People have been commenting like “OHH MY GOD THE BUBBLE IS STARTED AGAIN” and “Why would Google buy the site when they already run AdSense”
Ok its not rocket science let me explain…
Yes, YouTube currently does run AdSense which actually tells Google exactly what kind of income they are making. The thing is Google is only getting between 10-20% of the revenue based on there revshare agreement with Youtube.
Did you forget that more then 85% of Googles TOTAL Profit comes from Adsense? Did you also forget that the Yahoo Publisher Network, Microsoft and eBay (to name the biggest) have just launched (or are about to launch depending on your location) rivals to Googles AdSense contextual Advertising Product?
Earlier this year Google Signed a 900 million dollar deal to advertise on MySpace and other Fox properties like IGN. Now the last time I checked there was no AdSense on Google Video. If Google BUYS YouTube for 1-2 Billion then re-brands it under YouTube (which I was told is the plan) then they will be doing several things which make so much sense to me anyway:
- Merging to form the biggest video network – Does there really need to be anything said about this?
- Land-grab for publisher space – Both Microsoft and Yahoo are trying to get a foothold in contextual advertising market but without the brand recognition and volume of traffic of the largest sites on the internet it will make it more difficult.
- Block out Microsoft – This move is a total IN YOUR FACE to Microsoft, which currently has a 600 million dollar offer on the table to YouTube for Advertising.
- Making the 800 LB Gorilla even bigger – Adsense is thier bread and butter. Why not make it grow.
- Gotta spend it somewhere – Google HAS to spend money on stuff they cant sit on HUGE amounts of capitol or the stock holders will get pissy right quick and want a dividend. They have run out of web based Microsoft products to buy =P
- Why rent when you can own – Ok really… is 1.6 or 2 BILLION dollars that much? Especially when your dishing out 900 Million renting ad space on a site. Why not buy it and call it your own.
- Already have the data – YouTube Already runs AdSense so Google can currently see the statistics on revenues.
- Bandwidth is not a issue – Supposedly YouTubes biggest expense is bandwidth. Google has 10x more bandwidth on idle then YouTube will ever need and they are already paying for that.
- Legal issues are not issues – Cmon your talking about the company that scans library books and puts them online… AND GETS AWAY WITH IT
- Google needs to stick to what it knows – Google has bought so much crap that has been a complete money sink. The one thing they know makes them TONS of money is places users go where they can throw ads in there face. This works.
About the author...
Jeremy Schoemaker – who has written 2416 posts on ShoeMoney.com.
Hi I am Jeremy Schoemaker and ShoeMoney.com is my blog. 99% of the post here are done by me but you will see others occasionally make guest posts. This blog is fun to write but for my day job I run several online companies.
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{ 54 comments… read them below or add one }
What a great writeup shoe. Well done.
Shoe,
Where does that 85% of total profits number come from?
I don’t think Google gets anywhere near 85% of its total profit from AdSense – and AdSense for content is not that profitable for them overall. Their margin is much higher on their own search ads.
You have to wade thru their SEC filings (see below) but basically AdWords has huge margins – and it makes sense – they don’t have to pay anyone else…
I think AdWords is their bread and butter. AdSense is a nice supplement, though.
http://www.sec.gov/Archives/edgar/data/1288776/000119312505065298/d10k.htm
You are totally correct. But without Adsense there is no Adwords
Thank you for pointing that out though!
you mean that without ADWORDS there is no ADSENSE, right? It’s the other way around.
Hahaha. Well, when you put it THAT way…
Good post, Shoe.
As long as Google keeps YouTube as it’s own brand and keeps the current management to run the company it would be a good move.
Now if they go and screw it up and the site tanks, well that’s another story.
I completely agree with you, Jeremy.
Great post. You are absolutely right.
Yeah Google has this one in the bag, i saw this coming a long time ago,because YouTube was a driving user website plus i seen them ads on there will truely show Google the stats on YouTube.
Ohh well here comes “GooTube”
Great Post Jeremy!
If I can disagree here: I can see this move of Google to buy YouTube as act of desperation to diversify from one stream revenue business which is slowing down with click fraud and slowing economy on one side and finally sobering thoughts of founders on all crap products they announced which are not working and/or not wanted by anyone on another. I can imaging that after a big battle inside and clear understanding that all very expensive R&D are not bringing NEW PRODUCTS WHICH ARE ADDING to revenue and bottom line they were pushed to make a move which suppose to bring new dimension and advertisement space for monetisation efforts. Will it save GOOGLE from falling short of expectations – I doubt it. Apart from copyright issues fully described by Mark Cuban and others from business point of view this acquisition is wrong at the wrong point in time: YouTube is just a place where people are unloading their video content – it is real “LONG TAILâ€? staff, 99% of it will be seen just by creator and five other guys maximum. In order to monetise this audience media it will take ages and maybe never be profitable. If I would like to see news I will go to news portal, I will use good video search engine for lectures or similar CONTENT. Apart from hype this 1.6 billion investment will not bring any even middle term (1-3 years) google size meaningful revenues. So we have now very interesting point of Google business development cycle which will be reflected in earnings this and next quarter: no new working ideas from inside, all released products are not material in sense of revenue, strategy is to move into video space and buy out time but there is no clear business idea apart from proposal to advertisers: now we will put your add on every video download (99% is how I am cool dancing or baking or nice place in Zumbaramba). On the margin compression side we will have slowing growth of revenue due to click fraud recognition and slowing economy (not only YAHOO! disease), increasing Capex (now with not clear picture whether any of these investments are actually working) and expense related to options from 1st and 2nd q around 151 mil, so Free Cash Flow will be way below to reflect any sustainable multiple to the current stock price.
http://suffiy.blogspot.com/
The one thing I see many bloggers and pundits make mistakes on is bandwidth. I’m a minuscule, no-count blogger but I have been heavily involved with bandwidth building and leasing for many years now. Most people have no idea of the cost-benefit analysis … because they think in terms of paying out of their own pocket they try to avoid even thinking of a company with bandwidth bills like You tube. However, Jeremy sees the picture. In effect Google will pay nothing for bandwidth … they already own(lease) more than enough … you see you can’t tell the difference between sending a Google query and clicking on a You Tube vid … it will take more or less time to come to your machine and you’ll never know why. In a couple years the money Google is spending is going to look like peanuts and by sidestepping Microsoft and putting up a huge hurdle to any other competition they show great foresight. Others may be right when they say a new bubble is forming, but _this_ deal is no bubble.
Agreed. This is a very solid post. On point 1, people may not understand is the long term implications of having a big lead in Digital Video Distribution.
Nice writeup! Pretty natural step for Google, perfect owner of such an enourmous resource hog as YouTube.
I see the bubble not as the big sites like YouTube or Myspace, but the second and third level players who are getting multi-million dollar buyout offers. Toss in VC and a lot of experienced guys are saying that its feeling like 1999 again.
Excellent write up although it’s a little obvious to some. I’m surprised people can actually disagree with the reasons to purchase YouTube.com ? It’s huge and only growing rapidly everyday… Google does NOT have to pay for Bandwidth and they’re making a profit off of nearly 1/2 of the traffic that comes along, for now. The revenue is definately there and they needed to block out M$, even if they had to pay 2 times as much (who cares about that kind of money when the deal pays off over time?). It’s better to miss a few bucks than to miss out on a ton of money!
The name GooTube sucks tho -but ya – it makes sense
Good write-up Jeremy… I like your proposed logo.
GooTube is to funny! I want a sticker of that.
ShoeMoney looks like your friend Marc Cuban stole almost all your points for his lastest blog post
I think all that theory would be flawless if Google had not launched Google Video on the market to rival Youtube. But they did and failed to get the leadership position. So there is some “if you cant beat it, buy it!” in the deal.
“85% of Googles TOTAL Profit comes from Adsense”
I know someone has already picked you up on this, but seriously did you just make that up? How about a little fact checking. In reality it’s probably closer to 20% of their earnings.
Great post there, you are RIGHT
Good point about the bandwith. I didn’t think of that. I keep hearing occasionally the Google owns or is building big server farms. So YouTube’s biggest problem (bandwidth costs) might be solved right there. Then it’s just a matter of making the service profitable from ads.
Course then there’s still the copyright issue…
I have the feeling the minute, the second even the deal is made record industry will launch law suits after law suits (I suppose you heard of unauthorized posting and sharing of videos) to claim all the money they cannot at the moment since Youtube has nothing.
The biggest problem with Google buying Youtube is that all the copyrighted material will disappear fast (since even Google cannot afford to fight everyone for copyright infringement). It’s almost impossible to find something on youtube that doesn’t:
- Use any copyrighted music
- Use any copyrighted video
- or Blatantly republish something from TV/Movies
I think Google will wise up and it won’t happen … or Microsoft will get scared and make some ridiculous offer.
Maybe this whole rumor was started by the YouTube folks just to get Microsoft to buy them. Google seems too smart … but Microsoft will buy anybody for any amount of money just to make sure they don’t add to Google’s empire.
I was reading the news, it was just a rumour and deal won;t go down…
The interesting comment, is that Google know (at least some of) what youtube.com are making.
With the Google toolbar, Google also know where a lot of surfers go.
Alexa is ranking YouTube.com 6th today, with 89% growth in 3 months. Okay Alexa data is pretty warped in certain areas, but that is serious Internet real estate.
Sure I think it is a bubble, but then I don’t know how to turn eyeballs to cash as effectively as Shoemoney, if I did I wouldn’t be here reading.
I only read your first sentence.. but it’s wrong.. buying youtube is not diversifying at all. They do both things youtube does right now.. serve video and serve ads. //g
Actually, yeah, AdSense is the main thing.
I really don’t think 1.6 billion makes any sense for YouTube. Anyone that buys them out right now- before they go under- is doing them a favor.
my two cents:
- Where is the Businessmodel? Adsense? Come on …
- 80+% of the content is copyrighted and therefore illegal
Looks a load like Bubble1.0 we collect so many eyeballs and we will figure out how to make money later …
~frank
Gootube? Sounds like a fleshlight to me
He must have been sleeping in Strategic Mgmt. classes. Go GooTube.
no rumor. $1.65B in Google stock deal.
http://news.yahoo.com/s/afp/20061009/tc_afp/afplifestyleinternet_061009205236
no rumor. News just announced — $1.65B in stock deal.
$8.50 per share increase in GOOGLE stock today. Thats over 2 billion in revenue just from the announcement, Any moron could turn 100 million uniques a month into revenue, and GOOGLE plans to do more than that with it. “Click fraud” is a joke, as long as there is Advertising online there will be “click fraud”. Slowing economy? The DOW has been at a record high since last week
Google profited $400 mil just in stock price the first day of the aquisition, any lawsuits for copyright infringement will be offset by revenue from this.
Since they’re looking to get into online video ads, can you think of a better test market than the YouTube audience? Google is damn near the ultimate media company (if they arem’t already). Watch them buy Viacom or Time/Warner next.
Google has said they are interested in developing online video ads. Can you think of a better test bed than YouTube’s audience? Next purchase? Viacom? MySpace? Time/Warner?
sorry about double post. thought it didn’t work first time. delete one?
How about google video ads
We all know those are coming. How about google adsense style TV advertising? Youtube is the new TV and the old media pays about $30 CPM for a TV spot.
Thanks for the write up. It’s nice to hear some logical reasoning to this buyout.
What came first – The Chicken or the egg
gwon shoe! you the man http://www.nydailynews.com/business/story/460146p-387136c.html
Seems more like Poo Tube to me. If it walks like a duck and sounds like a duck…
Seems to me, it will be a great success.
90%(Youtube) + 6%(Google Video) = 96%!!!!!
= Monotony of Google!!!
I think they only need the user behavior. So many people search there and have so many information about the behavior and favourites.
This comment doesn’t even make sense. I don’t know how you’re involved in bandwidth building, but you need a good beating with a clue stick.
Nice 10 reasons. I love YouTube. The site has constantly inproved and the content has improved as more and more people use it. I am more worried about Google screwing up YouTube than Google will be screwed up by the deal. I saw two “How to use You Tube” books in Japanese the other day at the bookstore. Google just bought a huge international user base.
I think Yahoo is the biggest loser here. Google finally has something entertaining. Speaking of which, I just saw “Terminal”, it looked like Matt Cutts was playing the manager of the Discovery store. Trying his hand at acting?
Are you boycotting Digg? Saw you removed the Digg badge.
SM you have been spoofed!
http://forums.digitalpoint.com/showthread.php?t=157391
Shoe:
You dead on with the 10 reasons the deal makes sense. he $900 million MySpace–Google search deal announced in May established the valuation and made acquisition of YouTube inevitable.
While the headlines invoke demons of 1999, the real danger here is not the potentially inflated values of a few sites that lead their space; the real issue is the terrible consequences for other social media sites. The search advertising revenue model and skyrocketing valuations distort the focus of Social Media sites and turns them into giant affiliate sites for search advertising.
The inflated valuations caused by this deal may be even more devastating in the long run. Slapping a $1 billion price tag on an immature site with a tons of users puts a lot of pressure on management to cash in. A site that was organically evolving through the interaction with users and slowly approaching profitability is suddenly an entity on the auction block. If the site is sold, it creates an all consuming demand to generate revenue. In the end, these objectives are accomplished (or not) to the detriment of the users who synthesized these communities.
Hey, what’s wrong with the name GooTube??
Your ten reasons make perfect sense. I’ve given it some thought, too, but I still don’t quite know what to think… But you’re probably right: Google knows the best what YouTube can earn by selling ad space…
OMG… the merged name game is already starting ion the media… Googtube, Guble, and the like. The deal isn’t even inked yet!