Before the Google-YouTube merger was announced, it didn’t sound ludicrous for Yahoo’s Terry Semel or Microsoft’s Steve Ballmer to speak boldly of competing against Google.

But Google has become so big, with advertisers willing to pay such a premium to place ads on the search engine, that a virtuous “network effect” has finally pushed Google out of their reach. EBay did it with auctions. YouTube enjoys the same effect — people flock to post videos there because they know it has the most users, and they want their videos to be seen by the most people. The biggest player wins. With the “two kings” (GooTube) together, there’s no stopping it. The concessions from Google’s competitors are eye-opening.

Here’s Microsoft chief executive Steve Ballmer speaking to BusinessWeek, admitting that that it is almost game-over:

The truth is what Google is doing now is transferring the wealth out of the hands of rights holders into Google. So media companies around the world are all threatened by Google. Why? Because basically Google is telling you how much of your ad revenue you get to keep. They better get some competition. Us. Yahoo!. Somebody better break through or you can short all media stocks right now.

As long as there are two, you can hold onto media stocks. Google understands that. And that’s one reason why they’re willing to lose money up front. Just look at some of these deals. That MySpace deal (where Google provides the ad engine for MySpace). We bid a lot of money on that MySpace deal. And we got outbid. We wanted to win that MySpace deal. At some point, we said we can’t do this. Now Google can afford to spend more than us and Yahoo because they have more people in their ad system, so they’re getting better yield, effectively.

There are fierce competitors on the content side, the folks who compete with YouTube for video hosting — such as News Corp., which owns MySpace. MySpace users can load videos at YouTube and link to them — something that MySpace apparently considered prohibiting. MySpace makes a ton of money from Google ads, and so News Corp. looks like it wants to work out a deal — but it could team up with Viacom and GE’s NBC and demand up to billions of dollars in copyright penalties (see WSJ).

suetubegif.jpgThe sabre-rattling Dick Parsons, chief executive of Time Warner (which own AOL), said his group would pursue its copyright complaints against the video sharing site But he too complains about Google’s size: “..Google can do that better than anyone and I didn’t have Google dollars,” he said.

(Keep in mind that Justin Uberti, AOL’s top AIM Developer, was recently poached by Google, which adds to the wounds.)

In other notes about Google’s reach:

–Essayist Nick Carr is known for his sensationalism, but he suggests a case for Justice Department intervention on GooTube on antitrust grounds. (Sen. Stevens from Alaska will agree with Carr about the need for action, now that Google owns the “tube.”) Chad Hurley, Carr notes, argues in a recent interview that YouTube enjoys a “natural network effect” that should allow its share to continue to rise strongly.

–Statistics, and damned lies: The data about Google’s market share is unreliable. Google has a 43 percent share of the video market, after acquiring YouTube, Carr says, citing Hitwise. However, Comscore, which says it considers more sources and has more reliable methodology, has got GooTube with only 10 percent market share. Hitwise is now saying that GooTube has almost 60 percent! Yeesh.

–And what does it mean for Limelight, the content delivery network (CDN) that distributed a lot of YouTube video around the world? It just raised $130 million from Goldman Sachs Capital Partners, in part because it was showing so much growth. Limelight had YouTube as a customer, which clearly was helping drive some of that growth. It was placing large numbers of servers around the world to carry the video traffic. Google has its own network so won’t need Limelight (though we’ll have more next week about why this may not be a real problem for Limelight long-term.)

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