Google Reportedly in Talks to Buy YouTube for $1.6 Billion

Google is in discussions to acquire YouTube for about $1.6 billion, although the deal is far from done and the talks could collapse, The Wall Street Journal reported today, citing an unnamed source familiar with the matter.

Google's reported interest in YouTube would reflect a sense of urgency on the part of the search engine giant to improve its position in the red-hot online video market.

Google entered this market in early 2005, at about the same time YouTube was founded. But so far the success has gone to the scrappy startup, not Google.

YouTube Tops in Video Sites

In September, YouTube nabbed almost 46 percent of all U.S. visits to video Web sites, while the video section of News Corp.'s MySpace.com came in second with 21.2 percent, according to Hitwise. Google Video came in third with 11 percent, followed by Microsoft's MSN Video with 6.8 percent, and Yahoo's Yahoo Video with 5.6 percent.

YouTube, in typical startup fashion, approached the market aggressively, opening up its service to anyone wanting to upload their videos, and quickly became a phenomenon. It embraced tagging and sharing features, creating the most popular online video community.

Meanwhile, Google took a much more conservative approach, at first only featuring videos obtained through formal agreements with professional production houses. Consequently, users had to pay to view many of the videos in the catalogue. Months later, it added an upload feature for regular users, but closely policed submissions. It wasn't until recently that the company opened wide the service's door and added tagging and sharing capabilities.

Video Popularity

AOL, Microsoft, and Yahoo are also playing catch-up to YouTube, whose model these large Internet companies are adopting.

AOL, Google, Microsoft, and Yahoo need a strong position in this market, due to the increasing popularity of online video. Collectively, traffic to the top ten video Web sites increased 164 percent between February and May of this year, according to Hitwise. As traffic to online video sites increases, so does the interest of advertisers, who in turn generate most of the revenue for Google, Yahoo, Microsoft, and AOL.

For many years, online video remained an unfulfilled promise, hobbled by high broadband prices, inferior image quality, and the reluctance of TV networks and film companies to put their shows and movies on the Web. However, in the past 18 months, video on the Web has gained momentum, helped by a critical mass of users with broadband access, improved quality, and a willingness by production companies to distribute their films and programs online.

Merger Results?

The deal clearly would strengthen Google's position in online video, but it might also saddle Google with potential copyright liability issues, said analyst Greg Sterling of Sterling Market Intelligence, in an interview.

Critics have blasted YouTube for being lax about ridding its catalogue of copyrighted videos uploaded without permission. Some predict entertainment companies will sue YouTube out of business.

Thus, Google needs to walk a fine line between copyright protection and preserving the appeal of YouTube's rich catalogue, Sterling said

However, gaining YouTube's audience gives Google an enormous opportunity to boost its fledgling efforts in video advertising, of which it has done very little, Sterling said.

Most of Google's revenue comes from text ads that run along with Web search results. Google is trying to diversify its business with other types of ads, such as banners and video.

However, its video ad efforts have been hurt by Google Video's relatively weak position in the market, Sterling said.

For YouTube, getting bought by Google would mean salvation from death by copyright litigation, wrote Josh Bernoff, a Forrester Research analyst, on his blog.

Google has the technical resources YouTube lacks to implement a system to automatically detect and remove copyrighted material, Bernoff wrote.

If dealing with lawsuits, Google--unlike YouTube--can negotiate with plaintiffs and reach amicable resolutions to ligitation, according to Bernoff. "By itself, I still think YouTube is toast. But with Google--maybe not," Bernoff wrote.

Google and YouTube declined to comment.

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