Novice Investing - Googling For YouTube Profits

Date: Monday 13th 2008f October 2008 06:12:22 PM

Googling For YouTube Profits - 10/10/2006

By: Novice Investing Staff

Google Inc. (GOOG) decided to take the plunge on YouTube and acquired the company for $ 1.65 Billion in stock. While Google has $ 10 Billion in the bank, $ 1.65 Billion is pretty expensive for a company that has yet figured out a way to monetize its traffic. By now, a lot of other blogs might have discussed this very same topic. The pros and cons are there and it is hard to quantify these into the purchase. Thus, while we feel that the price is pretty steep, the outcome of the acquisition depends on how well Google take advantage of YouTube burgeoning traffics.

Pro # 1: YouTube is the leading provider of video sharing services. In recent period, it boasts an alexa rank of 10, way ahead of CNN's site. While it is not an orange to orange comparison, CNN is widely well-known and has a wide range of audience. Yet, it trails YouTube in terms of traffic. This validates the growth of online video as an industry.

Pro # 2: If anyone can monetize YouTube traffic better, it is Google. After all, this is the company that single handedly created an online advertisement systems based on click (pay per click).

Pro # 3: Video ad may fetch a better price per impression due to its interactivity. People loves interactivity as opposed to static text ad. For that reason, TV ad fetches better price than newspapers ad of the same period. This despites the fact that newspapers can be read over and over for a period of time. Meanwhile, a 30 second TV ad can last, well, 30 seconds.

Con # 1: Lawsuits for shared content. This too is widely known before Google made the deal. Hours earlier, YouTube has struck a deal with three major content labels; CBS, Universal Music Group and Sony BMG. While this eases copyright violation, YouTube has other uncountable contributions from authors that may raise this copyright issue.

Con # 2: Expensive cost of hosting video content. Video is a lot more bandwidth intensive than a text based or even an audio site. YouTube reportedly consumes millions of dollars of bandwidth each month. Thus, for the same amount of traffic, Google is buying a highly inefficient company, in terms of profit generation.

Con # 3: YouTube is a social networking site, in a sense. There is no secret that social networking site can be heroes in one day and villain in the next. The industry is evolving extremely fast depending on their service offerings and the social trend at that time. Friendster was a pioneer of social networking site but it is nowhere to be seen as the top desirable networking site. It is just 'average'.

All in all, while video ad will fetch a higher price, copyright issues will force Google to share this revenue with content generators. Meanwhile, for a given number of eyeball, YouTube is having a higher than average expense, due to bandwidth. As a result, we believe that YouTube might not be as good of an acquisition as one might think. In fact, buying pure social networking site such as Facebook or friendster might be a better deal, assuming the same valuation method that is based on traffic.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Google Inc. (GOOG) or any other securities.

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