Does YouTube acquisition make sense for Google?

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Direct marketers have mixed emotions about Google Inc. acquiring YouTube for $1.65 billion in an all-stock transaction that combines a growing online video entertainment community with the expertise Google is known for: organizing information and creating new models for advertising on the Internet.

But marketers are asking a good question: Is $1.65 billion too much to pay for a hype-ridden company with 65 employees, no revenue model, large piracy liabilities and no profit as of now? Bill Wise, CEO of Did-it Search Marketing, New York, has reservations.

"Google and the other engines have only two options for ad inventory: lease the eyeballs with a revenue share deal or own the eyeballs through acquisition," Mr. Wise said.

"Google buying YouTube is, in a sense, a failure of Google Video," he said. "They are admitting that even with the mighty resources of the No. 1 search destination they can't invest a few hundred million dollars to compete with a company that currently can't turn a profit."

According to the deal, YouTube will keep its individual brand identity and will continue to be based in San Bruno, CA. All YouTube employees will remain with the company.

Google hopes that its technology, advertiser relationships and global reach will build and add to the success of video entertainment.

Yoohoo Yahoo!

The planned acquisition has its fan in a leading search marketer.

"This a good move for Google right on the heels of their recent MySpace partnership," said Ellen Siminoff, CEO of Efficient Frontier, Mountain View, CA. "It will extend Google's reach through social networks, providing advertisers with greater scale with which to reach certain key lucrative demographics.

"Bottom line is that search engines are looking for greater distribution to offer their advertisers, and social networks provide that wide-scale distribution," she said.

Through Google, YouTube will attempt to provide a better, more comprehensive experience for users interested in uploading, watching and sharing videos.

"I think this deal is very damaging for Yahoo," said John Rodkin, CEO of ClickShift, San Bruno, CA. "Google dominates search, and so far, Yahoo has remained competitive by providing a more comprehensive offering - banners, videos, etc. - to brand advertisers who need advertising channels outside of search.

"Now Google has the largest site in the fastest growing area for brand advertising dollars moving online," he said. "Combined with their right of first refusal on display impressions at MySpace, Google is positioned to capture dollars from all forms of online advertising. That takes away Yahoo's only advantage."

Analyze this

The number of Google shares to be issued in the transaction will be determined based on the 30-day average closing price two trading days before the acquisition.

"The raw volume of YouTube could make Google display ads a must-buy, more probably it will make them a must-consider," Mr. Wise said.

"Research does suggest that graphical advertising campaigns positively influence conversion rates for search campaigns," he said. "There is an interaction effect that nobody is monitoring well."

However, there are a few steps that Google must take before this deal can be a success, according to Josh Bernoff and Brian Haven, analysts form Forrester Research, Cambridge, MA. Here's what they had to say in their analyst's note after the Google announcement Oct. 9.

"To make this huge purchase worth it, Google must move rapidly to: 1) address the problem of users uploading copyrighted content; 2) encourage marketers to think beyond traditional video advertisements; and 3) maintain YouTube's excellent video selection and viewing experience," the analysts said.

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