You think Google (Nasdaq: GOOG) paid too much for YouTube? Well, you're in good company: CEO Eric Schmidt knew all along that he was overpaying -- by a lot.
CNET News, a tech publication owned by CBS (NYSE: CBS), got hold of court documents from YouTube's long-running copyright battles with Viacom (NYSE: VIA). In these legal transcripts, where Schmidt spoke under oath, you see the magnitude of Google's willingness to pay way more for YouTube than the company was worth.
The video-sharing site was worth no more than $700 million when Google launched its $1.65 billion offer, by Schmidt's own estimate. But YouTube was -- and still is -- a fast-growing phenomenon that draws millions of eyeballs every day, and the unrealized potential to make money and control online traffic patterns was worth an extra $1 billion.
Schmidt explained that extraordinary circumstances demanded extraordinary measures. "In the deal dynamics, the price is not set by my judgment or by financial model or discounted cash flow," he said. "It's set by what people are willing to pay. And we ultimately concluded that $1.65 billion included a premium for moving quickly and making sure that we could participate in the user success in YouTube."
In other words, that extra billion kept YouTube out of the hands of Yahoo! (Nasdaq: YHOO), Microsoft (Nasdaq: MSFT), and possibly other companies with ambitions of online dominance. News Corp. (NYSE: NWS) had recently paid $580 million for social media site MySpace, and other media giants might have had their eyes on YouTube. If Google hadn't made this serious commitment right away, we might have seen a multiparty bidding war erupt -- and YouTube might have been a Disney (NYSE: DIS) property today, for all we know. Stranger things have happened.
Some might say that Google has yet to figure out how to make money from this expensive acquisition, but I respectfully disagree for a number of reasons. YouTube was a smart buy for Google -- if you take a suitably long view of the investment.
Which side do you take, dear Fool? Share your views in the comments below.
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