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The Honolulu Advertiser
Posted on: Saturday, October 7, 2006

Google may try for YouTube

By Chris Gaither and Dawn C. Chmielewski
Los Angeles Times

SAN FRANCISCO — Google Inc. appeared yesterday to be the latest suitor vying for the affections of YouTube Inc., a match-up that would unite the search giant's technical and advertising might with the online video pioneer's rapidly growing audience.

Since it debuted last year, YouTube has been a new-media darling, fielding proposals from the likes of Viacom Inc. and News Corp. But YouTube Chief Executive Chad Hurley has said repeatedly that he prefers to keep the company independent with an eye toward an initial public offering.

That may prove more difficult than YouTube's skyrocketing popularity would suggest. The company has drawn threats of lawsuits from music labels and TV studios for not adequately blocking copyrighted works. Meanwhile, the 60-person start-up is struggling to make enough money to offset its bandwidth costs, which are climbing as YouTube serves 100 million videos a day.

"They are just not able to keep up with what they've created," said Josh Bernoff, an analyst with Forrester Research. "They don't have the necessary staff to be able to move ahead here, especially with the threat of a lawsuit looming over them. They need to find ways to rapidly generate more advertising revenue, which Google is going to be terrific at."

Talks between Google and YouTube were first reported by the technology blog TechCrunch, which valued a potential deal at $1.6 billion.

Any negotiations could still fall apart. Other suitors also could offer more money.

Google and YouTube declined to comment yesterday.

A deal would mark the first time Google, which prefers to fill in the gaps in its product line with small acquisitions, has bought a technology company that makes a competing — and more successful — product. It would also be a major acknowledgment by Mountain View, Calif.-based Google that its own video service, launched in January, couldn't keep pace with the San Mateo, Calif.-based upstart.

YouTube received 46 percent of all visits to online video Web sites in September, compared with 11 percent for Google, according to Hitwise, a market research firm.

Observers said Google could give YouTube the advertising connections, technology team and legitimacy it needs to dominate the video-sharing business in much the same way that MySpace, the social-networking site, has blossomed into an Internet heavyweight since it joined News Corp. last year.

"There are a lot of media companies that kicked themselves for not seizing the opportunity to buy MySpace when it was available," said Lloyd Greif, president and chief executive of Greif & Co., a Los Angeles investment bank. "Nobody's going to make that mistake again."

Google shares gained $8.69, or 2 percent, to $420.50 after word of the talks began to leak out.

Josh Felser, president of Grouper Networks, an Internet video-sharing site that was acquired by Sony Pictures Entertainment in August for $65 million, said that it is widely known in Internet media circles that YouTube is for sale.

"Clearly, they have been put in play," Felser said. "They really have very little revenue. They've got high costs just in bandwidth costs. "

YouTube is experimenting with ways to make money, including charging advertisers to feature videos on the home page and to create branded channels for their content. Also, Warner Music Group Corp. agreed to license its entire catalog of music and videos to YouTube in exchange for a cut of any revenue from advertising or sponsorships sold around its music.