5 reasons why Google is looking to purchase YouTube

Rumors have surfaced that Google is in talks to purchase YouTube for an estimated $1.6 billion. Google’s own video site, Google Video, ranks a distant third in the ‘online video’ segment (MySpace Video is #2), with YouTube dominating the top position. YouTube streams 100 million videos per day — everyone would love that kind of traffic and eyeballs; the advertising revenues that could someday explode from that are incredible. But everyone is wondering how Google can even consider buying this copyright-infringement machine (a la Napster in the late 90’s) and expose their cash reserves to lawsuits.

The 5 reasons why Google is looking to purchase YouTube:

1) Google has deep pockets and wants to control the legal battle YouTube will be unmatched for. YouTube will eventually be embroiled in an industry defining copyright battle like Napster was. Much of the content found on YouTube is commercial content owned by the large TV networks, or is user-generated content using copyrighted songs without the consent of the owners. So why would Google possibly want to get involved in this copyright mess and risk their $10 billion in cash reserves? Google has significant interest in this battle, as it will set a legal precedent and have significant effects on their future plans …

2) Google’s future plans revolve around their dark fiber buying spree, which experts suspect is for building “the world’s largest video server network.” What does that mean? Dave Burstein, who writes the DSL Prime newsletter, says, “[The] key idea is that Google intends to become the most important video carrier on the planet, and is developing the servers and fiber network to make that possible. As television shifts to the net, only Yahoo and perhaps British Telecom are in position to compete. The ABC’s and NBC’s of the world are outclassed.”

Further comments shared in emails from Burstein to SiliconBeat back in September 2005:

“Google has told their folks to plan services ‘as though the servers and delivery’ cost next to nothing, although the real cost in 2005 remains in the $billions. They know that will come down with Moore’s law, and they are pricing down the learning curve. Once they build the basic network, the marginal cost of doing more will be amazingly small.

“To make that concrete, a company like Movielink or Akimbo makes a business plan around a cost of about 10 cents an hour to serve and distribute their shows at full-screen quality. That means that even if the content is free, they have to generate significant revenues from every show. That’s why 2 minute movie trailers, or video that shows in a three inch window, dominate the web. The infrastructure costs are manageable if you are selling movies at $2 or $4, but a tough obstacle if you want to be ad-supported or cheap in volume.

“Google is thinking ahead, building a network designed to bring that cost to a penny or two per hour by 2008. If they get video for free, they can afford to serve it just for the related ads. There is an unbelievable amount of video on the shelf not making money that can now be distributed through Google. Some will be free, other stuff as cheap as necessary to find a market.”

3) YouTube is profitable — that’s not a fact, but HipMojo.com ran the math and it’s hard to dispute. We’ve known YouTube’s bandwidth bills were $1 million/month roughly 6-months ago, but they’ve never publicly commented on their revenues and whether they’re profitable or not. I suspect they are, but just haven’t brought light to that fact — because then the TV networks (copyright holders) would likely start knocking down the doors with their lawyers.

4) YouTube is #1. They are the website people go to for watching online videos. Google wants that traffic (eyeballs) for their future plans, because Google Video hasn’t been able to unseat YouTube — and likely never will.

5) YouTube isn’t Napster. In fact, YouTube has recently signed deals with CBS, Universal Music Group, Sony BMG, and Warner Music. The deals allow for revenue sharing of advertising sponsorships of these content holder’s videos. YouTube has also implemented technology that CBS will be testing, which seeks out CBS copyrighted content on the YouTube network and allows CBS to either remove it, or claim it and share in the advertising revenue with YouTube. This seems to make perfect sense, as long as this technology can help copyright holders quickly and easily find videos with their content (which seems a very difficult problem, since there is so much media content in the world made by millions of people around the globe — but maybe this technology will allow content holders to upload all of the video and audio content that they own, which will then be run against every video in YouTube’s inventory to find matches).

With Napster you could download and own the media, whereas all of the YouTube media stays on YouTube servers; you can’t download YouTube videos to your machine to watch in the future. Shutdown YouTube.com and all that video content is gone, whereas with Napster being shutdown, people still had all the music they had downloaded illegally. This is part of the reason the video copyright holders haven’t unleashed their lawyers yet — they’re trying to figure this out, along with YouTube, so they can make some money from all YouTube’s viewers. Also, YouTube doesn’t have the deep pockets they’d like to be dipping into if they were to sue, but if Google picked them up … I can picture media executives licking their chomps right now in hopes of a Google takeover, because if they can’t work things out with YouTube on a rev-share basis, then the backup plan can always be working things out with Google’s bank account.

Steve Poland’s blog is here.