Tuesday, October 10, 2006


Is the Internet euphoria of the 1990s coming back into fashion? Things aren't quite that bad, at least not yet, but Google's announcement that it will pay $1.65 billion to buy
YouTube certainly makes me wonder.

YouTube is the king of Internet video. Any person can post videos of themselves, or anything else for that matter, on YouTube. Most of the videos are short in length and of poor quality. Most are tongue-in-cheek and have no important message. A good example is the one of a young man who films himself reacting to the tastes of different spices, which he stuffs into his mouth.

YouTube gets lots of eyeballs, but makes no money. Paying for eyeballs was all the rage back in the 1990s. But all the eyeballs in the world don't count for much unless their owners are willing to shell out bucks to buy something.

Some say eyeballs are all it takes to entice advertisers. But advertisers will pay only if the eyeballs belong to the right demographic. Advertisers will pay more to reach one pair of eyeballs belonging to a potential customer, than 100 pair belonging to those who couldn't care less about the message. And it remains to be seen how many viewers will stay loyal to YouTube if they have to watch commercials.

Google's CEO Eric Schmidt made some standard statements about how the two company's complement one another and share similar values when it comes to serving users. Google's founder Sergey Brin expressed hope that money will be made through video advertising, but no specifics were given.

Even though Google has about $10 billion in cash and marketable securities, it chose to pay for YouTube with stock. That was probably a wise decision for Google, and makes it a tax-free transaction for YouTube. However, the transaction price is fixed, so if Google shares fall in value, a greater number will be needed to close the deal.

The transaction is a great deal for YouTube and its founders. They are now rich men. But it's a big bet for Google. Right now it looks like Google is paying way too much. Unless it can come up with a way to turn YouTube's eyeballs into cash, it will regret this investment.