A bidding war for YouTube?
Google is supposedly near a deal to buy the online video site. But Microsoft, Yahoo or News Corp. could weigh in.
By Paul R. La Monica, CNNMoney.com editor at large

NEW YORK (CNNMoney.com) -- Spending $1.65 billion to buy a Web site that specializes in wacky user-generated videos may seem like a steep price.

According to several reports, YouTube, the popular online video site, is in talks to sell out to search leader Google (Charts) for that amount. A source close to the situation told CNNMoney.com a deal could be announced as soon as Monday.

Two of the most well-known brand names on the Web may be joining forces. Google is said to be looking to buy YouTube for $1.65 billion.
YouTube: The Coke of online video
Google may covet YouTube because it has a formidable lead in the online video market.
Site Market share*
YouTube 46%
MySpace Videos 21.2%
Google Video 11%
MSN Video 6.8%
Yahoo! Video 5.6%
Source:Hitwise * based on data for September, 2006
Will acquiring YouTube make Google a better investment?
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A spokesman from Google said the company does not comment on market rumors and speculation. YouTube was not immediately available for comment.

But some think that YouTube could become the subject of a bidding war that would drive the price tag even higher.

Trip Chowdhry, an analyst with Global Equities Research, said he thinks YouTube may ultimately sell out for a price between $3 billion and $5 billion since he expects other companies, such as Microsoft (Charts), Yahoo! (Charts) and News Corp (Charts)., which owns social networking site MySpace, are preparing their own bids for YouTube.

"The competition is probably also trying to put in counteroffers. That's the reason an acquisition will not occur at $1.6 billion," Chowdhry said.

Representatives of Yahoo, Microsoft and News Corp.'s Fox Interactive Media unit were not immediately available for comment.

A bargain price?

If Google's rivals try and drive up the price, Google could clearly afford to pay more. The company has about $10 billion in cash.

But is YouTube, which has quickly built a huge audience that watches over 100 million videos a day, worth fighting over? Marianne Wolk, an analyst with Susquehanna Financial Group, thinks so.

"This would catapult Google to the number one player in online video," said Wolk. She added that Google could use YouTube's database of user opinions about videos to improve its online video search results and therefore make money from advertising.

Google is the undisputed leader in search advertising. But it has struggled to make inroads in other areas and some have worried about Google's dependence on search for nearly all of its revenue.

Social networking has been one area in which Google has lagged rivals such as Yahoo!, MySpace and YouTube. Its Orkut social networking site has not been a market leader, nor has its Google Video site. So it could be worth it for Google to pay up in order to boost its presence in video and social networking.

"The price is on the rich side relative to other Internet deals, but it is not out of the question," said Wolk. She added that based on the 100 million videos or so that are downloaded every day, a purchase price of nearly $1.7 billion values YouTube at just pennies per download on an annual basis. So, she argues, Google could pay more and the deal would not be prohibitively expensive.

Glover Lawrence, co-founder, McNamee Lawrence & Co, an investment bank based in Boston, agreed that Google could generate a lot more advertising revenue by buying YouTube, since YouTube is a site that users tend to stay at for extended periods of time, which makes it potentially a lucrative destination for marketers.

"$1.6 billion strikes me as awfully high for a company that's been around for less than two years, but the question is what can Google and its machine do with YouTube?" Lawrence said. "The thing that intrigues me is the ability for Google to develop a community and get people to stay on the site longer. With YouTube you can spend, or waste, an untold amount of time on the site."

Lawrence added that Microsoft, Yahoo and News Corp. are also probably mulling whether or not to make a more serious offer for YouTube if they haven't done so already. But he said that YouTube may choose Google - even if Google doesn't make the highest bid - since it has the best technology. And since YouTube is private, it has more flexibility to choose its partner.

"The board of directors of a public company has a duty to get the best price for shareholders. The same rules don't apply for private companies," Lawrence said.

Investors also seemed to embrace the prospects of a Google deal for YouTube. Shares of Google gained more than 2 percent in trading on the Nasdaq Monday. That followed a more than 2 percent increase Friday, when rumors of a YouTube deal first started to circulate.

Or is Google overpaying?

Still, others are a bit more skeptical.

Citigroup analyst Mark Mahaney noted in a report Monday that if Google bought YouTube, it would be a "radical departure from its M&A strategy, which has been almost exclusively based on tuck-in technology deals" and also "would acknowledge that Google Video has failed to gain sufficient traction."

He added that a $1.65 billion purchase price would nearly match the entire amount of money that Google has spent on numerous acquisitions to date.

Some have also suggested that YouTube may never generate significant advertising revenue, since larger companies may be reluctant to buy spots tied to unedited user-generated content.

And late last month, billionaire Internet mogul Mark Cuban told a group of advertisers at an event in New York that anyone who bought YouTube would be a "moron" because of the litigation risks associated with the company since some videos posted on the site violate copyright infringements.

But Josh Bernoff, an analyst with Forrester Research, noted that YouTube would have significantly fewer legal concerns if Google bought it, since Google has the technology that would enable YouTube to more easily ensure that copyrighted videos don't make it onto the site.

"YouTube isn't viable until it automates detection of copyrighted material and takes it all down," Bernoff wrote in a Forrester blog posting late Friday. "Now, who do you think can do a better job of this - 60 people over at YouTube or the engineering power of the GooglePlex? So, part one, solving the copyright problem is easier at Google."

Bernoff added that YouTube needs to sell out in order to survive.

"By itself, I still think YouTube is toast. But with Google -- maybe not," he wrote.

However, more and more media companies have recently begun to partner with YouTube.

On Monday, YouTube announced separate agreements with broadcast firm CBS and music companies Sony BMG Entertainment and Universal Music Group to show video from these companies libraries. CBS (Charts) and Sony BMG will share advertising revenue with YouTube. Terms of the Universal deal were not disclosed.


Analysts quoted in this story do not own shares of the companies mentioned. Citigroup does have an investment banking relationship with Google. Top of page

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