The Mega acquisition by Google
By far the most fashionable byword in this internet era is "Lets Google". Ever since its inception, the company's journey spearheaded by couple of young Stanford grads has been just fascinating. It has revoultionsied information availability and simplified life in ways beyond measure. I have been hooked by the company's products, its work culture and whatever it does. On the flip slide, because of Google I do not try to remember much facts or technical details knowing that I can always get help from the the search bar on my browser.
I have been completely oblivious of it. Yes, only when Google acquired it did I get to know of Youtube. Yet, again I had to say "Wow!". A technology by which I could record my life events on video and share it with people. Consider, Orkut - a networking website by which I can not only see my friends but their friend's and so on. What an idea ! A public forum where I can see what others are writing to my friends and vice-versa. Today am connected to long lost friends from school, high school and college through this medium. And, now through Youtube I can come alive on my friend's or family desktop. This virtual world has bridged distance between people. The mantra is "To connect". Am excited to live be in this dynamic environment and see technology shaping our lives. In the next few lines, shall be crtically reviewing the deal between Google and Youtube and see if the combined synergy can transform business.
Introduction:
Google, which started as an Internet search engine 8 years ago has fast become one of the top most internet company through an effective business model based on contextual advertising system integrated into its search results (Adword, Adsense). Google’s strength has been innovation, providing superior user experience and a highly popular brand name. However, as a multi-billion dollar company, it needs to grow fast and have a futuristic outlook so as to preempt competition. Hence, strategically Youtube with an innovative offering of video on the net provided Google another platform to generate revenues from video advertising. In this essay, we shall analyze the online advertising market, the risks, issues and value drivers behind the acquisition, and provide our opinion on the strategic fitness of the combined entity.
Online Advertising Market:
The online advertising market has been growing steadily and has increased by about 30% to an estimated $12.5 billion in 2005, according to the IAB/PricewaterhouseCoopers[1]. The forecast from Jupiter research estimated that online advertising will reach $18.9 billion by 2010 with search engine advertising growing at about 12%[2]. With increased broadband access at homes, streaming media advertisements is estimated to grow at 30% compound annual growth rate (to $943 million) by 20102. Hence, this represents a considerable opportunity for advertising at online video sites. The top 10 sites by market share is as given below[3].
Rank Name Domain Market Share Average Visit Length
1 YouTube www.youtube.com 42.94% 13:20
2 MySpace Videos vids.myspace.com 24.22% 4:41
3 Yahoo! Video video.yahoo.com 9.58% 15:02
4 MSN Video video.msn.com 9.21% 2:58
5 Google Video video.google.com 6.48% 7:44
6 AOL Video us.video.aol.com 4.28% 6:41
7 iFilm www.ifilm.com 2.28% 6:14
8 Grouper www.grouper.com 0.69% 5:02
9 Dailymotion.com www.dailymotion.com 0.22% 11:31
10 vSocial.com www.vsocial.com 0.09% 7:14
Source: hitwise.com/press-center/hitwiseHS2004/videosearch.php
As we may note from the above table, YouTube’s average session time was nearly three times greater than its nearest rival demonstrating a high level of engagement between YouTube’s content and its visitors. YouTube also saw the most traffic among video sites, accounting for 43 percent of category visits by market share. On the other hand, Google was at No 5 behind its closest rivals Yahoo and MSN with just 6.48% market share.
However, Google tops the share of search market with market share of 44.7 % ahead of its nearest rival yahoo which trails at 28.7%[4].Hence, for a growing steaming video market with promising search engine generated revenues, clearly Google’s portfolio was weak and incomplete.
Again, Youtube is one of the fastest-growing websites on the World Wide Web. It serves
· 100 million videos per day[5]
· Has 65,000 videos uploaded daily5
· Has nearly 20M unique users per month5.
· Named TIME magazine's "Invention of the Year" for 20065.
So, Youtube with an exponentially growing traffic and usage seemed the right fit for Google.
Issues in the acquisition:
· Lack of a business model – YouTube has not proven to be profitable and has huge bandwidth costs[6]. Presently bandwidth cost is around 1 M$ per month and there is possibility of this cost to increase in future.
· Copyright issues – There is huge copyrighted content on YouTube site with pundits predicting that Google will be hit by a string of legal battles as soon as the takeover is complete6
· Censorship –YouTube has been questioned regarding what it allows, and more importantly doesn't allow, on its site6. It has received accusations of double standards with regards to freedom of speech which may hurt Google’s reputation. Special consideration is required regarding video pornography to prevent minors from viewing them.
Risks to Google:
· While Google already has a video service, there is no real mechanism behind generating income. So, Google may require coming up with an appropriate business model to stop bleeding in the video service category after acquisition of YouTube.
· YouTube appears to be a phenomenon. Its critical success factor is based on ease of use and a good video trans-coding mechanism[7]. However, these competencies can be easily copied which would erode market share for YouTube. So, Google may just be buying page view inventory without offering any sustainable competitive advantage.
· With Google primarily reliant on advertising-reliant businesses and now adding huge inventory with potential sales calls may require big effort to fulfill7. It is a risk for Google to depend just on online advertisement for revenue purposes.
· Google, unlike any of its previous acquisitions is now buying a company riddled with liabilities and risks at a much higher price. It’s a free service that acts like a social entity for millions of users. Hence, there is risk of loss of goodwill in case Google decides to make people pay so as to increase revenue at the site7.
Addressing concerns of the acquired company:
1. Lack of Profitable Business Model - When Google introduced its search engine, it did not know how to make money. However, it’s known to innovate to create value for users and customers alike. It can generate revenue from YouTube in some of the following ways:
a). Introducing short video advertisements at the end of a YouTube video[8].
b). Sell premium video content using YouTube8.
c). License content on YouTube to other networks8.
Google, which started as an Internet search engine 8 years ago has fast become one of the top most internet company through an effective business model based on contextual advertising system integrated into its search results (Adword, Adsense). Google’s strength has been innovation, providing superior user experience and a highly popular brand name. However, as a multi-billion dollar company, it needs to grow fast and have a futuristic outlook so as to preempt competition. Hence, strategically Youtube with an innovative offering of video on the net provided Google another platform to generate revenues from video advertising. In this essay, we shall analyze the online advertising market, the risks, issues and value drivers behind the acquisition, and provide our opinion on the strategic fitness of the combined entity.
Online Advertising Market:
The online advertising market has been growing steadily and has increased by about 30% to an estimated $12.5 billion in 2005, according to the IAB/PricewaterhouseCoopers[1]. The forecast from Jupiter research estimated that online advertising will reach $18.9 billion by 2010 with search engine advertising growing at about 12%[2]. With increased broadband access at homes, streaming media advertisements is estimated to grow at 30% compound annual growth rate (to $943 million) by 20102. Hence, this represents a considerable opportunity for advertising at online video sites. The top 10 sites by market share is as given below[3].
Rank Name Domain Market Share Average Visit Length
1 YouTube www.youtube.com 42.94% 13:20
2 MySpace Videos vids.myspace.com 24.22% 4:41
3 Yahoo! Video video.yahoo.com 9.58% 15:02
4 MSN Video video.msn.com 9.21% 2:58
5 Google Video video.google.com 6.48% 7:44
6 AOL Video us.video.aol.com 4.28% 6:41
7 iFilm www.ifilm.com 2.28% 6:14
8 Grouper www.grouper.com 0.69% 5:02
9 Dailymotion.com www.dailymotion.com 0.22% 11:31
10 vSocial.com www.vsocial.com 0.09% 7:14
Source: hitwise.com/press-center/hitwiseHS2004/videosearch.php
As we may note from the above table, YouTube’s average session time was nearly three times greater than its nearest rival demonstrating a high level of engagement between YouTube’s content and its visitors. YouTube also saw the most traffic among video sites, accounting for 43 percent of category visits by market share. On the other hand, Google was at No 5 behind its closest rivals Yahoo and MSN with just 6.48% market share.
However, Google tops the share of search market with market share of 44.7 % ahead of its nearest rival yahoo which trails at 28.7%[4].Hence, for a growing steaming video market with promising search engine generated revenues, clearly Google’s portfolio was weak and incomplete.
Again, Youtube is one of the fastest-growing websites on the World Wide Web. It serves
· 100 million videos per day[5]
· Has 65,000 videos uploaded daily5
· Has nearly 20M unique users per month5.
· Named TIME magazine's "Invention of the Year" for 20065.
So, Youtube with an exponentially growing traffic and usage seemed the right fit for Google.
Issues in the acquisition:
· Lack of a business model – YouTube has not proven to be profitable and has huge bandwidth costs[6]. Presently bandwidth cost is around 1 M$ per month and there is possibility of this cost to increase in future.
· Copyright issues – There is huge copyrighted content on YouTube site with pundits predicting that Google will be hit by a string of legal battles as soon as the takeover is complete6
· Censorship –YouTube has been questioned regarding what it allows, and more importantly doesn't allow, on its site6. It has received accusations of double standards with regards to freedom of speech which may hurt Google’s reputation. Special consideration is required regarding video pornography to prevent minors from viewing them.
Risks to Google:
· While Google already has a video service, there is no real mechanism behind generating income. So, Google may require coming up with an appropriate business model to stop bleeding in the video service category after acquisition of YouTube.
· YouTube appears to be a phenomenon. Its critical success factor is based on ease of use and a good video trans-coding mechanism[7]. However, these competencies can be easily copied which would erode market share for YouTube. So, Google may just be buying page view inventory without offering any sustainable competitive advantage.
· With Google primarily reliant on advertising-reliant businesses and now adding huge inventory with potential sales calls may require big effort to fulfill7. It is a risk for Google to depend just on online advertisement for revenue purposes.
· Google, unlike any of its previous acquisitions is now buying a company riddled with liabilities and risks at a much higher price. It’s a free service that acts like a social entity for millions of users. Hence, there is risk of loss of goodwill in case Google decides to make people pay so as to increase revenue at the site7.
Addressing concerns of the acquired company:
1. Lack of Profitable Business Model - When Google introduced its search engine, it did not know how to make money. However, it’s known to innovate to create value for users and customers alike. It can generate revenue from YouTube in some of the following ways:
a). Introducing short video advertisements at the end of a YouTube video[8].
b). Sell premium video content using YouTube8.
c). License content on YouTube to other networks8.
2. Handling Copyright issues - YouTube has signed content deals with entertainment giants CBS, Universal Music Group, Sony BMG, NBC and Warner Music Group which will allow YouTube to distribute approved copyrighted material in exchange for a share of advertising revenue[9]. This might lessen the copyright issues. Google has also handled and won legal battles related to copyright issues of books and scholarly material. It can back up on its strong legal team.
3. Financial analysis - Using the Google’s revenue model to bring revenue using advertisements, YouTube can be hypothecated to generate huge revenue around 7.5 $M per month approximately.
4. Complementary Assets: Google’s expertise, technology leadership, and resources will provide YouTube with the flexibility to innovate and build the best, most entertaining service on the Internet. This way it can fend competition in an emerging market.
5. Financial Bond: Sequoia Capital, an early Google investor also owns about 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[10].
6. Organisational Culture: With just 67 employees and co-founders in their late twenties, YouTube appears to what Google was just a few years ago. YouTube will retain its brand, its headquarters and all employees. This will ensure continuity and success in the merged entity.
Value drivers behind the acquisition:
Google’s rationale was a strategic move to increase and maintain its revenue stream from Advertising through all streams of Internet Market. Presently Google gains its 99% of revenue from adverting in the search tool.
As part of this strategic move, Google aims to gain:
· Large Audience: Google can drive traffic, handle all bandwidth needs, monetize the site and aggregate a larger audience. Google’s near 2 billion dollar shell out to YouTube was for its audience.
· Enter Display and Video Ads: Google can use YouTube as the canvas on which it can finally compete with Yahoo! in display banners and video advertising, two areas that Google badly needs some exposure in, since video ads are set to grow faster than search, even though search will remain the main beneficiary of online advertising with 40% of the market.
· Gain Major Market Share in Online Video Sharing: Google approached this deal as part of its strategic acquisition to acquire bigger market share possibly in the 2/3 of the entire video market which is at its nascent stage of growth and having a huge future growth potential.
· Create larger entry barrier: Google launched video in January 2006, but it failed to make a dent in You Tube’s lead, which grew to 100 million video streams per day. And, what’s worse is that Rupert Mudoch’s MySpace launched its own video strategy and that immediately became larger than Google’s video offering.
Hence, from the above due diligence review we can say that Google-YouTube has the potential to become a huge success – providing value to users, customers and shareholder alike.
Further, through the acquisition, Google will be to amplify (and protect) it's key revenue stream - ppc. Video ppc is a higher value domain, and a hugely untapped one.
Google will also have assets at the edges of the value chain through which can exert market power against 1.0 publishers - just like it's doing in book search. The more of these assets it has across media markets, the greater economies of scope it can ultimately realize; the flipside of these scope economies is, of course, the more market power it can exert. In other words, Google can redesign a more efficient value chain.
There is however, threat of video search engines that index and search many video sharing sites at once. This will send people to all the different video sharing sites which in turn could eat into YouTube's market share. Hence, Google may need to act on this aspect as well.
Conclusion:
As we may conclude from the above analysis that this deal was primarily a big strategic move by Google and based on future projected cash flows. However, Google requires showing diligence in coming up with an innovative revenue generating mechanism and effectively handling copyright issues to make this deal a success. But, given the opportunities and synergies of the two companies, Google and YouTube can monopolize video sharing market in future. The combination of expertise from top Video and search engine players in market, Google can re-position itself to become a 'World Power' in Internet Media, by reshaping media itself.
[1] http://www.youtube.com/t/fact_sheet
[2] http://www.jupitermedia.com/corporate/releases/05.08.15-newjupresearch2.html
[3] http://www.hitwise.com/press-center/hitwiseHS2004/videosearch.php
[4] http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B5E5B2119-8B40-45C2-8C7D-40980EE5028A%7D
[5] http://www.youtube.com/t/fact_sheet
[6] http://www.pvrwire.com/2006/10/10/google-youtube/
[7] http://www.marketwatch.com/news/story/google-youtube-deal-has-lots/story.aspx?guid=%7B386C2165-CBB3-4095-AC9F-66766539CF63%7D
[8] http://www.pvrwire.com/2006/10/10/google-youtube/
[9] http://news.bbc.co.uk/2/low/uk_news/politics/6087976.stm
[10] http://biz.yahoo.com/ap/061009/google_youtube.html?.v=23
4. Complementary Assets: Google’s expertise, technology leadership, and resources will provide YouTube with the flexibility to innovate and build the best, most entertaining service on the Internet. This way it can fend competition in an emerging market.
5. Financial Bond: Sequoia Capital, an early Google investor also owns about 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[10].
6. Organisational Culture: With just 67 employees and co-founders in their late twenties, YouTube appears to what Google was just a few years ago. YouTube will retain its brand, its headquarters and all employees. This will ensure continuity and success in the merged entity.
Value drivers behind the acquisition:
Google’s rationale was a strategic move to increase and maintain its revenue stream from Advertising through all streams of Internet Market. Presently Google gains its 99% of revenue from adverting in the search tool.
As part of this strategic move, Google aims to gain:
· Large Audience: Google can drive traffic, handle all bandwidth needs, monetize the site and aggregate a larger audience. Google’s near 2 billion dollar shell out to YouTube was for its audience.
· Enter Display and Video Ads: Google can use YouTube as the canvas on which it can finally compete with Yahoo! in display banners and video advertising, two areas that Google badly needs some exposure in, since video ads are set to grow faster than search, even though search will remain the main beneficiary of online advertising with 40% of the market.
· Gain Major Market Share in Online Video Sharing: Google approached this deal as part of its strategic acquisition to acquire bigger market share possibly in the 2/3 of the entire video market which is at its nascent stage of growth and having a huge future growth potential.
· Create larger entry barrier: Google launched video in January 2006, but it failed to make a dent in You Tube’s lead, which grew to 100 million video streams per day. And, what’s worse is that Rupert Mudoch’s MySpace launched its own video strategy and that immediately became larger than Google’s video offering.
Hence, from the above due diligence review we can say that Google-YouTube has the potential to become a huge success – providing value to users, customers and shareholder alike.
Further, through the acquisition, Google will be to amplify (and protect) it's key revenue stream - ppc. Video ppc is a higher value domain, and a hugely untapped one.
Google will also have assets at the edges of the value chain through which can exert market power against 1.0 publishers - just like it's doing in book search. The more of these assets it has across media markets, the greater economies of scope it can ultimately realize; the flipside of these scope economies is, of course, the more market power it can exert. In other words, Google can redesign a more efficient value chain.
There is however, threat of video search engines that index and search many video sharing sites at once. This will send people to all the different video sharing sites which in turn could eat into YouTube's market share. Hence, Google may need to act on this aspect as well.
Conclusion:
As we may conclude from the above analysis that this deal was primarily a big strategic move by Google and based on future projected cash flows. However, Google requires showing diligence in coming up with an innovative revenue generating mechanism and effectively handling copyright issues to make this deal a success. But, given the opportunities and synergies of the two companies, Google and YouTube can monopolize video sharing market in future. The combination of expertise from top Video and search engine players in market, Google can re-position itself to become a 'World Power' in Internet Media, by reshaping media itself.
[1] http://www.youtube.com/t/fact_sheet
[2] http://www.jupitermedia.com/corporate/releases/05.08.15-newjupresearch2.html
[3] http://www.hitwise.com/press-center/hitwiseHS2004/videosearch.php
[4] http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B5E5B2119-8B40-45C2-8C7D-40980EE5028A%7D
[5] http://www.youtube.com/t/fact_sheet
[6] http://www.pvrwire.com/2006/10/10/google-youtube/
[7] http://www.marketwatch.com/news/story/google-youtube-deal-has-lots/story.aspx?guid=%7B386C2165-CBB3-4095-AC9F-66766539CF63%7D
[8] http://www.pvrwire.com/2006/10/10/google-youtube/
[9] http://news.bbc.co.uk/2/low/uk_news/politics/6087976.stm
[10] http://biz.yahoo.com/ap/061009/google_youtube.html?.v=23
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