YouTube Purchase Confirms Google Stupidity

Google's YouTube Blunder

 

by Bill Wise, Monday, October 16, 2006

 

YOUTUBE IS A 65-EMPLOYEE STARTUP that hasn't yet turned a profit, that's in an unproven industry, and that faces enormous legal problems. Which is why last week's Google purchase of the video-sharing site for $1.6 billion--was a huge mistake.

 

Let's go through the facts, and you'll see what I mean.

 

Problem #1: YouTube is young, the market is young. YouTube hasn't made a profit yet. It certainly gets a lot of traffic, and it's got advertising; but it's still deeply enmeshed within the "let's just get more eyeballs and wait" stage of the business. What will happen next is still unclear.

 

YouTube might hit on the magic formula of turning eyeballs into money--as Google has done for itself; and as Google is looking to help YouTube do, by supporting it with advertising. But there are definitely Google ad ventures that don't work out (think Google print); and it's entirely possible that, even with all of Google's help, YouTube still might not live up to its $1.6B expectations.

 

After all, a lot can happen in online video over the next few years. Microsoft is beginning its own video sharing site, Soapbox. Meanwhile, MySpace still ranks higher than YouTube--at the time of this writing Alexa ranks MySpace as #6 on the web; and YouTube as #10 and MySpace offers video. It's even possible that the traditional television networks, which are starting to expand online (ABC.com now delivers complete episodes of "Desperate Housewives" and "Lost"), will also enter ithis newest medium of user-generated video. Think about it: reality TV and televised talent shows aren't all that different from the 15-seconds-of-fame world that YouTube has created on the Internet.

 

And keep in mind that great empires certainly do fall. MySpace has clearly trumped Friendster in the social networking space, and Google itself pulled ahead of Yahoo, its elder rival. Both Google and Yahoo joined forces to crush Lycos.

 

And there's always the possibility of something entirely new jumping out of nowhere that changes everything, rendering YouTube passé. YouTube didn't even exist two years ago; who knows what the next two years will bring.

 

Problem #2: YouTube has 65 Employees. YouTube is still a small business. Google has about 8,000 employees; MySpace, which NewsCorp bought for $580 million, has a workforce of 300. So paying $1.6B for YouTube is placing an awful lot of faith in only 65 people.

 

Of course, YouTube will need to hire more people if they're to fulfill their new parent company's huge expectations. That shouldn't be hard to do--a job at YouTube probably looks pretty good around now--and Google is certainly waiting in the wings to help out (or to take over) if organizational issues become a problem. But whatever step the YouTube organization takes next, it will certainly need to become a different animal than it has been until now. YouTube has achieved fairytale success as a grassroots-driven startup; but it remains to be seen how it will fare as a billion-dollar player and subsidiary of a Fortune 500 firm.

 

There are bound to be serious changes in how business gets done, and there might even be changes in the way the youth market reacts to a cool indie site that's gone corporate. Only time will tell whether those changes will be positive or negative.

 

Problem #3: The legal issues. At the time of this writing, a YouTube search for Billboard-topping artist Justin Timberlake yields 3,084 results. A YouTube search for Kelis, number 50 on the Billboard Pop 100, returns 789 results. There's clearly copyright infringement going on, and YouTube makes it possible. That could mean real legal headaches for both YouTube and Google.

 

Thus far, Google and YouTube have kept the lawsuits at bay by creating ad-revenue sharing deals with Warner Music Group, CBS, and Sony BMG. Google will also offer technologies that help YouTube prevent illegal filesharing. But either of those acts of appeasement could go sour, especially if the entertainment world feels that Google's anti-piracy technology doesn't go far enough. If the entertainment world's relationship with the two online kings does fizzle, the breakup might not be so friendly.

 

There's no doubt that YouTube's a valuable company. And Google is certainly on to something in pricing out the competition in a valuable market--which most analysts think is Google's strategy in overpaying for YouTube. But the high price is a huge gamble, and there's a lot of reasons to say that it won't pay off. If the relationship doesn't pan out, it could very well go down as the greatest blunder in Google history.

 

Bill Wise is CEO of Did-it, a leading agency for search engine marketing and auctioned media management, based in New York. You can reach Bill at bill@did-it.com.

 

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[ Editor's comments:

 

[Chuckles to self]... I just love finding articles like this. Is video distribution really an "unproven industry"???

 

Problem #1 - YouTube may not be making a profit, but how hard would THAT be? Just throw some contextual Ads (How much might people pay to have ads next to cat videos? Yes, a lot!) on the site and let people add descriptive text of their videos. It would not be hard at all to charge for some videos with a revenue-sharing plan. "Host your content on YouTube and earn cash". How to pry loose the money? Every hear of "Google Cash"? They're positioned for micropayments and they may actually pull it off if they have figured out what I think is the key to making micropayments work (No, I'm not telling you in case they haven't...).

 

Then you add the idea of adding video ads to the front and end of the videos - Yow! That may be why it's not obvious on how I can download my favorite Okgo! video...! No problem, I don't mind ads paying for my entertainment in that way.

 

Ok, why would anyone care what the Alexa rankings are? Since when do they really mean anything? And while MySpace may have video (It was news to me) YouTube IS video.

 

OMG, "reality" TV is not that much different from user-created videos? Is that to say reality TV doesn't have more than 1-2 people editing, scripting, and producing the shows, or that all the user-generated productions spend hundreds of thousands on production?

 

And yes, YouTube didn't exist two years ago, but web video did. So before web video, what site came to mind when you thought of web video...? And what does now? Is there a second largest video site? I'm sure there is, but I can't tell you what it is.

 

Problem #2 - Faith in the Employees? Please. They can be replaced if they have to. Yes, "time will tell", but why is this uncertainty a "problem"?

 

Problem #3 - Ah, just how does a text search for terms show that "clearly copyright infringement going on..."? They could be parody videos or something else. Not that it is not a problem or might be in the future, but why can't we read an article that deals with facts and not opinion? I think at this point Google has enough experience (and lawyers) to be in a position to foresee and deal with the potential problems.

 

I too was surprised at the amount paid for YouTube, but given Google's track record (including print, which lost how much money? I think it was something less than 1 Billion if I remember correctly. Perhaps there will be a Print 2.0? AdWords wasn't so great to start with the first time out either.) and what I know about the web and user's appetite for video production and consumption, I think things will work out very well indeed.

 

(hris ]

 

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