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The Honolulu Advertiser
Posted on: Tuesday, October 10, 2006

YouTube becomes Google's gamble

By Michael Liedtke
Associated Press

YouTube will retain its brand, as well as its co-founders Chad Hurley, 29, left, and Steve Chen, 28 under the Google deal.

Associated Press

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THE GOOD, THE BAD IN THE $1.65B DEAL

THE DEAL: Internet search leader Google Inc. said yesterday it will acquire online video leader YouTube Inc. for $1.65 billion in stock the biggest deal in Google's history.

THE UPSIDE: Google, which has struggled to become a major player in online video, will now own a site with a worldwide audience of more than 70 million.

THE DOWNSIDE: Some critics have questioned whether YouTube, a still-unprofitable startup, has staying power. Others say the company could face copyright lawsuits akin to those that killed the original Napster song-swapping service in 2001.

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SAN FRANCISCO Google's executives say they love YouTube because they see a lot of the Internet search leader's DNA in the online video phenom.

After committing yesterday to buy YouTube for $1.65 billion, Google must now hope that the 20-month-old startup doesn't morph into the next Napster a disruptive innovator buried in a legal avalanche triggered by rampant copyright infringement.

Although most analysts believe Google's ownership will lessen the chances that media companies will attack YouTube, the legal threats still could spoil the biggest acquisition in Google's eight-year history.

"There are still some huge risks that Google could be stuck with some very expensive lawsuits," Forrester Research analyst Josh Bernoff said.

But here's a more likely scenario envisioned by Bernoff and other analysts: Google's engineering prowess helps YouTube do a better job of flagging copyright violations before they appear on its Web site. At the same time, more media companies and advertisers are likely to want to work with YouTube now that it's aligned with the Internet's most profitable company.

"It's going to be like, 'You can either fight us or you can make money with us,' " predicted Charlene Li, another analyst for Forrester Research.

The all-stock deal announcement came just a few hours after YouTube unveiled three separate agreements with media companies to counter the threat of copyright-infringement lawsuits.

Although some cynics have questioned YouTube's staying power, Google is betting that the popular video-sharing site will provide it an increasingly lucrative marketing hub as more viewers and advertisers migrate from television to the Internet.

"This is the next step in the evolution of the Internet," Google Chief Executive Officer Eric Schmidt said during a conference call yesterday.

YouTube will continue to retain its brand, its new headquarters in San Bruno and all 67 employees, including co-founders Chad Hurley and Steve Chen the twentysomething buddies who decided to start the company because they couldn't find an easier way to share video taken at a dinner party.

While YouTube remains independent, Google will continue to run a less popular video service on its own site.

The deal is expected to close before the end of the year.

"We are excited to have the resources to move faster than ever before," Hurley, YouTube's 29-year-old CEO, said yesterday.

Schmidt thinks so highly of Hurley and Chen, 28, that he likens them to Google's now 33-year-old co-founders, Sergey Brin and Larry Page.

Brin sees the similarities, too. "It's hard to imagine a better fit with another company," Brin said. "This really reminds me of Google just a few short years ago."

The two companies even share a common financial bond: Sequoia Capital, an early Google investor that owns a roughly 30 percent stake in YouTube. Menlo Park-based Sequoia remains a major Google shareholder and retains a seat on the company's board factors that might have helped the deal come together after just a week of negotiation.

Several other suitors, including Microsoft Corp., Yahoo Inc. and News Corp., reportedly had mulled a possible YouTube purchase in recent weeks.

"This deal looks pretty compelling for Google," said Standard & Poor's analyst Scott Kessler. "Google has been doing a lot of things right, but they are not sitting on their laurels."

Google's YouTube coup may intensify the pressure on Yahoo to make its own splash by buying Facebook.com, the Internet's second most popular social-networking site. Yahoo has reportedly offered as much as $1 billion for Palo Alto-based Facebook during months of sporadic talks.

"Yahoo really needs to step up and do something," said Roger Aguinaldo, an investment banker who also publishes a dealmaking newsletter called the M&A Advisor. "They are becoming less relevant and looking less innovative with each passing day."

While Google has been hauling away huge profits from the booming search market, it hasn't been able to win a starring role in online video.