Google grabs eyeballs with YouTube

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Direct marketers see concerns both for Google Inc. and its rivals in the search giant's $1.65 billion acquisition of YouTube 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.

Marketers wonder whether $1.65 billion is too much to pay for a hype-ridden company with 65 employees, no revenue model, large potential 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."

YouTube keeps its brand identity and remains based in San Bruno, CA. All YouTube employees will stay with the company.

Google hopes that its technology, advertiser relationships and global reach will build and add to the success of video entertainment. The acquisition has a fan in a leading search marketer.

"This is 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 aims to provide a 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. "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."

The number of Google shares to be issued in the transaction will be 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," Mr. Wise said. "More probably it will make them a must-consider. Research does suggest that graphical advertising campaigns positively influence conversion rates for search campaigns. There is an interaction effect that nobody is monitoring well."

However, Google must take a few steps before this deal can be a success, according to Josh Bernoff and Brian Haven, analysts from Forrester Research, Cambridge, MA.

In their analyst note after the Google announcement Oct. 9, they said: "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."

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