Monday, October 09, 2006
Deal Note: Google + YouTube
Why did Google buy YouTube?
Some reasons:
1) Google has to amplify (and protect) it's key revenue stream - ppc. Video ppc is a higher value domain, and a hugely untapped one.
2) Google wants assets at the edges of the value chain which can exert market power against 1.0 publishers - just like it's doing in book search.
The more of these assets it has across media markets, the greater economies of scope it can ultimately realize; the flipside of these scope economies is, of course, the more market power it can exert.
In other words, Google's goal is to redesign a more efficient value chain.
3) Google Video failed miserably.
Further points to note:
1) YouTube realized that to make money (revenue streams, not big fat exits), it would have to be less of pure platform play. It tried shifting to being a network/community, like Myspace.
2) Google has no idea what it takes to make networks/communities productive (ie, the hypersocial, etc, etc).
2.5) Conversely: YouTube has no dude. I don't have time to explain, but hopefully someone (who's been part of the discussions on Wednesdays, where we've been talking about this) can elaborate in comments. And I'm only half-kidding about this point :)
3) Revolutionizing branding is the real play at the heart of all this. Google thinks they are closer now, with YouTube in their back pocket - because they have a platform for experimenting with branded ads.
I think the reverse is likely true: Google has no idea what normal people want (or even are like, if you like), and so a YouTube acq might be just a nice way to geek out, possibly earn a nice marginal revenue stream (a la AdSense/Blogger), but never really redefine the value chain in the way it wants.
4) Deal math - yes, the deal is rich. Especially since YouTube is not as lightweight a business as most others - it is relatively capital intensive, and will stay that way for at least the medium term. Google can scale/scope many of these costs away, certainly.
But basically the math of the deal boils down to this: whether you believe tomorrow's attention is worth 10-20x today's revenues.
Google does - and that in itself is a data point that beancounters across industries will be chewing on for quite a while to come.
Discuss, comment, debate away...
Comments:
Ah, hahaha.... See you wednesday evening to
discuss
Feeling a bit geographically challenged...
Well, have to say that M&A is quite boring and predictable. While people may debate its strategic logic, my bet is that Google noticed how much it was paying to MySpace for search traffic and didn't want to miss the video bus (which should have a longer impact over the 30's crowd prowling for dates on MySpace).
A dude? Probably not even on the Google radar. IMHO - 2 key factors here:
1. This deal is
all stock, which is a strong currency, but a highly valued one at that. Agree, Umair, that this may be dillutive even long term at the current market valuations.
2. With HD costs dropping through the floor (and bandwith to follow), this deal seems to be as much about the content and advertising insertions. There's some other interesting technology plays here, but I'll just say there's strong IP that should be acquired/locked up (hint - not just video search/copyright).
Finally - is this really about Google buying into community? Maybe we're getting a bit too social-network-focused on that part. Maybe I'm just too main-stream to know better. :P
C
C'mon dudes, let the rest of us in on this "YouTube has no dude" discussion!
Whatever form video PPC takes, I can't help but feel that the revenue generated from it will be small beans compared to the potentially awesome power of virally-spread ads that are plugged into the community itself. Zero-attention advertising and branding (term from Umair) is the only kind that will be truly effective.
That being said, I can't imagine Google understanding this. Was Joga (google/nike social network) and attempt to learn how to do this, creating and spreading ads through community/culture?
What will the system look like that allows a Myspace or a YouTube or a Google to systemize, coordinate, and capture value from zero-attention advertising and branding?
I'm sorry I only seem to bring more questions to the table and not more answers.
I think I missed the point in my above post. Are zero-attention ads only a small part of the greater potential? Redefining the entire media value chain?
In terms of deal math, Google is willing to pay more because they think they can monetize the YouTube content and users much better than others. Also, they are hoping to take siginificant infrastructure costs out compared to others.
I am not too high on Google either...but I do think that they can do posess the monetization mechanism, and now the audience to exert enough muscle to change the way that old mass media video content is distributed. Where there jury is still is what happens with the long tail content. Where do they sit in this deal??
One key component of the deal, which I think needs to be seriously stressed: all the parallel agreements signed by Google and YouTube with Warner, Viacom etc.... to a) show music videos in streaming for free b) allow people to show videos on their own sites and get paid as part of google adsense c) some of the content will be available for re-mixing and re-distribution on behalf of users...
My feeling is that this is a first step, actual downloads (not only streaming) and above all not only music videos but actual tracks (thus the deals with record labels..).. will be next... this is an experiment (especially for labels who have put great trust in the google model)
What this show is that Google "gets it" a bit more than your post outlines.. I agree with all the rest, and see you all on Wed!
Yes--YouTube needed to be more of a platform. And you are right, they aren't very clueful at it. And Google is less clueful.
But what i think is interesting is from Google's perspective as a firm they use a vast number of different tools for innovation--from DIY to buy and scale. My sense is that buy-and-scale has more luck (Blogger, Oingo, Keyhole) than DIY outside of the core domains--interesting in itself.
Not that I 'm going to short google any time soon...
Is tomorrow's attention worth 10-20x today's revenues? That depends. I think the question that hasn't been answered is about attention elasticity and attention inertia. In general, it takes a lot to move someone away from a brand they really like, but switching costs are much lower on the web. Will consumers quickly move on and direct their attention to an offering that is slightly better, or will inertia keep them tied to the site(s) they like?
The barriers to entry for the web are low, are the barriers to entry for people's attention just as low? If future generations get used to switching (and I think web services that manage identities across platforms will make this easier), Google significantly overpaid.
I look at this deal as an M & A professional and ignore its implicit metrics because IMHO one can't quantify this in the traditional M & A sense. No comps, no deal precedence, no DCF to speak of - huge amounts of intangibles and goodwill everywhere have valued this deal, and frankly its hard to crtisize as no one on here can speak first hand about the implied network effect the combination presents.
That said - its all about the future of branding. As the edge continues to take up on content creation, presentation and distribution, the larger branding context of this content provides the creator with a staggering opportunity to layer his / her work. It may provide a musician with the corner turning ability to create socially acretive music, the more a song is shared, the more a brand attribute is distributed in a frictionless way......
No one will solve this with DRM, or litigation, or new players etc - the solution is truly fritionless brand attributes that dont require a behavioural shift to reward the creator.
YT is an early platform in this shift, adsense is a brand attribute capability that could possibly be another piece to this puzzle.
my 2 cents.
I look at this deal as an M & A professional and ignore its implicit metrics because IMHO one can't quantify this in the traditional M & A sense. No comps, no deal precedence, no DCF to speak of - huge amounts of intangibles and goodwill everywhere have valued this deal, and frankly its hard to crtisize as no one on here can speak first hand about the implied network effect the combination presents.
That said - its all about the future of branding. As the edge continues to take up on content creation, presentation and distribution, the larger branding context of this content provides the creator with a staggering opportunity to layer his / her work. It may provide a musician with the corner turning ability to create socially acretive music, the more a song is shared, the more a brand attribute is distributed in a frictionless way......
No one will solve this with DRM, or litigation, or new players etc - the solution is truly fritionless brand attributes that dont require a behavioural shift to reward the creator.
YT is an early platform in this shift, adsense is a brand attribute capability that could possibly be another piece to this puzzle.
my 2 cents.
I look at this deal as an M & A professional and ignore its implicit metrics because IMHO one can't quantify this in the traditional M & A sense. No comps, no deal precedence, no DCF to speak of - huge amounts of intangibles and goodwill everywhere have valued this deal, and frankly its hard to crtisize as no one on here can speak first hand about the implied network effect the combination presents.
That said - its all about the future of branding. As the edge continues to take up on content creation, presentation and distribution, the larger branding context of this content provides the creator with a staggering opportunity to layer his / her work. It may provide a musician with the corner turning ability to create socially acretive music, the more a song is shared, the more a brand attribute is distributed in a frictionless way......
No one will solve this with DRM, or litigation, or new players etc - the solution is truly fritionless brand attributes that dont require a behavioural shift to reward the creator.
YT is an early platform in this shift, adsense is a brand attribute capability that could possibly be another piece to this puzzle.
my 2 cents.
guys,
can someone who was in the wednesday discussion fill in what umair is referring to. Too bad i can't come to london to be a part of these discussions
So what's the whole dude thing about? I guess it's just a convenient shorthand for the hypothesis that among the ingredients of a successful 2.0 startup is the need for a larger-than-life personality at or near the helm: part visionary, part just plain crazy person, someone who definitely attracts myths and good stories about themselves and their product. Here are some examples...
Dudes:
http://bernardmoon.blogspot.com/2004/02/skype.html
(If you're lazy like me and don't want to read through all this, it's a blog with a reprint of Daniel Roths's Feb 04 Fortune article on Skype. Here's a paragraph from that article to give you an idea:
"Not that the RIAA has given up. Late last October, according to a motion filed by Zennstrom, he and his wife went for a morning walk in London's Branham Gardens when they were surrounded by men - including one sporting a black-and-white leather suit and riding a motorbike - who tried to shove a subpoena into Zennstrom's hands. (The RIAA insists there was only one person attempting to serve him.) Zennstrom and his wife took off running."
Not Dudes:
http://www.youtube.com/watch?v=QCVxQ_3Ejkg
Pretty sure this is what Umair is talking about...
The fact that Google paid in stock is certainly a plus for them. We all know they're very keen on preserving their war-chest.
The WSJ.com just mentioned about an hour ago (http://online.wsj.com/article/SB116052366106588684.html - subscription needed) that Fox wanted in on the bidding of YouTube, but wasn’t even invited. I find that very odd. Perhaps YouTube was afraid of Fox/MySpace blocking YouTube content on their site as the WSJ.com suggests (which would have hurt MySpace).
Note: Slashdot notes that Yahoo is blocking YouTube URL’s in its IM stuff: http://yro.slashdot.org/yro/06/10/10/2042248.shtml Very bad move on their part if the story turns out to be true.
I honestly think that Google sees value in the copyrighted content on YouTube rather than lawsuits. It gives them some leverage to sign on networks (which has already been done). “People are already viewing your snippets on our site, why not profit from it rather than kill a revenue stream?”
I’d bet that user-generated content doesn’t drive the most views on YouTube. My guess would be 1)Stuff from TV; 2)Indie-Video Producers (i.e. LonelyGirl15); 3)Everything else’s “Funniest Home Videos.” If other video sites sprung up, it’ll be easy to grab all three of those categories (Networks could care less who hosts their stuff so long as they make money, Indie goes everywhere, and so will everything else). Unless of course Google can gain 100% exclusive deals with #1 and #2. But that leads to the “Sue everyone else but YouTube” model, which probably doesn’t make financial sense for the Networks.
PPC is certainly key. Trying to track advertising spots down to individuals is a huge untapped market. But really, weren’t video ads killed with Tivo? How many of you don’t mute your volume when a 30 second ad comes up when you’re viewing a video on the net? My time spent in front of a computer is different than time spent in front of a TV. This doesn’t say that the model won’t work though. How well it works is the question.
Lastly, YouTube is already being attacked at the edge. Look at PornoTube.com. YouTube apparently cleaned itself up right before this deal (don’t have a link, but I think it was on the WSJ.com). Niche markets will eat away at a company that tries to be “nice” to everyone.
why did Fox not get asked in on the youTube deal? Well, clearly its political. YouTube booted Michelle Malkin offline. maybe this says nothing, but i think both YouTube and Google vote and think the same way, some humanistic values rather than murdoch's right wing views. Maybe this doesn't have anything to do with the deal, but it's a possibility.
Fox could rise to YouTube's level in about 2 weeks if they opened up all their vault content to users, added remix tools, and made video max length of 15 minutes. Combine it with their user submitted stuff, make the URL myspacevideo.com and open it up to all with social filters etc. YouTube is getting stale.
Google is really getting into the video side of things with first the release of their own video search engine and now with the acquiring of YouTube, Google will grow even faster as a company as a whole. I am wondering what percent of people think that Google’s Acquistion of YouTube Is A Positive One in this Online Pole at Entertaining Polls.
