Comment: Google's long-term YouTube play

The news that Google has acquired YouTube has grabbed mainstream attention. However, the implications could be far bigger than most have realised.

By Ewan Spence, 10 Oct 2006 at 17:04

gallery

It is only natural that Google's purchase of the Flash video storage and playback site YouTube for $1.65billion of stock is big news. The deal is one of the largest acquisitions of an internet based company (previously Yahoo payed $3.6 billion for the Geocities Web Hosting service, while Ebay purchased Skype and Paypal for $2.6 billion and $1.5 billion respectively).

Has Google paid too much for YouTube? Are we back in a bubble reminiscent of 1998? No. I'm confident that Google have made a positive strategic move in acquiring YouTube. The company clearly has one eye on the long goal of building an advertising powerhouse, while also making sure the competition has little room to grow.

Putting aside the major distractions of the Google/YouTube deal - such as the amount of unlicensed content hosted on the site, or what will they do now YouTube has a licence to freely air a number of music videos while Google Video tries to sells the same content, DRM'ed for a dollar - these are for another time. From a marketing point of view, what are the top three sites on the internet where advertisers want to spend dollars?

Arguably these are YouTube, MySpace and AOL. Google now owns YouTube, and it should be no surprise to the Machiavellian readers that it also has the exclusive advertising supply deals for MySpace and AOL. At a stroke, the multi million dollar Madison Square Garden campaigns have a one stop shop to reach pretty much the entire internet generation. So even though the Adsense competitors from Yahoo and Microsoft are starting to get a foothold on blogs in the US, they still have a long way to get a strong and profitable portfolio of ad space that can rival Google.

Consolidating web advertising

By purchasing YouTube, Google has not only made its first major move to expand the company portfolio by acquisition, but it also locks out the other major players in internet advertising from the largest markets. What company would turn down that chance, even at a cost of $1.65 billion dollars?

Of course it is worth it - how many multi million dollar advertising campaigns have Google just guaranteed themselves over the next 3-5 years? Certainly a significant multiple of the cost of YouTube.

With this being a Web 2.0 play, the long tail concept is going to kick in. Look at the massive number of blogs on the web in need of advertising services. Will these smaller sites sign-up with a powerhouse such as Google that has the big advertisers going through them? A company that can drive up the CPM because they are the big player in town? Of course they will. In creating this economic ecosystem, Google will also solidify its position as the number one partner for sidebar ads.

As to this bringing in a new dot com style bubble? Irrespective of the political rhetoric, economies are cyclical and work best when they fluctuate over a number of years (but never quite reaching the boom and bust peaks). We are clearly in an upswing at the moment, with the money flowing in. However, the money is being carefully targeted, at sites and business plans that have their routes in traditional areas: Investment, media and marketing.

This is why we see deals such as the recent $15 million second round funding for PodShow - a company that has the permission of around 1000 independent podcasts to place adverts directly into shows. With almost no production costs, it can act as a clearing house for radio-style advertising on the Internet.