October 10, 2006 3:35 PM PDT

With YouTube, Google puts its competitors in a jam

With its planned $1.65 billion acquisition of the video sharing Web site YouTube, Google may well have its big Internet search competitors in a jam.

YouTube has a 45 percent share of the online video market, which is more than its top four competitors combined, according to market trackers at Hitwise. It has mainstream cachet, as page one stories about the impending Google deal in both The New York Times and The Wall Street Journal aptly demonstrated. And, not even two years old, it has a start-up momentum unheard of in any Internet company not named Google.

Responding to this combination is going to be tough for Google competitors like Microsoft and Yahoo. Should they build on the video services they already have? Should they make their own acquisitions? Either way, there's no easy answer.

"There doesn't seem to be an obvious property out there for Yahoo or Microsoft to go after for an acquisition," said Troy Mastin, an analyst at William Blair & Co. "I think an obvious response does not exist outside further investment in their internal properties."

"I'm scratching my head trying to figure out who they (Microsoft and Yahoo) would buy," added Danny Sullivan, editor of search industry blog site Search Engine Watch. "I think Microsoft will try to build up their existing video service and make it as strong as they can. I expect Yahoo will do the same thing."

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Google's billion-dollar video play
Read continuing coverage of Google's planned $1.65 billion purchase of YouTube.

That would mean a serious uphill climb. Social networking site MySpace, which is owned by News Corp. and has an advertising and search deal with Google, is ranked second for online video search, with more than 20 percent market share. That's followed by Google Video (which will continue to exist after the YouTube deal is completed) with about 10 percent share, Yahoo Video with 6 percent and MSN Video with nearly 6 percent share, according to Hitwise.

Yahoo declined to comment on its plans in light of the Google-YouTube merger, while a Microsoft spokeswoman said the company would focus on its in-house efforts with its Soapbox on MSN video sharing site, which it launched in beta form last month.

"Microsoft evaluated acquiring this type of technology several months ago, and decided to build our own offering, focused on driving better customer and advertiser experiences through integration with Microsoft assets and services that reach an estimated global audience of 465 million consumers," said spokeswoman Whitney Burk in a statement. "We are excited about the potential we are seeing in the beta of Soapbox on MSN and believe building our own solution is a more cost-effective way to compete in this new space."

Microsoft is getting some outside help, though. On Monday, video search provider Blinkx said it signed a deal with Microsoft to power video search on parts of MSN Internet sites and Live.com.

Still, Karl Heberger, advertising director for eBaumsWorld, a video site that offers homemade movies as well as games and other content, predicted a gloomy end for anyone trying to compete directly against YouTube.

"Competitors who rely on the same setup as YouTube," said Heberger, "where it's all user-generated content, they might be in trouble facing a Google-YouTube team."

Of course, baked into all these predictions is the assumption that online video really is the next big thing in Internet content and that its popularity can translate into advertising sales. Certainly, Google's executives think that's the case and were willing to spend big on YouTube, despite having their own video service and a reputation for steering clear of major acquisitions.

"Microsoft already signed a deal with Blinkx, and (Yahoo Chief Executive Terry) Semel is a movie guy," said Stephen Arnold, author of "The Google Legacy." "Google was the odd guy out (in content). Now it's not."

Google has the data centers that can help cut YouTube's prodigious bandwidth costs and is likely better equipped to solve technological hurdles related to filtering out copyright and pornography.

"Google has the infrastructure and bandwidth to drive down those costs, and Google has a way to monetize it," said Arnold. "It produces an upside in revenue with no significant cost impact."

Small YouTube competitors--either because they think they're now great acquisition targets or just because they love being underdogs--profess being excited about the Google acquisition.

"These are exciting times," said Steven Starr, CEO of Revver.com.

Entertainment conglomerates have already shown a willingness to shell out big bucks for some of YouTube's competitors. In August, Sony paid $65 million for Grouper, a company with no profits and less than one percent of market share.

That acquisition led many to speculate that YouTube would easily fetch $1 billion. Turns out, that was a lowball estimate. Now the value for every other video-sharing company is rising with the purchase of YouTube, said analysts.

"I would think now companies like Guba and Revver may get purchased in a reactionary move," said Josh Martin, an analyst with the Yankee Group.

"Other media companies aren't just going to cede (the market) to Google because it bought YouTube," said Greg Kostello, CEO of video-sharing site vMix. "I think they are going to be willing to pay a premium for companies with either traffic or the tools to compete with Google."

"This is the first time in history where people can shoot, edit and distribute video," Kostello added. "Video is the most powerful mass media there is. (Google's CEO Eric) Schmidt said that Google will continue to make acquisitions in video, so Google isn't finished here. I think this is very, very early (in) Internet video."

See more CNET content tagged:
YouTube, video search, online video, video service, Yahoo! Inc.


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Ok, but do the economics justify the deal?
Its interesting that none of these tech analysts is commenting about how this acquisition creates concrete value for GOOG shareholders. Just look at this expression: "Now the value for every other video-sharing company is rising with the purchase of YouTube, said analysts." Its not VALUE that's rising - only PRICE is rising! Such comments show that these deals are being driven by speculation - not by economic fundamentals.
Posted by ancre007 (25 comments )
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According to Marketwatch
YouTube was #3 in most watched videos and unique visitors and Google was #10. With My Space and Yahoo fighting for first place...why would Yahoo need to acquire anything?
Posted by vhannon (5 comments )
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Microsoft is masterful
Oh my and no one yet recognizes how masterfully Google has been played...

I just about do not know where to begin, but here goes...

Google is about bringing people to other peoples' content - not owning content and certainly not about managing it.

YouTube has not yet turned a profit and on its own, likely never would. Google has a lot of strengths, but management isn't one of them - neither are controls. They are faced with a real challenge and must continue to add to the value of their stock and reward shareholders, of face their own internal dot.com bubble.

Inevitable copyright challenges aside, Google faces the single greatest threat to any social engineering enterprise - the people. YouTube tapped into a well known behavioral thread - people seeking to be unique, and expressive by being just like everyone else. It's a weird group, but one that is so very predictable - make anything mainstream and it loses its edge. Make it common and it loses its appeal.

YouTube became the ultimate aggregation of material, subject to contraints, that is already found on dozens of other sites - etensity, illwillpress, Linkswarm, and College Humor all come to mind. Yes, it added the ability for anyone to have a voice and a face, but that is a process that is already "no longer new" and subject as all things are, to competitive parity.

Microsoft's soapbox, yahoo's video offer the same, and many others coming online that offer specialization - twit TV, dl.tv, etc... each far better sites that Goog-Tube.

Google didn't need YouTube, but Microsoft sure needed Google to go after YouTube, and as many other distractions as possible - hence why soapbox was launched early in BETA to bait Google into the buy.

All the while, all those legitimate partnerships, amazing VC-1 HD tools and SoC technologies Microsoft and her partners have engineered are all coming together... all while Google musses about with YouTube and before one can say, "You What?" Microsoft will have put it all together within a vast ecosystem of superior and better fielded technologies.

With that said, I have to re-think what Bill Gates is retiring - I used to think it was to fulfill a promise he made to himself, but know I think he was simply bored with his competitors' idiocy - he grew weary of watching them fall into one trap after another - so easily.

You watch - give it ten years, Microsoft will emerge as a media house so large, it will make Sony look puny. In that age of Web 4.0, we'll all be asking, "hey, remember Google?" - "yeah, weren't they one of those search companies that tanked in the second dot.com bust?"
Posted by lketchum12 (10 comments )
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Refreshing Opinion
I'm glad to hear such refreshing contrarian comments about this deal.

The fact that Google bought Youtube when they themselves already has a similar service (Google Video) makes me wonder: was that a desperate move?
Posted by dysonl (151 comments )
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You give MS far too much credit
They have nothing to compete over.

MS is a slow, calculating behemoth. There is no agility or innovation there whatsoever.

YouTube has mindshare. Similar to iTunes, but not in scope. MS will have to make a product so superior to iTunes to even make a tiny mark, something they have not done.

Anything MS produces to compete with YouTube will be be described as "like YouTube but ...".

As MS has proved time and again, quality does not float to the top. All that is required is massive marketing hype. YouTube has this, doubly so with Google taking over. Rightly or wrongly Google is still considered as an outsider by many. The corporatizing of YouTube by Google will have little to no effect.

If MS bought YouTube it would be its deathknell.

Google rarely reacts to what others might or might not do. This deal is just Google doing what it wants. The MS business model is all about reacting and following.

ANd no I am not a Google fan(nor a MS fan). I think Google is arrogant in its data collecting practices and there is a major potential danger in Google becoming more destructive to the industry the MS is.
Posted by qwerty75 (1164 comments )
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was yahoo's lack in discipline: Google's advantage
Yahoos lack of initiative and management principle has definitely created another prominent gap behind Google in a constantly evolving internet advertising market. Yahoos most recent setback as in the recent YouTube scenario illustrates its instability in grasping an opportunity and closing a deal efficiently. Read my article at your own interest to see how:
<a class="jive-link-external" href="http://www.askdrweb.com/2006/11/12/yahoo%e2%80%99s-lack-in-initiative-and-management-discipline-google%e2%80%99s-advantage/" target="_newWindow">http://www.askdrweb.com/2006/11/12/yahoo%e2%80%99s-lack-in-initiative-and-management-discipline-google%e2%80%99s-advantage/</a>
Posted by webwhiz (4 comments )
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