Google (GOOG) today announced that has struck a deal to acquire YouTube, the leading online video distributor, for $1.65 billion. For those that are unaware, YouTube serves approximately 120 million videos on a daily basis. Even though the reach of YouTube is quite higher than the reach of some broadcast media, YouTube has yet to define a revenue model. This is where Google’s acquisition of YouTube will play a crucial role in defining a revenue model that is bound to make a whole lot of money. A few months ago, Google announced that AdSense would, in addition to their contextual advertisements and banner advertisements, also provide video advertisements. With Google Video only having close to 6.5% market share, surely Google’s video advertisements wouldn’t be a huge moneymaker through Google Video. This is where YouTube has a whole lot of potential to rake in a big chunk of change for Google, as YouTube owns close to 43% of the online video market share.
I would say that this is a different type of acquisition for Google. First of all, YouTube was bought out not with cash, but in exchange for Google stock. Additionally, Google will not be rebranding YouTube; YouTube will remain as a separate entity and resume operations as it always did with its full staff. Sounds pretty good to me, knowing that it is the YouTube brand name that is attracting 43% of viewers of online video.
Many people were skeptical about the acquisition of YouTube by Google. Especially since the first big leak of a potential acquisition surfaced on Friday, October 6th. As it turns out, YouTube and Google were in talks for about two weeks, and one can conclude that both entities were pretty serious about the talks. This draws my attention to the potential acquisition of Facebook, the second largest social networking website. It seems that it has been over a year since Facebook has been taking turns having talks with potential acquirers, such as Yahoo! (YHOO) and Microsoft (MSFT). But every time a rumor of a potential acquisition of Facebook is ever mentioned, the rumors turn out to be rumors after all. What might be the cause behind it? I would have to say that Facebook has put too big of a price tag on itself. Rumors and leaks state that Facebook is asking in excess of $1 billion, which is obviously turning away the buyers. Yes, the largest networking website, MySpace, was bought out for $750 million. But that three-quarters of a billion dollars was paid to acquire a huge chunk of the social networking market share (currently a few percentage points over 75%), while Facebook commands less than 10% of the social networking real estate. Trying to catch up to first place, Facebook was willing and is willing to try anything, first diversifying away from its niche market of college students to high school students, then diversifying away from students and opening up to the general public (something that angered hundreds of thousands of college students).
Just to tie things back all together, I would like to say that I doubt Facebook will ever be bought out for a price that they are asking for, especially when they are trying to do anything to gain market share. Yahoo! is falling behind Google by being unable to diversify its portfolio of products and services and take the lead in the many online ventures that Google has a hold on. Google on the other hand is able to acquire small ventures that have a lot of growth potential, and at the same time, small companies like YouTube on the receiving end are able to take advantage of their “huge potential for growth” situations.
In my opinion, Yahoo!s problem isn’t that they don’t have diversity in their products and services. They have a decent range of products from a music service to web hosting to job search tools to maps with traffic reporting to games. Also, Google may seem to have a lot of product diversity, but most of their projects are still in beta phase and not officially released (while yahoo seems to bring their projects to the public in late phase). The problem they do have is that what they do create or acquire does not capture the same amount of attention as a new Google product. While decent products, they do not leave a big enough impression on users/advertisers/businesses.
I also agree that a Facebook acquisition wouldn’t create enough benefit for Yahoo! to be worth over a billion. The most Yahoo! can do with Facebook is a little advertising (too much ads would drive away Facebook users) and possibly add features that link to other products (Yahoo! music users could share songs and playlists through Facebook). I don’t think that Facebook could convert enough people to Yahoo! to be worth over a billion.