Another week, another Internet merger rumor.
On Friday, the rumor mill also known as the business press went into overdrive on yet another mega-merger in the making:
was in talks to buy
for $1.6 billion.
The rumor, first appearing Thursday evening on the TechCrunch blog, gained traction when it also ran in Friday's
Wall Street Journal
earlier had said that a
merger was in the works, although speculation has since died down. Michael Arrington of TechCrunch gave the Google-YouTube deal a 40% chance of happening.
So why bother taking this new rumor seriously?
Because, unlike a Yahoo!-Facebook deal, a Google-YouTube marriage makes sense. A lot of sense.
This deal, if it's being discussed seriously, is probably the best exit strategy YouTube will ever see. Its founders have hinted that they'd prefer to launch an IPO rather than be bought out, even though the site has been valued with a straight face as high as $2 billion.
But there are a couple of clouds hanging over the company: First, the cost of streaming 100 million videos a day is probably swamping whatever revenue the company is bringing in.
Second, as Mark Cuban argued on his blog, YouTube is to video what Napster was to audio -- an extremely useful technology that, scaled up, angers copyright holders. YouTube has tried to navigate within the safe-harbor provisions of copyright laws, but Cuban says those laws may force YouTube to kick them off or reveal their identities.
"To some this might not be a big deal, but one of the great things of YouTube is how easy it is," Cuban wrote. "If it stops being easy ... the value and breadth of content declines as do the number of users."
If anyone can disperse these gathering clouds, it's Google. Its vast and growing network of servers can ease YouTube bandwidth costs by sheer economies of scale. And copyright attorneys who might relish the chance to squash an upstart like YouTube will think twice before taking on Google.
Google, of course, has had its own run-ins with content owners, especially with Google News and Google Print. But rather than backing down, the company has proven surprisingly resilient and resourceful. Google is reportedly planning a searchable archive for stories dating back to 1700, working with major media outlets and news databases such as Factiva.
Nor would a $1.6 billion price tag be daunting for Google. The company not only has a market cap of $128 billion, but also it had nearly $10 billion in cash and short-term investments at the end of the second quarter. So even if Google paid all cash for YouTube, it would still have as much cash left over as it did about a year ago.
True, the price is a high valuation. It's more than 10 times the net revenue that one venture capitalist estimated YouTube would have. But Google would boost overnight its share of the online-video market to 56% from 10% currently, according to figures in the
For Google, a YouTube buy would be consistent with the new direction the company is taking, which is away from an ever-sprawling array of confusing new products to more attention on existing features.
If Google is serious about improving the most popular products, YouTube will present a fix-it project that could yield strong profit growth.
Google is qualified to work out some of the kinks that remain in YouTube's service. YouTube's search engine is clunky, and could benefit from Google's sharper algorithms. Additionally, Google could deliver ads that are at once less annoying and more relevant to the ones that accompany YouTube videos today.
Finally, such a merger could have repercussions beyond the two companies. Many executives and investors in Silicon Valley are just waiting for a big deal to ignite activity, whether it comes in the form of IPOs or M&As.
At this point, it doesn't look like YouTube will set the IPO markets on fire, if only because the lingering copyright issues would weigh down its reception. But a big acquisition could move other potential merger deals to the front burner.
As long as those other deals make as much sense as a Google-YouTube linkup, they would be just the tonic to wake up a sluggish Internet sector.