Google 's (NASDAQ:GOOG) recent acquisition of YouTube continues to spark spirited debate. Will Google see big money in video? Can Google successfully navigate possible legal challenges? And what does the deal mean for competitors like Yahoo! (NASDAQ:YHOO), Microsoft (NASDAQ:MSFT), and News Corp. (NYSE:NWS)?
The Motley Fool's Mac Greer puts these questions to Pulitzer Prize-winning reporter David Vise, a senior commentator with Breakingviews.com and author of The Google Story. This is the first of three parts.
Question: David, we've got to talk about the big Google-YouTube deal, a $1.6 billion all-stock deal. What is your take?
David Vise: Well, my view is that it is the riskiest deal and the riskiest move Google has made, in the following sense: They paid an enormous price, $1.6 billion, for a company that has virtually no revenue and no profit. There is no way to arrive at price here, except to say that this is the price that it took for Google to make sure that neither Microsoft nor Yahoo! nor News Corp. ended up as the winning bidder. You can't get there by looking at numbers or anything else.
So the first point is that this is a risky deal because of price. Now, with risk comes reward. Some bets pay off big; some don't. But I don't actually believe that over time, there is only going to be one video service on the Internet that is going to dominate. I think we are going to see, just like we saw in television and later in cable television and satellite, lots of different video services over time. Video on the Internet is in its infancy.
I think one thing this shows is that Google is going to be very, very aggressive at making sure it remains at the epicenter of mindshare on the Internet. We saw that in the $900 million deal they did with MySpace. When Google's own social networking site, Orchid, didn't take off, Google went out and cut an advertising deal with MySpace, the leading social networking site, and again, Microsoft, Yahoo!, the others were left at the altar. Here we are seeing Google do the same thing.
Despite all the efforts at innovation at Google --- the "20% time" people being able to work on whatever they want one day a week, keeping the teams really small, and hiring the best and brightest minds --- Google Video is not the one that took off. So here you have Google, Yahoo!, and Microsoft, with all the resources in the world, and Google with a particular focus on entrepreneurship, creativity and innovation. And we see that Facebook is Mark Zuckerburg's creation, and we see two guys doing a funny video today about how they peddled YouTube to Google for a billion six.
It is a great time to be an entrepreneur, because people are playing on a bigger playing field than ever before with the Internet, and I do think that Google has the ability that no one else has, potentially, to monetize the traffic on YouTube through a video-driven advertising platform.
They share a similar culture, where they both favor users over anyone else. So Google is not likely to slam an ad in your face ahead of a video on YouTube that makes you unhappy as a user. Instead, they are likely to give you a choice of whether or not you want to see an ad after. That's very similar to the extremely successful advertising model Google has used in connection with search: a contextual ad that is something that you can choose to view or read.
I think Google has tested that successfully already on Google Video, or they wouldn't have had the gumption to step up and pay such a big price for YouTube. But if I were YouTube, I would like to have done this deal half cash and half stock. It would be nice to have $800 million in the bank, because you never know what's going to happen to Google shares down the road.
There is risk and there is reward, and these guys have come from nowhere to do a phenomenal deal. But life is lived forward and understood backward. That is what makes an interesting horse race, and it remains to be seen what other services out there will take off. It certainly is a watershed moment to see Google also not doing a small acquisition and tucking it in and branding it with Google.
Google is going to let YouTube remain independent. Google has the computing infrastructure, and most of all, YouTube needs more bandwidth in order to keep showing all these videos to people that are being shared. That service has been successful because people can do social networking by sharing videos with their friends, and they need a lot of bandwidth. Google has the most powerful computing enterprise and the greatest amount of bandwidth in the world today, so they can help YouTube with that. They also can help YouTube sort out all the legal issues that relate to copyright, trademark, and all the rest as it relates to videos that may be commercially licensed.
Question: And I want to come back to a few of the issues you touched on, but you mentioned early on that this was a risk in your mind for Google. But when I think about it, David, Google has a market cap north of $100 billion.
David Vise: That's right.
Question: This deal is less than 2% of Google's total market cap. So what is the real risk?
David Vise: The risk here is that the management time and attention that could get focused on making this work is enormous. If YouTube doesn't turn out to be a big winner in this space, and if the execution of this is not successful when Google rolls out the ad platform for video that it hopes to with YouTube, that is a real cost, because Google has got to put most of its resources into doing search better than anyone else in the world.
I think Google would have been wiser if it could have [done] an advertising deal with YouTube, because in the MySpace deal, Google is protected on the downside. If MySpace doesn't generate the traffic, Google doesn't have to pony up the $900 million over several years. Here, Google is committed to a very, very large deal, and a lot of management time and attention to make it work. There is nothing as valuable as how people are going to prioritize and spend their time. You can bet anything this visible is going to get a lot of time and attention from senior management.
Question: Microsoft CEO Steve Ballmer says that if you believe YouTube is the future of television, it is clearly worth $1.6 billion. But he also says that if you believe something else, then YouTube may not be worth much at all. Do you agree with that?
David Vise: I think it is too early to know what the future of television is, and so I think it is a very dramatic statement. There are going to be lots of ways to see video on the Internet. There is not going to be one. Ballmer is saying [that] the only way YouTube is worth what it is worth in terms of what Google is paying is if it is the only one, and it is the global television network. I don't think that anybody sitting here today can predict that accurately. I think the truth is somewhere in between the extremes that Steve Ballmer outlined.
In our next installment, David Vise talks about some of the legal challenges for Google, and explains why he doesn't think YouTube should be compared to Napster.
Fool contributor Mac Greer holds no shares in any stocks mentioned in this story. Yahoo! is a Motley Fool Stock Advisor pick, while Microsoft is a Motley Fool Inside Value selection. The Fool has a disclosure policy.
