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Google's YouTube Gambit

Editor's Note: The following is a guest column by Roy Shkedi, CEO and Founder of Almondnet, a New York-based media and advertising technology company. The views expressed in this article are his own. TheStreet.com accepts unsolicited manuscripts but will only respond to those it considers publishing. If you would like to submit a column for consideration, please email comment@thestreet.com.

In the wake of Google's (GOOG - Get Report) $1.65 billion acquisition of YouTube, many observers have questioned whether the acquisition price can be justified, citing the following uncertainties:

  • The number of advertisement impressions that potentially could be delivered over YouTube.
  • The CPM (cost per thousand) such advertisements could fetch, considering that YouTube's entertainment-related content typically receives lower advertising prices than more lucrative categories such as automotive, travel and finance.
  • The response of YouTube's audience to video advertisements, which are expected to bring in a significant portion of the site's revenue. Will they simply leave in droves to other video sharing sites once those advertisements are deployed on a large scale?
  • Copyright issues that can affect the site's development, as well as that of its peers. (Just last week YouTube deleted nearly 30,000 files after a Japanese entertainment group complained of copyright infringement, according to The Associated Press.)
  • Only a small percentage of visitors to most video sharing sites upload content to them. Could these users be lured away with the promise of a share of the revenue generated from advertisements placed next to their content? Could they be paid if they use copyrighted material as many of them do?
  • Analyzing the above issues and others places a big question mark on the much-ballyhooed acquisition.

    Some have argued that Google acquired eyeballs for the purpose of owning some of the advertising space out there, as companies did in the Internet's early days. I argue, however, that Google could have got a much better deal by buying a combination of content and communication related sites. According to the Online Publishers Association and Nielsen/Net Ratings, people spend approximately 40% of their time online at content sites (i.e., news, information and entertainment sites) and about 40% of their time online visiting communication sites such as Web-based email and instant messaging sites. If Google was interested in merely owning ad space, it could have just purchased Web-based email sites and content sites.

    Yet, despite all of these concerns, the acquisition does make sense -- at least, for Google, it does.

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