It finally happened. Google (Nasdaq: GOOG ) has at last made an earth-shattering acquisition. After more than a few days of speculation, it has agreed to buy popular video-sharing site YouTube in a $1.65 billion deal.
The transaction won't even make a dent in the company's $9.8 billion cash-rich fortress -- YouTube has opted to take Google stock in exchange for the company.
Just before the deal was announced following Monday's market close, I was in the process of asking my fellow Fools what they thought about the proposed pairing. Here's what they had to say just as the news was about to break.
Until Monday morning, I thought the deal stood a snowball's chance in Miami of happening. Google doesn't need to pay $1.6 billion for anything more than a brand name. Google's video service is no worse than YouTube, and the proposed partner comes with a large, dark cloud of copyright trouble hanging over it.
And then I got the press releases. Google signs video-distribution deals with Sony (NYSE: SNE ) and Warner Music Group (NYSE: WMG ) . YouTube signs suspiciously similar deals with Sony and Universal. It got Warner a couple of weeks ago. All of a sudden, it looks like everybody sat down at a table, had some hot chocolate, and worked out their differences. That snowball just moved to Canada.
So, the other day, I'm reading how a company that collects catchy domain names for ad space has attracted $220 million in venture financing inside a year. Now I'm reading that Google might pay $1.6 billion for YouTube. Is it really worth more than three times MySpace? Seriously, since when did we start paying billions for companies that create, in effect, nothing? Oh, that's right, during the last bubble! Pop!
YouTube should take the money and run. I love the site -- this weekend, I spent about two hours watching Queen music videos (love that group) -- but I am not sure about the sustainability of its competitive advantage. If it doesn't sell, it may face the fate of Pointcast, which did not want to sell itself on the cheap for $500 million in late '90s and later went bankrupt. That being said, maybe YouTube's competitive advantage is the tremendous library.
Mark Cuban says that only a moron would buy YouTube because of the copyright issues. According to Cuban, YouTube is the video version of Napster (Nasdaq: NAPS ) , and all Google would be buying for $1.6 billion is a bunch of costly lawsuits. I can't believe that Google's management hasn't thought this issue through. Google must be confident that it can strike licensing deals with content providers to avoid litigation hell.
I'm just trying to imagine the T-shirts: GooTube? YouTooble?
It depends on whether Google will be paying with real money or with its own overvalued stock. I'd happily buy out eMeringue.com myself if they'd take Monopoly money in payment.
Google and YouTube. There's no question that this is a huge business event. But will the acquisition actually add value over the long term, once all the hype fades away?
This is a difficult one to assess. The YouTube brand is hot right now -- everyone's talking about it. It's sort of a cross between MySpace and local cable access -- anyone who has a digital camera can make decent-looking creative fribbles on any subject matter. Users can channel and instantly distribute their inner Scorceses. Hey, it's definitely cool, and it's a good example of what a site fueled by user-generated content should be.
But will YouTube always be as hot? I'm not so sure. Remember that any company can replicate the YouTube model. That could hurt brand equity down the line and make the $1.6 billion of capital deployment -- a large number for Google in comparison with its previous acquisitions -- look like too much money spent for something without a well-defined moat. Would a media conglomerate have been a better fit?
As I said, though, this is difficult to assess. I wonder whether it would have been better for Google to have simply worked on its own video brand. At the very least, a cheaper buying price would have been nice. Perhaps the powers that be at the greatest search engine in the world know something about YouTube's future that we can't possibly see. Either way, though, to the other question of whether YouTube should have remained independent -- no way. For the founders of that site, strike while that iron is hot, baby!
YouTube may not amount to anything, but even if it doesn't, the money is peanuts for Google.
On the other hand, YouTube may become a huge success, propelling Google far higher than anyone thought and putting even more distance between it and rival Microsoft (Nasdaq: MSFT ) .
Google's management has shown yet again that a strong scientific background doesn't always translate into sound financial management.
YouTube's format won't be easy to monetize, and now that it is owned by a deep-pocketed corporation, the lawsuits will start to fly from organizations being infringed upon by YouTube.
This is basically Napster part two. The recording studios were able to destroy Napster with their lawsuits. Now with YouTube, the movie and television studios will have no problem not only taking it down but also wounding Google. Bad, bad move.
So now what?
As I had mentioned on Friday, Google wouldn't have bumped Froogle off its landing page to make room for a Video tab if it wasn't serious about competing in the clip-culture revolution. Google wasn't having much of an impact against edgier sites like YouTube and MySpace's own video-streaming initiatives.
When eBay (Nasdaq: EBAY ) realized that its fledgling Billpoint financial-payment service would never supplant PayPal as the deal-sealer of choice on its auction site, it swallowed hard and acquired PayPal. When Yahoo! (Nasdaq: YHOO ) recognized the value of paid search, it wasted no time in snapping up industry pioneer Overture rather than ramping up its own service.
The stock market is funny that way. It can make a surrender seem like sweet victory. The one with the fattest billfold wins, even if the buyer was getting smoked by its acquisition target. Google is buying YouTube because Google failed at being the online leader in video, yet Google will be hailed as the top dog in digital video streaming by the time the transaction is completed in a month or two.
Quite frankly, you've got to love the pairing of Google with YouTube. I know that many of my bright and esteemed colleagues don't agree, but this was really the best fit for both companies. Watching the way Google took on the book publishers and the government proves that it has no problem with YouTube's potential for copyright litigation. YouTube, meanwhile, is going to the "do no evil" company that's open to letting the video specialist operate as independently as possible.
Will YouTube ever approach the sweet margins that Google has been achieving? Not a chance. The eventual profit -- and Google will turn a profit with this move -- will still be incremental. However, that doesn't bother me. If Google were limited to entering only sectors that would broaden its margins, it would be struck expanding exclusively into computer animation and Chinese gaming. That wouldn't work. Even Microsoft would never have rolled out the Xbox if big margins were the only measure of success.
Google will make this work.
More importantly, it just saved me an embarrassing run to the mall.
"How much do you want to bet that YouTube doesn't make it to next year as an independent entity?" I wrote back in March. "If it does, I'll put on a sundress and upload the video to YouTube."
Thank you Google, for sparing the world -- and my family -- from seeing me in that.
Longtime Fool contributor Rick Munarriz isn't a YouTube junkie, but he does find himself on the site more often than he would care to admit. He does not own shares in any of the companies in this story.The Fool has a disclosure policy.