By Jon Fortt
October 9, 2006

Now that we know Google is buying YouTube for $1.65 billion, it makes sense to stop for a moment and consider what this means. Google, which already has its own ho-hum Google Video service, has decided to buy what it failed to adequately build.

And it’s using a little more than 1 percent of its $130 billion-plus market cap in the process.

Investors can lay aside for the moment the question of whether YouTube, the never-profitable video site with a worldwide audience of 72.1 million according to comscore Media Metrix, is actually worth $1.65 billion. (There’s nothing better Google could think to do with one and a half billion dollars?) This purchase says an awful lot more about Google, and the search giant’s failure to be the fastest, smartest player in online video.

A powerful pair

First, a “to be fair” moment: This Google/YouTube deal might turn out to be brilliant in the long run.

YouTube has a dizzying volume of information about what works in online video, and that amazing resource will belong to Google. Also, as the leader in Internet search and advertising, Google is probably the company best equipped to figure out how to monetize millions of loyal video watchers. Text ads near YouTube video searches? YouTube video ads near Google text searches? Video ads everywhere? It’s all possible.

Last, and perhaps most important, Google will know even more about the world’s online media consumption habits. Google will certainly use that knowledge as it seeks to sell advertising on new platforms.

A lost opportunity

But this can’t be a happy day for Google Video engineers, who might have decided to work for mighty Google rather than take a chance on the 67-employee startup down the road. (I bet those YouTube employee stock options will translate into a nice-sized chunk of change.) It’s also got to be a wake-up call to some other smart Google employees, who just got the subtle message that they might just do better taking their ideas elsewhere.

Nor can it be a completely happy day for Google management, which could stand to get its act together (and acknowledged it last week). Wall Street has given Google a valuation that allows it to make all-stock transactions like this without a lot of pain. But investors should take note any time a company gives away that much equity. Especially when it’s not as if Google was late to the online video party. Google got to the party on time, and just failed to do much once it got there.

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