Google spent $1.65 billion, mostly in stock, to buy YouTube four months ago. The price tag raised a lot of eyebrows, not just because YouTube was so new, and so small, but because we now know that the company only generated about $15 million in advertising revenue last year. Sure, the company has the eyeballs; 135 million visitors, a billion video views every month, growing at a staggering 1,300% annually. But eyeballs, as we learned during DotCom 1.0, don't always translate into dollars.
"The internet and media are developing at such a rapid pace that making the wisest judgement at any given point and time is probably impossible as a practical matter. YouTube was an enormously valuable strategic acquisition at its time and remains a very important component of the way that Google is developing different pathways to the consumer on the internet and offline as well," says Lee Westerfield, of BMO Capital.
But against that backdrop of tectonic shifts in new and old media, Google and YouTube face more than a $1 billion worth of lawsuits over copyright infringement, even though some legal experts say YouTube may comply with the letter of the law when it comes to the Digital Millennium Copyright Act (DMCA). YouTube also enjoys what the company says are hundreds of content-sharing agreements with major providers, including its most recent deal with Britain's BBC network. But its stance against the copyright suits, and particularly Viacom, shows a kind of disdain for copyright holders, and those public comments could alienate the company from striking new deals, or extending the ones it already has. Especially if other studios and programmers follow NBC and News Corp.'s lead today and create their own online distribution sites featuring their own programming.
"The biggest threat to YouTube is arrogance," says Phil Leigh at Digital Insights. "The biggest threat to the media companies is arrogance. These two sides need to stop glaring at each other like they're considering taking up cannibalism or something, and come to the table and understand that it is important to get a uniform platform evolved so that the consumer doesn't get confused and everybody can make money."
Sounds reasonable, unless you take into account the squabbling and stumbling that plagued the music business when it went through much the same thing with mp3.com, napster, and so many others. A joint effort between two stiff competitors in the video and movie world today suggests that broadcasters and filmmakers may have learned some valuable lessons from the music industry's early missteps.
But now the pressure is on Google. YouTube has the numbers, but not the revenue. And there's been no clear strategy vision offered up by Google as to how it plans to "monetize" the YouTube property. If major, commercial content providers start to leave Google and YouTube for online distribution projects of their own, YouTube runs the risk of becoming marginalized as a kind of Funniest Home Videos for the net. Sure, it will always feature user-generated, homegrown content that will attract the eyeballs, but that's probably not the "niche" position Google envisioned when it came up with the $1.6 billion takeover offer.
"The question about YouTube becomes, 'Did they pay too much and is the investment going to recapture its investment in any monetized way?' That remains to be seen but if it is going to be the case, then the 'recapture' is going to come from monetizing ad sales on user-generated video and that seems far off at this stage," says Westerfield.
NBC and News Corp. today fired a shot right across Google's keyboard.