Thoughts on Google and YouTube...
By Tom Foremski - October 11, 2006
Google's acquisition of YouTube for $1.65bn stunned many in Silicon Valley.
Some thought it was way too much to pay for a startup with hardly anything in revenues and it indicates a bubble mentality.
While others took it as good news because it would boost the valuation of other startups in the same or related markets.
Those opinions would be true if this was 1999, but it's not. In 1999 we didn't have these massive computing platforms, such as Google, Yahoo, AOL, EBay, Amazon, etc.
One way to look at this deal is to say that YouTube acquired the most efficient and powerful computing platform on the planet. GOOG can offer YouTube instant economies of scale that would have taken it years to build.
In addition, Google has a business model that can monetize YouTube much better, and more quickly than anybody else. If YouTube had an IPO today, it would take it a long time to become a large thriving business, fighting off many similar competitors along the way.
GOOG can monetize YouTube far better and far more quickly than anybody else. Therefore YouTube's valuation is likely on the low side considering the revenues Google can make from this acquisition.
This also means that the valuations of similar businesses are not boosted by this deal, because suddenly, there is an 8,000 lb guerilla in the room. And it is taking all the oxygen out of the room.
In 1999, the Internet was still a level playing field, all the big Internet players were still relatively small, you could build competing businesses and take on the leaders and win. In 2006 this is not the case.
So what if you have a better search technology today? Google can monetize it better than you can, you would partner with it or sell out to it.
What the Google/YouTube deal represents is the bet that scale on the Internet will win every time. That if you can aggregate the largest number of users, the largest number of applications, the largest number of advertisers, you will win each time.
And today, there really is no "rule of three" in the market, the notion that the "big three" as in car mackers, and in other industries, become the dominant monetizers and everyone else grabs the scraps.
The Internet is all about scale, where scale is rewarded. There is no reason for anyone but the largest, most efficient Internet company to dominate Internet markets.
Google is essentially building a proprietary Internet with efficiencies that the current Internet cannot hope to match. The Internet is a patchwork quilt of old and new systems and networks.
The "GooGnet" is a modern network made from the most cost efficient and effective systems and networks ever built.
Google's engineers are already influencing and changing the architecture of computer systems at Sun Microsystems and Hewlett-Packard, of microprocessor designs at Intel, and influencing similar developments at hundreds of other companies.
Google is spending hundreds of millions of dollars per quarter and it will soon become the world's largest computer systems buyer as it builds out its platform.
And the more the GooGnet is loaded with massive applications such as YouTube, the faster Google can scale and dominate.
Over time, there will not be a number two, or a number three competitor in Google's markets. There will be many small companies living off the margins, in niche markets - making decent livings but nothing blockbuster.
That's why Google has its motto - "Do no evil" because with such scale it could do tremendous harm.
But will it be doing good? It doesn't need to "do" anything, it will be essentially neutral, just as the Internet itself is a neutral entity in any ethical and moral sense.
- - -
So what about things like copyright problems on YouTube? It's not a problem because Google will sort it out in the same way its news aggregator Google News sorts it out: if you don't want to be in Google News, tell the company and it will remove you. And it will also remove any traffic that Google is sending to you.
With Google News, the news sites have become dependent on nearly half of their traffic coming from Google. It has become a distribution platform for them and they could not survive without it.
That's what will happen with "YouTube powered by Google," it becomes the distribution platform for the emerging world of IP TV.
I had an interesting chat recently with William Jolitz, a Silicon Valley veteran about this topic. He notes that it costs about $1 per minute to deliver TV content to a viewer as compared with 5 cents per minute via a service such as YouTube.
Those are powerful numbers, a 20 to 1 cost advantage is huge. It's a huge competitive advantage. And Mr Jolitz knows the value of a broadband driven business model, see: "The Google Test" on VentureBeat.
Share with Bit.ly
October 11, 2006 | Permalink | Comment | Category: | Subscribe to SVW
- Top Stories:
- Socialbrite: Helping Non-Profits Master Social Tools For Social Change
- The Pressure Is On When Every Company Is Now A Media Company...
- Vinod Khosla: How To Succeed In Silicon Valley By Bumbling And Failing...
- Saturday Post: If You Are In The Path Of A Disruptive Technology You Are Toast - Goodbye Newspaper Companies
- SDForum Garden Party Notes: Vinod Khosla is the Antichrist; Jim Clark has a size problem; Silicon Valley Trophies - Hot women and large yachts...
- Traveling Geeks Trip Next Week ... Join Us In London!
- Bitten and Smitten: Why Journalism Is Like Falling For The Wrong Person
- Year One: The Lessons Of The Intel Insider Media Advisory Program
- UberCEO Survey: CEOs Of Fortune 100 Snub Social Media - None Blog, Only 2 Twitter
- From Big Blue To Big Brown - IBM Launches Green Services In Smart Sewage And Beyond
- Keeping It Real: PR's Real-Time Web Challenge
- A Saturday Post: The Internet Devalues Everything It Touches, Anything That Can Be Digitized
Comments (10)
This was a fantastic move on Google's part. Yes, there's a great many people claiming that YouTube has the potential to be this decade's Napster and bow out due to copyright issues, but I think it's safe to see the steps they've already taken (ie: removing clips at request, working with WB) to instill confidence that they value copyright ownership and have no interest in crashing down in the name of providing free content to all, with no restrictions. Besides, the smarter artists, networks, and corporations realize that sometimes, the simplest message still rings true "there's no such thing as bad publicity." Even I would admit that's not a true statement 100% of the time, but in this case? Absolutely. Video clips can push something (or someone) from obscurity to global recognition, and companies should be ecstatic at the buzz generated when they're passed around on the internet on YouTube with clever commentary and humor attached to the brand. Well, most of the time. *wink*
Personally, though, I think what businesses are doing to propel web-video use is more interesting and ultimately, more exciting. One of my clients, IVT, just launched a do-it-yourself webcasting platform that IBM is already using internally. They've already had success with large corporate use of their first tool, MediaPlatform, and where they're going is without a doubt more logical than too much emphasis on the business implications of YouTube. And not just because they're a client of mine--take a look at the fact that what, a month ago? a former Lockheed Martin employee turned to YouTube to try and get his voice heard throughout the company, and to the world? People in business want to be able to communicate with web-video, and companies that latch onto this and deliver solid products based on this are who will really stand beside YouTube as success stories in this "web 2.0" world.
Posted: October 12, 2006 7:05 AM
Tom, what is the next big thing? I believe it's called education on demand. Who could build the Education 2.0 platform? Google or a federation of startups? Academic education doesn't work well. It's boring, it's antiquated, it should be fixed. There is a huge market all over the world.
Wikipedia + blogs + Facebook (social networks) + podcasting + videocasting (YouTube) + Flickr + mobile (cell) phones + gaming + IM + VoIP = Education 2.0
"Rather than spending 4 years of your life taking a bunch of courses that may or may not really matter in your life once you graduate, you can choose your education on an 'as needed basis,' based on your unique interests and talents."
http://ben.casnocha.com/2006/09/college_admissi_1.html
Who is interested in this idea?
Posted: October 12, 2006 7:55 AM
Tom, Great read. You've captured it exactly.
Let me tell of when I visited Intel's board room to present for Tandem years back. Justin Rattner pulled me to the side, and captured the moment by reminding me how Intel dominated - by bringing the best to market, and having the lowest cost manufacturing of the most massive semiconductors.
This is what Google is attempting with scale on the Internet. Best products with largest scale at the lowest total cost. Note - total cost, not cheapest product. A mistake National Semiconductor made when I was with them and they took on Intel in 32bit microprocessors.
A mistake others make in understanding Google.
Posted: October 12, 2006 11:20 AM
Hi Tom
Thanks for a great future peak. I am not trying to play the devil's advocate here, but with the so called social-sites or online communities there is always a risk of users hanging around for a while and later deserting it for newer cooler stuffs, Orkut is one I can think of here. So in deals like this (YouTube/Google), I am curious to know if we can be sure if Google will not land with another Orkut by buying YouTube.
Posted: October 12, 2006 12:19 PM
$1/minute/viewer is ridiculous. Obviously it doesn't cost anywhere near that much to broadcast television (since TV stations are profitable, and their revenue is much much less than $1/minute/viewer).
Maybe you meant $0.01/minute/viewer. Or $1/hour/viewer. Those numbers *still* seem too high, but at least they are slightly plausible.
Posted: October 12, 2006 1:15 PM
Hari: I think YouTube is much more than Orkut. Google is buying a large user base, and a momentum. Orkut is organically grown, it didn't cost them hardly anything, just some engineering time, and it can be grown over time.
David: Whatever the costs are, GOOG-Tube TV costs will be substantially lower and that is what counts...
Posted: October 14, 2006 11:28 AM
Google's success (present and future) has nothing to do with the scalability of their network or the absurd idea that they are building a "proprietary" Internet.
Google success is simply that they provide a better way for the average Joe to effectively advertise their business. Google is more an ad sales company than a technology company. Why? Because that's how they make money.
So with respect to YouTube is how do you sell keyword ads that are relevant to the videos? Has anyone ever seen the Metadata associated with a YouTube clip? How do you index that? How do you get people to spend money on advertising around that data?
The more they extend themselves from their core capabilities of selling targeted adwords the less effective they will be. Just take a look at their other endeavors - http://weblogs.hitwise.com/bill-tancer/2006/05/google_properties_understandin.html.
Posted: November 3, 2006 6:53 PM
Harry, why does Google operate some of the largest computer data centers on the planet if it is just an ad network? Surely it shouldn;t matter to Google that it own the distribution system if it's just an ad network?
GOOG is a media company, it sells ads around pages of content. Some of that content is in the form of services which require efficient computing platforms. And needs those computing platforms and its global proprietary networks because it needs to own its means of distribution - otherwise it could be cut out of the loop by third parties (cable, telcos...?).
To keep costs low it acquires the lowest cost content - it harvests free content from millions of websites under a "fair use" policy.
Posted: November 5, 2006 4:50 PM
Dimitar, my apologies for the late reply, I was away studying Indian bathroom fixtures for about a week. However, I have been thinking a lot about your comment about the web and education. The promise of distance learning is just about to reach a tipping point, and the effects will be massive and quick.
I just wonder which way the dice will roll in terms of our future options. But that's something that we can all have a say in, if we choose.
I would choose that we all should have a say in how the democratization of the Internet proceeds . . . :-)
Posted: November 5, 2006 6:28 PM
The problem with Google’s acquisition of You Tube is video is entertainment and search is educational. They may be able to segment video to the nth degree like they have text, but eyeballs won’t convert as well for their advertisers because viewers have objectives different than readers.
They had to buy the traffic to keep it out of their competitors’ hands.
Posted: November 6, 2006 8:09 AM