Google Gives It Gas

Its move to acquire YouTube gives it a second chance to dominate online video.
Publish date:

The deal is done. Now what?

The founders of


(GOOG) - Get Report



are joined in corporate matrimony following a media frenzy that made the Brad and Angelina showlook like a game of shuffleboard. They held a public conference callwhere they handed each other oversweet pieces of wedding cake. Theytalked about how engineers from both companies will be getting it on to create new ways of watching video on the Internet.

And the squabbling has already begun. Not between the two companies,but among the commentators, pundits and bloggers who are split betweensaying this deal will bring online video to maturity and those whopredict YouTube will become a bigger, smellier albatross around Google'sneck than Skype is around


(EBAY) - Get Report


Google's purchase of YouTube is, as Citigroup analyst Mark Mahaney wrote, an acknowledgement "that Google Video has failed to gainsignificant traction." Citigroup has received investment bankingcompensation from Google in the past year. Google Video has around 10%of the audience for online videos, behind YouTube's 46% and


(NWS) - Get Report

unit MySpace's 23%, according to Hitwise.

So, a YouTube-powered Google is a second chance for Google to takecontrol of what the company clearly believes is a key growth area.Google founder Sergey Brin said in Monday's conference call that Googlehas excelled in two areas -- search and advertising -- and that video is amedium that can greatly enhance both.

Where will Google's second chance to dominate online video lead? Some argue the deal portends a world where users can watch what theywant whenever they want, while content owners make more money than theyever dreamed of.

Investors seemed to take this view, as the stock recently rose $3, or 0.7%, to $432, lifting Google's market cap by another $900 million, or more than half the $1.65 billion in stock it's paying to YouTube.

But others see the deal taking Google into a different world, one oflitigation pain, where Google users are sued by media giants, and wherecopyright violations trigger numerous shareholder lawsuits, furthercompounding Google's legal bills and PR woes.

Which prediction will prevail depends on how Google managesrelations with the music, movie and television companies that own thekinds of content that in the long run will generate more advertisingthan self-conscious attempts at viral videos.

This kind of disagreement makes for fiery roundtable discussions,but Google investors have to decide which scenario ismore likely. For now, I'd say the more bullish scenario is the saferbet. Here's why:

YouTube is one of those rare technological achievements thatactually makes life easier for millions of people. Before YouTube,people dreaded watching videos online. It meant using a buggy programlike Windows Media Player or RealPlayer.

It often meant watching acommercial before the video clip you wanted, a tactic that has beenproven to drive away online viewers. And it meant having to find yourway to a site like



to pay a fee to watch content, rather thanstumbling across it on a friend's blog for free.

The acquisition of YouTube is reminiscent of Yahoo!'s $5.7 billion purchase in 1999. Yahoo!'s then-president, Jeff Mallett, predictedbroadcast-based advertisers would flock to the Internet.

But he was largely wrong. Instead, more advertising comes viasearch-related links like Google's. A good part of the reason why isthat online videos and video ads are a nuisance that people would ratheravoid.

YouTube has fixed many of those problems, while cutting in many of the contentowners to get their own financial due. It worked outarrangements with

General Electric's

(CBS) - Get Report

NBC and


(CBS) - Get Report

this summer and, more recently, withmusic companies

Warner Music

(WMG) - Get Report

and Sony BMG to provide limited amountsof content.

That both Google and YouTube announced music video deals the morningbefore the merger was announced was no accident. It was a clear messageto investors and to content owners that the companies can work aroundcopyright restrictions to make videos more common on the Internet.

The next step belongs not to Google or YouTube, but to the owners ofcontent that has yet to find a viable business model online. Do theywant to stick with a practice that is clearly broken and repellent toconsumers? Or is it time to put aside their more irrational fears andexperiment with a medium that could increase their revenue?

That's a question that book publishers have been facing for a while.On Friday, while the business press was awash in speculation about theGoogle-YouTube merger, a Reuters story ran saying that publishers at theFrankfurt Book Fair were raving about Google Print, the book-searchservice that many publishers were afraid would lead to rampant piracy.

But instead of piracy, many publishers found that Google Print aswell as


(AMZN) - Get Report

book-search function, have led to increased sales."Google Book Search has helped us turn searchers into consumers," anexecutive at Oxford University Press told Reuters.

The same is sure to be true for music videos, TV shows and movies.If a company comes to you with a way to make more money, should you suethem?

Certainly not. And that's why I'm casting my vote with those whothink Google is going to pull this off.