Google Picks up You Tube for $1.65bn

Having previously turned down MySpace, Google has paid more than three times the amount of money NewsCorp paid for that community to pick up the video sharing social network YouTube. Conceived in February 2005 by three ex PayPal employees and with only $11.5m in venture capital funding to date, the 67-employee company boasted over 100 million films watched per day, dwarfing the audience share of many major TV stations. YouTube was one of the last remaining independent massively-popular rich-media social networks; the merger brings around 57% of web video under the code of a single corporation, according to Hitwise. 

The deal, announced late on Monday evening, came after a day of announcements from YouTube about new content deals signed with Sony  BMG, Universal Music and CBS about the use of copyrighted content. The partnerships allow for YouTube to post music videos and allow users to deploy certain copyrighted songs in their work, but at the same time has the potential to prevent users from uploading mashups or films with a backing of commercial music from these labels through a new YouTube technology. Google also unveiled a content deal with Sony BMG and Warner Music leaving the UK's EMI the only music label not partnering with either website.

The all stock $1.65bn 'merger' is expected to be completed by the end of the year and will see YouTube existing as a separate branded operation with its own offices. A merry message from YouTube founders Chad and Steve follows:

Creative Commons analysis from PaidContent.org

GOOG-YouTube: Conference Call: No Name Change; Audio

Speaking from YouTube “world headquarters” as Google CEO Eric Schmidt dubbed it at the start of the call, Schmidt, Google founders Sergey Brin and Larry Page, YouTube founders Chad Hurley and Steve Chen. Theme of the day: Steve and Chad are Google Guys 2.0. and Google’s expertise will help them fulfill their promise.

– Schmidt immediately brandished the content deals announced this morning by both companies — five total — “… which, in my view, highlight the growing value that content owners place on the internet asa new channel to distribute and promote their work. This acquisition is an exciting exciting next step in terms of our thinking about the evolution of the internet in video and it’s one of many investments that Google will be making to make sure that video has its proper place … on the internet worldwide.”

– Schmidt, who now gets to mentor another garage band, on the YouTube founders: “Chad and Steve remind me of Sergey and Larry when I first came to Google and I say that with great affection.” He called them “the perfect example of the people we like to work with” and said, “the think that tipped us over was not the great business success of YouTube or its good working relationships, but, in fact, how the vision of serviing their end users was exactly the same as Larry and Sergey’s vision in founding Google.”

– Why Google: Hurley: “By joining forces with Google we’ll be able to sharpen our focus on this vision to create a new media platform for consumers and partners to distribute their media worldwide.”

– Why all stock: David Drummond, general counsel, Google: The deal was structured this way to make it tax-free for YouTube shareholders. It also made the deal cheaper for Google. Schmidt added during that part of the discussion as he looked arounf world HQ, that “the YouTube had not spent very much money; they have been very. very thrifty.” (Don’t think he was referri9ng to bandwidth, though.) No details on the financials as in how the valuation was reached but Drummond said it was modeled on just about every model you could imagine. He said he thought the price was fair and a good value.

– Google Video stays: Asked why Google would need YouTube when it has Google Video, Schmidt said the company’s own video service is doing well, has good content relationships and is being more integrated with the company but they were drawn to YouTube’s social media aspects: “That’s what really drove us to begin the conversation.” As for Google Video, he said, Google video doesn’t go away now or ever. It’s going to become even more integrated with Google overall.

– Merger or purchase: Brin described the deal as a “merger.” Brin described YouTube as part of “a new class of sites tjhat have really developed very quickly, are very successful and are very attractive to users and are obviously delivering a lot of value.”

– No name change: Schmidt: “No name change. We think the brand has value and we want to preserve that.”

– On copyright: Hurley and Chen gave a brief description of the new content ID technology; Chen said he hoped to begin using it next month. Hurley said they’ve always respected rights. Drummond said both companies rely on the safe harbor of the DMCA.

– On advertising: Hurley said YouTube would be exploring a lot of options, including using Google’s advanced ad technology.

– Other bidders: As Hurley seemed to explain it, YouTube really wasn’t for sale until they decided it should be. No real answer about why they couldn’t have made a similarly independent deal with other companies.

– Schmidt: “This is the next step in the evolution of the internet. It (video’s) a natural next step.” In a way, this reminded me of the New York Times Company’s acquisition of About.com, which gave it much needed SEO technology. Google wants YouTube to provide that extra edge in video to become as dominant globally in video as it is in search.
You can download the audio here (10.4 MB, 22:51 mins). Or you can stream it here … click on the arrow:

GOOG-YouTube: Numbers Tell Different Stories; VCs Win 

Lots of people chiming in about valuation and pricing where this deal is concerned. As soon as the number $1.6 billion was floated by Mike Arrington and picked up by others, it was clear if the deal went through Google would be paying a significantly higher amount than I’d ever heard seriously mentioned for YouTube. That’s because Google’s interests lie beyond a traffic boost or even video sharing. It’s seeking nothing less than world domination in video and that’s an expensive mission.

In return, YouTube gets to leave behind the endless drama of who will own it and acquires an owner sympatico to its own ideas on copyright, something a media company could not have been, and possibly on the cutting edge of video advertising, something YouTube needs solved. Not incidentally, its founders, investors and employees with options get $1.65 billion in Google shares; the number of shares is tied to Google’s share price in the days before the deal closes. After that, their fortunes will be tied to Google. When the share price rises, so will their paper worth. If the stock drops before they can sell, so does their net worth.

– FIM paid $580 million for MySpace and its parent company and was considered by many to have overpaid. FIM and Google made a $900 million ad deal and suddenly that value looked more justified. Google may be counting on that when it expects FIM to accept that it just acquired its nearest competitor in delivering videos.
What are others saying:

VC Ratings: “Sequoia Capital, which has invested $11.5 million for about 30% of YouTube, is doing really, really well. and may have finally usurped Kleiner Perkins Caufield & Byers as the top venture capital firm. … This is the clearest admission yet by Google that it’s maturing and it can’t build everything on the web itself.”

Jeff Clavier: “From a pure deal perspective, Sequoia Capital (which also backed YHOO and GOOG) adds another icon to the list of successful exits they have had. Their 30% investment in YouTube for $11.5M has turned into $500M in less than two years – a 43x multiple, or more if the GOOG stock gets a pop over the next 30 days.”

PEWeek: SF hedge fund Artis Capital Management was a co-investor in the $8 million spring second round this spring, according to a reg filing. With the total at $11.5, that means Sequoia’s win may be a bit lower than estimated. Stephen Welles, a lawyer with Wilson Sonsini Goodrich & Rosati, also participated, PEWeek reports. No details on amounts.