I wrote the following in response to a friend’s email, since I don’t have much time to really sit down and blog these days but felt the need to share my views on this deal. This post will be some off-the cuff thoughts as i wanted to bounce some ideas off here. Pardon the factual errors but I really want to get a feel of what some of you guys might be thinking out there..
“Some seem to think it’s brilliant for google to buy them out in order to escalate themselves as a media gateway. While other’s think that google’s bringing the bubble back by throwing money on eyeballs and nothing else.
Is it a smart move? Or have they really lost it this time?”
i think its a wise move at this time. Strategy-wise, its both a defensive and an offensive move at the same time. It fends off the vultures from Yahoo, Microsoft, NewsCorp, AOL Time Warner, who will have otherwise unassailable community bases from their Yahoo groups, IM, MySpace and AOl communities, if they bought Youtube instead.
Hence, buying community is one strategic move Google made, raising its user base to parity level with the other players. Remember, so far they only have “searchers”, not community members, and I dun count Orkut or Gmail users which are insignificant.
I consider this a defensive move, its the last chance to buy a community, other than an expensive buyout of AOL. And Facebook is just a social network, no real technology capabilities like Youtube.
Now for offensive,
Revenue driver diversification
Google is getting shit from Wall Street on its one-trick pony act of relying only on text-based ads. In the realm of advertising, it is king in text while the whole world knows “Video” and “rich media” ads are the next big thing due to the importance of the interactivity factor when reaching out to consumers. Google needs to develop that capability and it is, by signing deals with MySpace and Viacom’s MTV division to distribute their video-based ads on its search engine and affiliated sites. However, all these are only biting away at the huge video pie as the current Google “real estate” is limited to its search pages and its affiliated sites. Hardly a lot of prime video inventory for advertisers to choose from. Crucially, the bulk of their current users are on their search results pages which is video-free and I think its wise to stay that way to avoid looking like Yahoo.
So yes, I think buying the largest video distribution website in Youtube acquires them massive advertising inventory with accompanying users who are used to perusing video content (and wun find them obtrusive to the user experience). This move is both offensive and defensive at the same time. Offensive as they enhance their stranglehold on video ad distribution by having Youtube to complement their Viacom and Myspace deals,. Defensive cos they prevent some other company from buying Youtube and threatening their domineering status. In a way, it has become a two-horse race now between Myspace and Youtube for serving video content. Hence a 2 horse race between News Corp and Google. Google wins by preventing a third player from storming the party and limits competition with a “former old media warhorse” in NewsCorp, forcing the latter to compete on technology which is Google’s strong suit.
But the price? Thats a separate issue.
I see numbers floated around of $32 worth of per-user acquisition costs which is decent compared with the $580 million buyout of Internmix Media (includes Myspace) which had close to 30 25M users that time and works out to approx $100 $23 per user. Again, my numbers might be wrong bbut shld be in the ballpark, a fact check is needed but read these numbers somewhere from techcrunch probably and am using them here for illustrative purposes. Based on this, Youtube has 72M unique visitors per month working out to $1650M/$72M= $23/user. For the NewsCorp-Intermix deal, based on this article, the user-acquisition cost is about $580M/ 23M= $25. That is if, you believe into using user-acq costs as a rough valuation model..
To add on, I think a lot of the media attention has been on legal liabilities centering around the copyright infringement issues. That might be why pple are not buying much google stock as they are fearful the courts will wipe out any revenue advantages such a deal will bring.
And that is true, alot of home-made content is amateurish save for a few really good ones made by the next Spielberg… I use Youtube to watch Jon stewart, family guy and some really cool viral ads. But i also use it, for eg today, to watch some amateur clips on North Korea taken by tourists and journalists when they visited in an earlier time Kim Jong Il was less crazy.
Alot of this has to come down to deal-making by the Google folks, which is why I believe the deals signed with the TV networks on the day before they announced the deal was orchestrated to prevent any free-falling of the stock. Its too bloody coincidental to not be. In the long run, they really have to fight with NewsCorp and its Fox network while gaining allies with with cable channels,. CBS, NBC. We forgot someone important here too which has been really pushing the frontiers in opening up Old Media and that is Apple and its new affiliate Disney Networks with ABC.
I am guessing, really a wild guess here, that Google is relying on the advertising model to roll out media and videop content over the web while Apple is advocating you download the clip and pay. Google will prefer to stream it over their vast fiber optic capabilities and give content away for free over Youtube, by allowing ad placement where as Apple is a direct download, pay-per-clip model that allows ownership of the content. The competitive dynamic in terms of content delivery and revenue model is interesting and I like to see more discussion on this.
Apple-Disney, NewsCorp-MySpace and now Google-Youtube. Who’s gonna try to crash this party next?