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Google’s YouTube Blunder October 16, 2006

Posted by Bill in Google, Search Marketing.

YOUTUBE IS A 65-EMPLOYEE STARTUP that hasn’t yet turned a profit, that’s in an unproven industry, and that faces enormous legal problems. Which is why last week’s Google purchase of the video-sharing sitefor $1.6 billion–was a huge mistake.

Let’s go through the facts, and you’ll see what I mean.

Problem #1: YouTube is young, the market is young. YouTube hasn’t made a profit yet. It certainly gets a lot of traffic, and it’s got advertising; but it’s still deeply enmeshed within the “let’s just get more eyeballs and wait” stage of the business. What will happen next is still unclear.

YouTube might hit on the magic formula of turning eyeballs into money–as Google has done for itself; and as Google is looking to help YouTube do, by supporting it with advertising. But there are definitely Google ad ventures that don’t work out (think Google print); and it’s entirely possible that, even with all of Google’s help, YouTube still might not live up to its $1.6B expectations.

After all, a lot can happen in online video over the next few years. Microsoft is beginning its own video sharing site, Soapbox. Meanwhile, MySpace still ranks higher than YouTube–at the time of this writing Alexa ranks MySpace as #6 on the web; and YouTube as #10and MySpace offers video. It’s even possible that the traditional television networks, which are starting to expand online (ABC.com now delivers complete episodes of “Desperate Housewives” and “Lost”), will also enter ithis newest medium of user-generated video. Think about it: reality TV and televised talent shows aren’t all that different from the 15-seconds-of-fame world that YouTube has created on the Internet.

And keep in mind that great empires certainly do fall. MySpace has clearly trumped Friendster in the social networking space, and Google itself pulled ahead of Yahoo, its elder rival. Both Google and Yahoo joined forces to crush Lycos.

And there’s always the possibility of something entirely new jumping out of nowhere that changes everything, rendering YouTube passé. YouTube didn’t even exist two years ago; who knows what the next two years will bring.

Problem #2: YouTube has 65 Employees. YouTube is still a small business. Google has about 8,000 employees; MySpace, which NewsCorp bought for $580 million, has a workforce of 300. So paying $1.6B for YouTube is placing an awful lot of faith in only 65 people.

Of course, YouTube will need to hire more people if they’re to fulfill their new parent company’s huge expectations. That shouldn’t be hard to do–a job at YouTube probably looks pretty good around now–and Google is certainly waiting in the wings to help out (or to take over) if organizational issues become a problem. But whatever step the YouTube organization takes next, it will certainly need to become a different animal than it has been until now. YouTube has achieved fairytale success as a grassroots-driven startup; but it remains to be seen how it will fare as a billion-dollar player and subsidiary of a Fortune 500 firm.

There are bound to be serious changes in how business gets done, and there might even be changes in the way the youth market reacts to a cool indie site that’s gone corporate. Only time will tell whether those changes will be positive or negative.

Problem #3: The legal issues. At the time of this writing, a YouTube search for Billboard-topping artist Justin Timberlake yields 3,084 results. A YouTube search for Kelis, number 50 on the Billboard Pop 100, returns 789 results. There’s clearly copyright infringement going on, and YouTube makes it possible. That could mean real legal headaches for both YouTube and Google.

Thus far, Google and YouTube have kept the lawsuits at bay by creating ad-revenue sharing deals with Warner Music Group, CBS, and Sony BMG. Google will also offer technologies that help YouTube prevent illegal filesharing. But either of those acts of appeasement could go sour, especially if the entertainment world feels that Google’s anti-piracy technology doesn’t go far enough. If the entertainment world’s relationship with the two online kings does fizzle, the breakup might not be so friendly.

There’s no doubt that YouTube’s a valuable company. And Google is certainly on to something in pricing out the competition in a valuable market–which most analysts think is Google’s strategy in overpaying for YouTube. But the high price is a huge gamble, and there’s a lot of reasons to say that it won’t pay off. If the relationship doesn’t pan out, it could very well go down as the greatest blunder in Google history.


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