Tuesday, October 10, 2006

Google and YouTube

There is no question about what this week's Internet Economy news story is. It is the $1.65 billion (£880 million) acquisition of the social networking/video-sharing/ entertainment site YouTube.

According to press reports YouTube will continue to operate independently "to preserve its successful brand and passionate community". Apparently it was this reassurance (and maybe just a bit the money?!) that persuaded YouTube CEO and founder Chad Hurley to sell. In July media reports already put YouTube ahead of its rivals MySpace, Flickr and Bebo with a 3.9% share of global Internet daily visits. The deal with Google will presumably further promote the growth of the site and give it access to the Google team's technical know-how and experience. PcWorld reports that Google Video will continue to operate although one would think that in the long run it would make sense to merge its activities with YouTube operations.

YouTube is of course an example of what some writers have called Web 2.0. People who use this phrase stress that recent developments in web use have tended to involve users much more, with web sites accommodating user-generated content rather than simply displaying company material. So as well as these social networking sites like YouTube we have seen the growth of blogs, podcasts and Wikipedia. I have been rather sceptical about whether these developments constitute on their own a new phase of Internet development. But Google executives obviously think that it is worth paying a huge sum of money (well via highly valued Google shares actually) to get hold of YouTube. And the market has responded well with Google shares up by $8.50 (=2%) on news of the deal. Is this another dotcom bubble that will have to burst at some point or the genuine creation of new wealth?

Google's business model is of course based on revenue generated from personally targeted advertising. So Google will hope to generate additional revenue from adverts linked to YouTube content. There are two interesting elements to this. First, there has been an emerging market for video advertising so that what you see when you click onto an advertiser's link is not static text or graphics but a short video clip. Obviously it makes sense to put video advertising next to user generated videos. Secondly, some of the revenue generated in this way is promised to the creators of the YouTube content who attract users to their site. This extra revenue could allow content creators to be more imaginative and creative in what they do and provide an explosion of high quality content, challenging the traditional TV and movie industries even more.

There are still some problems to be faced however. There have been complaints that YouTube has aloowed pirated clips to be uploaded and so Google may face expensive copyright lawsuits. Of course some entertainment companies have already signed deals with Google - Warner, SonyBMG and Universal Music Group among them. Perhaps Google will find a way through this and set up a system where copyright holders (whether multinationals or just individuals) will get paid for what they have made as it is viewed. While Google has seen itself become a rival to Microsoft on one front now it will increasingly face a challenge from Rupert Murdoch's News Corporation. Not only is the company the owner of MySpace but it also has FoxTV as part of the global empire. Exciting times!

Google nets YouTube in $1.65bn takeover Andrew Clark, The Guardian 10th October 2006.
Google buys YouTube for $1.65bn BBC News 10th October 2006.
Google swallows YouTube for $1.65bn Joe Fay and Chris Williams. The Register, 9th October 2006.
Dot-Com Boom Echoed in Deal to Buy YouTube Andrew Ross Sorkin, New York Times 10th October 2006.
Adding to the House of Google John Markoff. New York Times 10th October 2006.
Google to buy YouTube for $1.65 billion Eric Auchard, Reuters 10th October 2006.
It's Official: Google Buys YouTube Nancy Weil, IDG News Service, PcWorld.Com, 9th October 2006.
YouTube may add to Google's copyright worries Declan McCullagh. C|Net News 9th October 2006
Google signs video deal with Sony, Warner Music AFX News Limited. E-Commerce Times, 9th October 2006.
YouTube Inks Content Deal With CBS, Sony, Universal AFX News Limited, E-Commerce Times, 9th October 2006.
YouTube in 'landmark' music deal BBC News 18th September 2006.


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