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A Loopy Deal That Actually Makes Sense
IS Google’s $1.65 billion acquisition of the video Web site YouTube another milestone in the annals of the Internet? Or is it evidence of a second silly season? The answer to both questions: Yep, you’d better believe it.
The terms of this all-stock deal are a marvel, given YouTube’s age (18 months), revenue (negligible) and profitability (nil). As we were in the dot-com bubble a few years ago, we are back in a moment of “metrics” that can make the acquisition appear quite reasonable — a bargain even — when measured by nonfinancial considerations like “uniques” and “trailing 12-month page views.”
There is also the nagging question of whether YouTube can keep its party going and cut workable deals with the copyright holders whose material populates much of the video that people post on the site. Or how long it will be before one or two of them tries to shut down the place — or to extract a huge toll from its new moneybags owners. But never mind.
Another question raised by Google’s move is whether the Internet land grab is different this time. The answer, again, is yes. The last go-round, of course, was a broad stock market mania for Internet and technology stocks and initial public offerings. This time, the leading companies being snapped up are clearly onto something as a business, but are not even yet contemplating going public.
Above all, one glaring difference amplifies the reverberations that “GoogTube” is sending through the tech and media worlds: this time around, big conventional media are largely on the sidelines of the deal flow, at least where the biggest prizes are concerned.
This is a marked shift in the dance of so-called old and new media. For one thing, YouTube was not some clever techie thing invented by people in lab coats. It is the biggest online outlet in a realm that every media giant knows well: video. Yet the biggest traditional media companies — even those with newfound religion over their Web strategies — couldn’t wrap their heads around it.
If Yahoo ends up buying Facebook for about $1 billion — the two sides are reportedly talking — the deal would be the third of at least that amount this year in which a Web company bought a coveted Internet media property. The other was eBay’s purchase of the Internet phone service Skype for $2.6 billion up front and the potential for a further $1.5 billion down the road.
YouTube, Skype and Facebook — a social networking site built around college students — have existed for a grand total of around seven years. In each case, media companies that have been around in one form or another for decades sniffed around these businesses and decided that they could not make the non-numbers of these newbie titans work. Dinosaur imagery does come to mind.
There are obvious reasons for this, given the carnage of the last boom and previous online efforts of media’s giants. We needn’t recite the saga of AOL- Time Warner yet again, but it is worth recalling that lesser degrees of digital pain were felt across the media spectrum: from the wayward Go network at Walt Disney and the Snap.com and NBCi fizzles at NBC to the great Seagram- Vivendi-Universal debacle.
Even the News Corporation’s chief, Rupert Murdoch, whose purchase of MySpace for around $580 million appears to be the hallmark old-new media deal of the modern era, has a long way to go before he balances out the ledger from past digital letdowns, chief among them the meltdown of Gemstar-TV Guide International.
The full implications of big media’s pragmatic approach toward large Internet endeavors are, at best, murky. Media chieftains may be kicking themselves a few years from now because they didn’t step up to pay whatever it took to own the emergent first mover in online video. Or they may be reminiscing about YouTube they way they do about much-praised but now faded game-changers like Napster and Friendster.
Given Google’s $130 billion market capitalization, one could argue that paying $1.65 billion in stock is an easy nut to swallow, even if it doesn’t pan out.
Jeffrey L. Bewkes, the president of Time Warner, told me in an interview that YouTube made perfect sense for Google — even at $1.65 billion — because the deal had to be viewed in the context of Google’s ambitions to extend and evolve its search advertising platform, rather than as a media play.
Thus, no sane chief executive of a traditional media conglomerate would have been able to sell the YouTube deal at that price to his or her shareholders or board.
That includes the risk-friendly Mr. Murdoch, whose attempts to get in the middle of the YouTube-Google talks were ignored. But a person close to Mr. Murdoch who spoke on background because he was not authorized to speak publicly on the matter says the News Corporation would not have stepped up with the kind of price Google was offering, even though it has the financial wherewithal.
Now, even if traditional media companies are passing up the biggest prizes of the day, they aren’t exactly sitting on their hands. NBC Universal has bought iVillage, Mr. Murdoch has bought several smaller Web businesses beyond MySpace, AOL has quietly beefed up its service with a series of add-on acquisitions and Viacom has made a series of smaller deals.
Viacom’s supposed lack of aggressiveness in moving online — in particular, losing MySpace to Mr. Murdoch — was cited as a main reason that its respected chief executive, Tom Freston, recently lost his job. His successor, Philippe P. Dauman, has decried making acquisitions that can’t be justified financially.
Mr. Dauman has said that the company is looking for the next-generation Web hits before they break from the pack. “We need to create a process to identify these opportunities early,” he said at a conference last month.
In other words, buy up all the garages in Silicon Valley.
SO for now, it looks as if the big, loopy Internet deal will remain the province of the big Internet players for as long as their stock prices allow it. It is hard to say whether Google is being foolhardy or prescient.
It is worth remembering that the company’s founders rebuffed reported overtures from Microsoft before they went public — and look what they’re worth and doing today.
On the other hand, the survival skills of the media moguls may be hardier than some people give them credit for. After all, the dinosaurs ruled for more than 150 million years — and some even became birds that still flap around today.
