Saturday, October 21, 2006

Google buys YouTube. Deal or No Deal?

We all thought it was coming, but when? Google finally shelled out $1.6B in stock for the lowly video sharing site. So if any of you have an idea for a company that will lose a few hundred thousand dollars a month, give me a call. Maybe we can get something rolling and get bought out for a billion or so.

Most investors and analysts agree that Google is a fairly intelligent and forward thinking company, especially compared to it's peers (Yahoo!, Microsoft). So after today's news many analysts are forced evaluate the wisdom of Google's decisions, even if they don't coincide with their own. Through this evaluation they and we are now seeing a new era of virtual (and viral) acquisitions whereby there is no real product. There's not even a digital product like software. No paid memberships; nothing.

So now you're asking yourself..."What the hell did Google they buy for $1.6B? What did News Corp buy (MySpace) for $580M?"

They bought an opportunity, a demographic, the ability to advertise to 100 million people for about $16 dollars and $5.80 apiece, respectively. Of course with any opportunity there is ample room for success and failure, lemons or lemonade. So if you're Google and you have this great new toy, what do you advertise? Easy, NOTHING and EVERYTHING. You resell. Because if you're Google you have access to one of the largest pools of private advertisers (AdWords) in the world. A single click through AdWords can be worth a few pennies or up to $70 for the most valuable terms. So while consumers continue to tune out the TV and cancel their paper subscriptions and advertisers continue to scratch their heads trying to figure out how to advertise to the online demographics, Google decided to shoot first, ask questions last and buy the whole demographic.

So how well will it work out? Probably pretty good. After all if you're a company worth $100B, what's a couple billion between friends? As of this writing Google's stock rose $8.50 or 2% intraday on the news of the acquisition. For those of you without a calculator handy, that means Google's market cap rose two billion dollars and they netted $400M on the little video sharing site that could. Not bad for a days work.


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