Licensing Sweetens Deal as Google Buys YouTube

Last Friday, the rumors began in earnest regarding Google’s desire to acquire video networking site YouTube.com. On Monday, with market close approaching, the final offer—$1.65 billion in stock—was announced, along with YouTube’s agreement to the price, pending shareholder approval.

YouTube is a privately held company, founded in early 2005 by Chad Hurley and Steve Chen. In a story reminiscent of Silicon Valley and internet startups like Hewlett-Packard, Apple, and Broadcast.com, YouTube was spawned from the founders’ personal desire to take consumer computer use in a new direction—in YouTube’s case, to share video clips on the web.

Google announced that Hurley, Chen, and YouTube’s 65 employees will operate as a separate entity, while Google continues to operate its Google Video business. Google also announced that no YouTube employees would lose their job as a result of the acquisition.

Google has been seeking a partner to help it leap to the forefront of the online video space, after an uncharacteristically slow start for Google Video, launched in late 2005. In the meantime, I’ve run into several Google employees at various trade shows who were actively looking for technology and business acquisition opportunities.

Analysts had mixed reactions to the announcement, especially given what many considered the premium price Google had agreed to pay for YouTube after Google had established a reputation for acquiring small startups. Still, as of June 30, Google had $9.82 billion in cash and marketable securities, off of generated sales of $6.14 billion in 2005.

"This is the quick entry for Google into becoming Google TV,'' said Allen Weiner, an analyst at market researcher Gartner Inc. in Scottsdale, Arizona. YouTube is "this huge TV-like platform that includes a significant amount of content.''

"This fits with Google's strategy," said Roger Aguinaldo, an investment banker who also publishes a dealmaking newsletter called the M&A Advisor. "It's something that they couldn't build fast enough by themselves."

Since rumors began flying on Friday, other analysts had noted that Google was one of the few companies that could stomach the move to take on a video-sharing company and the potential pressures and possible lawsuits from copyright holders. Lost among the news of YouTube’s acquisition, though, was a silver lining that may limit Google’s exposure. YouTube announced today a series of deals to license content from key record labels, including Universal Music Group and Sony BMG.

YouTube CEO Hurley explained the licensing agreements as a balancing act. "YouTube is committed to balancing the needs of the fan community with those of copyright holders,'' he told the Associated Press. For its part, Sony BMG seemed pleased with the licensing agreement. "The enormous popularity of these video sites made it clear that a large number of people absolutely love these sites, and so connecting artists with their fans using this viral video platform is incredibly important to us,'' Thomas Hesse, Sony BMG's president of global digital business, told the news service.

Universal Music Group CEO Doug Morris, meanwhile, went from accusing YouTube of violating copyrights held by Universal to the tune of several million dollars, to praising YouTube for "recognizing the intrinsic value of [our] content."

Rob Enderle, an analyst for the Enderle Group, summed it up succinctly in a statement after the acquisition was announced: "The cloud that was hanging over YouTube was really the cloud of piracy charges. Having these licensing deals at least lowers substantially the downside risk."

Finally, analysts and investment bankers have contended since last Friday that Google’s move toward YouTube would probably begin a string of consolidation in the video-sharing and social networking space, with a Yahoo-Facebook merger being noted as most likely.