Google acquires YouTube (online video sharing)
Companies in Relationship
Initial Announcement Date:
Consideration: $1.65B stock-for stock transaction that included $21 million in cash payments (Source: Google 10-K)
Google announced that it has agreed to acquire YouTube, the consumer media company, which displays a wide variety of video content as well as amateur content, for $1.65 billion in a stock-for-stock transaction. Following the acquisition, YouTube will operate independently, retaining its brand and all their employees, including co-founders Chad Hurley and Steve Chen.
Google's slow traction with its own video site has been a major factor fuelling its interest in the acquisition of YouTube. Google Video was building its business by working cooperatively with major content producers to protect their intellectual property and avoid any piracy of their work: movies, television shows, music videos, etc. Therefore, the content on Google Video largely consisted of home videos. YouTube, meanwhile, took a much more aggressive approach. They did not censor user-generated content to control for concerns over piracy.
The transaction makes sense in terms of the combined audience, which is largely unduplicated according to comScore data. Google's ability to monetize video streams through sponsorships from its large advertiser base combined with the high magnitude of streams on YouTube could potentially create a significant revenue opportunity in branded advertising, an area where Google has historically trailed. Google's relationship with content owners could provide YouTube access to premium video content, thereby assuaging some of the problems related to copyright on the site.
The deal closed on November 13, 2006.
Unlike other Google targets of the time, such as FeedBurner, YouTube was allowed to run completely autonomously. Eric Schmidt was personally proactive in defending this autonomy. Google had witnessed other companies absorb smaller companies and completely ruin their product innovation and agile culture. A former Google Group Product Manager intimately knowledgeable with the transition, “YouTube was growing so well that they were afraid to mess it up like big companies sometimes do when they acquire smaller ones.” To that end, YouTube maintained its San Bruno office location rather than moving to the Google company headquarters. As late as 2014, there was no Google branding visible at YouTube’s offices.
An example of the benefit of YouTube’s autonomy was that during the time YouTube was acquired, every major carrier wanted to create a YouTube smartphone app. Had Google’s business development team interfered, they would have tried to bundle YouTube into a larger deal as leverage for each smartphone operating system to carry other less successful Google apps. By giving YouTube the right to act on behalf of its own interests, Google allowed the company to thrive under its own.
YouTube’s acquisition made the Google Video team’s work obsolete in many ways. The Google Video team transitioned its focus to video search as part of the google.com experience, as opposed to creating a video social network as it had intended to do in the past. The relationship between the YouTube and Google Video teams was fragile, as the acquisition was an admission that Google’s internal stakeholders had lost the internet video race.
It's noteworthy that the YouTube acquistiion was able to succeed despite the precarious environment surrounding the deal back in 2007. During that time, YouTube was operating at a significant loss. Viacom was also suing the company for copyright infringement in the amount of $1 billion. Had YouTube lost the suit, not only would Google have been on the hook for the $1 billion liability, but there would be a possible injunction that would prevent YouTube from operating.
January 2014 -- YouTube business has made considerable progress as an advertising platform. Investment bank UBS estimates that in 2013 YouTube generated some $4.7 billion in revenue in 2013. This number is still less than 10% of Google's advertising revenue. It appears there is considerable room for more growth.
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