Original URL: http://www.theregister.co.uk/2006/10/12/google_youtube_comment/

On that $1.65bn Google - YouTube deal

Of course it's too much, but how much too much?

By Faultline

Posted in Financial News, 12th October 2006 18:17 GMT

Google is probably the right home for YouTube, for many reasons, not least of which is the corporate culture which prefers to fund everything with advertising and the fact that both companies have emerged as popular web favorites against the odds.

Google itself has been attacking video, as is MSN, with a deal this week with Blinkx as well as Yahoo and AOL, and with all their existing traffic, it made more sense that one of those would have had the success that YouTube had. But as in so many of these cases, it is the newcomer that manages to get to grips with the passion that the man in the street has for video.

Google no doubt will extract as much revenue from YouTube as it is possible to extract, but there have to be question marks over whether or not YouTube will ever repay the $1.65bn that Google this week agreed to pay for the company.

The acquisition of MySpace by New Corp, for a measly $580m, puts this in perspective and what we have here is a heating up of the valuable properties in the market, in a very similar way to the dotcom era, when companies that had never made a penny of profit, and had only just begun to have revenues, however minor, were sold for a multiple of the number of people that visited their web sites.

We have said time and time again that there is something not quite right about services like Google Video, or AOL’s Truveo (which is at least the most technically accomplished video search engine), and also about Blinkx, which is perhaps the best known search engine, and of course YouTube.

While they offer novelty, and low quality, but original, user generated content, until this week they never offered the type of material that elicits a long term engagement with viewers that professional TV consistently does. People will sit watching YouTube for a couple of hours sat at their PC in the evening, but mostly those people are not typical and won’t do it for the remainder of their lives, just for a few months until the novelty wears off.

Harvesting e-potatoes

Sure, there are enough people on the planet that the proportion that continue to visit YouTube will provide Google with advertising targets for a long time to come, but YouTube is not the finished article and it has to continue to re-invent itself if it hopes to become so. By this we mean that it must engage people on a semi-permanent basis.

One major stumbling block is the lack of professional content that is available on YouTube and the other is the lack of a comfortable way of viewing such content.

This week YouTube has gone some way to rectifying the first problem by cutting deals with Universal Music, Sony BMG and CBS. That will bring it professional music videos, and it said quite recently that it wants to hold every music video ever made. The CBS TV deal through Showtime Networks will also offer the YouTube community short-form video programming from its news, sports and entertainment divisions.

But that’s our point. These are all short form deals, the type that people can watch between jobs at work, and at home when they are sat at the PC. There are not TV class 30 minute plus entertainments, that require connectivity between the TV and the PC, such as that promised in the first quarter of next year by Apple Computer.

Try the search interface at any of the above companies and see how long it holds your interest. The visitor has to come up with the search terms, has to have a reason to be there, unless he or she wants to watch "favorites" of other visitors that they don’t know, and who may have hugely different tastes from them.

We’re not saying that YouTube cannot continue to evolve to become a mature video market place where all types of video are watched, in both the comfort of the sitting room, or with the flexibility of being sat at a PC, but there are still hurdles to overcome and if the YouTube management spend more time counting their $1.65 billion than working on breakthrough new ideas, then the phenomena that introduced us all to user contributed video, could just be frittered away, along with Google’s money.

Given the revenue share that CBS and the other content partners are happy with, and the fact that they have all signed similar deals already with Google, then many more TV series should find their way onto YouTube in the near future, as soon as viewing figures for these deals become stable.

These deals have only been made possible by new technology announced by YouTube a few weeks ago, that will filter out copyrighted content which is not authorized to appear on the YouTube service.

That made a big difference between the P2P networks of music piracy fame, and the attitude of YouTube, and so has led to a viable business model. That solved, the company became marketable, and the bidding only took a few days.

Following the acquisition, YouTube will operate independently from Google, although Google will add its technology, advertiser relationships and global reach to the YouTube pie.

The deal is thrown into perspective by a report from In-Stat, a US researcher, that said that the User Generated Content market would only hit $850 million in value by 2010. If I were one of the Google managers that signed the YouTube deal, I would hope it would be an awful lot more than that at YouTube alone.

Copyright © 2006, Faultline

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