Google, YouTube looking to link? - Some say deal makes sense; firms silent

Google, YouTube looking to link? - Some say deal makes sense; firms silent
By David Greising and Eric Benderoff, Tribune staff reporters. Tribune staff reporter John McCormick contributed to this report
Copyright © 2006, Chicago Tribune
Published October 7, 2006

YouTube, which burst from nowhere to become the most popular Web site for Internet video, has caught the attention of the Internet's biggest player, Google Inc., which reportedly is offering $1.6 billion for the upstart video service.

It would be a rich sum for a Web start-up that still operates from a loft above a pizza parlor in San Mateo, Calif. Even though it launched its business just over a year ago and runs with just 64 employees, YouTube has grown to dominate the promising new world of Internet video, attracting more than 100 million people a month.

YouTube offers a quirky mix of homemade videos, online ramblings of video bloggers, commercially produced mini-programs and music videos. One of the site's first big hits featured two Chinese college students offering a lip synching send-up of a Back Street Boys tune.

The Chicago band OK Go found a mass audience recently with a video of the band dancing and skating on numerous moving treadmills while singing their song "Here it Goes Again." Following that, the suddenly popular band showcased its treadmill act on a comparatively old-media platform, the "MTV Music Video Awards."

A sale would mark a significant payday for Steve Chen and Chad Hurley, who founded YouTube after a conversation at a Silicon Valley party about how ideal it would be to upload homemade videos onto the Web. Chen, who grew up in north suburban Chicago and graduated from the University of Illinois, sought--and is finding--his fortune in Silicon Valley.

If Google succeeds in its bid to buy YouTube, it could mark a turning point in the evolution of the search-engine giant, and of the Internet. Alongside computerized search, video over the Internet may be one of the richest new opportunities on the Web.

Enthusiasts believe online video may become as big a part of entertainment as television itself. Internet technology is making it possible for people to tap into entertainment on even small, hand-held devices and changing viewing habits toward shorter-form content.

"We're moving from a television generation to a video generation, and YouTube is by far the leader in video," said Rishad Tobaccowala, chief executive of Denuo, a Chicago-based unit of ad giant Publicis Groupe that focuses on Internet marketing.

YouTube appeals to people like Christian Hellsten, 30, an information technology consultant from Helsinki, Finland. "It's easier to go to YouTube and find something I like than watching some random show on TV," Hellsten said Friday in an interview through instant message. Besides entertainment, Hellsten also follows the war in Iraq via YouTube videos.

An equally enthusiastic fan of online video is Larry Page, a co-founder of Google. "I watch it a lot. It's really unbelievable. And I think it's really interesting compared to the things that I often see on television," Page told the Tribune earlier this summer. Page could not be reached for comment on the YouTube negotiation.

Google has $9.8 billion in cash and securities on hand, putting Page in a position to seize the largest Internet video site, should the two companies strike a deal. A deal also would ace out Microsoft, Yahoo and Rupert Murdoch's News Corp., all of which reportedly have visited YouTube's offices in recent months.

At a time when other high-profile Web sites are rumored to be takeover targets, Google would be snatching up perhaps the hottest property on the Internet--at a lofty price. Facebook.com, a social networking site and another possible takeover target, could fetch $1 billion or more. The price Google is offering for YouTube is up 60 percent from the valuation discussed in blogs and bars throughout Silicon Valley since early this year.

More than 106 million people--about three of every five Internet users--streamed or downloaded at least one YouTube video in July, according to ComScore Networks Inc. Even so, YouTube's audience continues to grow at a breakneck pace, which could make YouTube a relative bargain today should the trendline continue.

Talk of a sale also comes at a time when speculation is growing that YouTube might run into problems with creators of commercial video content, much as the music piracy site Napster foundered.

Mark Cuban, the flamboyant billionaire investor who co-founded HDNet and owns the Dallas Mavericks, declared in a September talk to advertisers that only a "moron" would buy YouTube, in part because of copyright issues.

Kevin Donahue, vice president of content at YouTube, said in an interview this summer that the company works hard to avoid offering copyrighted content for which it has no license. YouTube limits user-supplied videos to 10 minutes each, has a tool that enables copyright holders to search for pirated videos, and aggressively takes down any video believed to violate copyright.

"We're going as far as we can," Donahue said.

As part of the effort to avoid lawsuits, YouTube has negotiated rights deals with commercial video-makers. Google has rushed to do that, too. Among other deals, YouTube has exclusive rights to Webcast previews of NBC shows, while Google has rights to put some MTV content on its site.

Josh Bernoff, an analyst for Forrester Research, recently cited coypright concerns in a blog posting titled, "YouTube is Goin' Down." Even so, he still sees the takeover talk as a positive for Google. "Their attempts to get users more engaged with them have been sort of hit and miss. There is definitely a risk that they could be seen as a one-dimensional player if they don't do this," Bernoff said.

Takeover talks first were reported on a Silicon Valley blog called TechCrunch. A spokeswoman for YouTube and a spokesman for Google each declined to comment.

Google had little choice but to make the move. Even though Google recently put a link to Google Video on its main search page, replacing the sputtering price-shopping service Froogle, the company remains a distant third place on online video.

YouTube dominates with a 45 percent market share. MySpace videos account for 21 percent of the site visits, while Google garners a modest 11 percent share, according to Hitwise, an online tracking service.

For YouTube, a deal with Google would provide access to Google's robust Internet infrastructure, which is perhaps the most powerful computer network in the world. Google's vast bandwidth would allow YouTube to continue its explosive growth.

YouTube needs the computing power, Google needs the users, said Denuo's Tobaccowala. "That makes a good fit."

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dgreising@tribune.com

ebenderoff@tribune.com