was profitable. He also declined to say how much he and Chen stood to make on the deal.

Chen, 28, said the acquisition would give YouTube the resources to pursue new ideas and features.

"We put aside a lot of things because of resource constraints," he said. "Google has immense resources to help us in the areas where we need help: search, advertising, bandwidth, the whole list of things that they're the industry experts on."

Mountain View, Calif.-based Google launched a competing service, Google Video, with much fanfare in January. But it could never catch up to YouTube, which broke out of the pack of online video sites by making it easy to upload clips, post them on blogs and communicate with video watchers who had similar tastes.

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