Digital Media

Google has entered into an agreement to acquire online ad-optimization firm Teracent, the search giant announced in a blog post on Monday. The transaction is subject to several closing conditions, but is expected to close by the end of the quarter.

Google said it has been "busy releasing new features and products to help improve display advertising on the Web," according to the blog post. After examining Teracent's technology, the company felt that it fit "neatly" into its display-advertising goals, the blog said.

Teracent certainly brings something new to Google's advertising efforts. The company's technology tweaks images, products, messages, or colors to optimize ad units based on the viewer's location, what language they speak, the kind of content they're viewing, the local time, and how well particular units have performed in the past. It does all that work in real time as the algorithm examines the ad's environment.

"This technology can help advertisers get better results from their display ad campaigns," Google wrote in a blog post. "In turn, this enables publishers to make more money from their ad space and delivers Web users better ads and more ad-funded web content."

Teracent should be integrated into Google's advertising efforts by the end of the quarter. Neither company divulged how much Teracent was acquired for.

Networking giant Cisco Systems announced another acquisition this week. This time the company said it will buy the set-top division of a Chinese digital cable technology company.

Late Monday, Cisco said it would pay a total of about $44.5 million for the set-top unit of DVN. It will pay $17.5 million upfront, and the remaining $27 million will be paid over four years, based on the unit achieving sales milestones.

The deal is expected to close in the first half of next year, and it is subject to the approval of regulators and DVN shareholders.

Cisco is also partnering with the rest of DVN to provide joint customers with expanded services.

The DVN unit being acquired makes products that connect digital signals to televisions. Cisco already makes and sells set-top boxes for customers around the world through its Scientific Atlanta division.

Cisco sees a big opportunity in the Chinese cable market, which it says is the largest in the world with 160 million subscribers and with an additional 200 million subscribers expected to become customers in the next few years.

China is in the process of moving its cable subscribers to digital. The government has mandated that all cable be digital by 2015, Cisco said. Today only about a third of Chinese cable customers are using digital cable.

This is the fourth acquisition that Cisco has announced since the beginning of October. The company has spent about $6.2 billion in total during this shopping spree.

Amazon's acquisition of shoes-and-more retailer Zappos is complete, the e-commerce giant said in a release Monday. The company in July had announced its intent to make the purchase, for about $850 million in cash and stock.

Zappos, which made a name for itself based on outside-the-box customer service principles, will stay independent from the Amazon.com brand and will continue to operate out of its Las Vegas headquarters.

Numbers released by J.P. Morgan Research in conjunction with the acquisition announcement predict that Zappos will post moderate, single-digit growth for the 2009 fiscal year after raking in $635 million in revenues last year.

Since 2006, many observers have scratched their head over what prompted Google to pay $1.65 billion for the video site YouTube. We're now a little closer to the answer.

Google CEO Eric Schmidt said in May, "I believe YouTube was worth somewhere around $600 million to $700 million."

(Credit: Elinor Mills/CNET)

The blockbuster acquisition for the 18-month-old start-up played a large role in sending valuations in the tech sector skyrocketing. Although YouTube made little revenue, the all-stock transaction gave Google control of a company many believed would change the face of mass entertainment. It also led to criticism from skeptics who thought that Google would never get its money back.

Google has revealed little about how it decided to pay $1.65 billion but CEO Eric Schmidt said under oath last spring that he was willing to pay a premium--a big one--for YouTube. Leading up to the acquisition, Schmidt told Google's board of directors that his estimate of YouTube's worth was somewhere between $600 million and $700 million, according to court records reviewed by CNET.

A Google representative declined to comment about Schmidt's valuation.

Schmidt had his reasons for asking his board to OK an offer of $1 billion more than what he thought the site was worth. The CEO made the comments during a deposition he gave in May as part of the copyright lawsuit Viacom filed against Google and YouTube in 2007. In short, he believed that Google had to offer that much, or competitors, presumably Microsoft or Yahoo, would walk away with the increasingly popular video site.

"This is a company with very little revenue," Schmidt said while being questioned by Stuart Jay Baskin, a Viacom attorney. "(YouTube was) growing quickly with user adoption, growing much faster than Google Video, which was the product that Google had. And they had indicated to us that they would be sold, and we believed that there would be a competing offer--because of who Google was--paying much more than they were worth...We ultimately concluded that $1.65 billion included a premium for moving quickly and making sure that we could participate in the user success in YouTube."

Three years later, that user success continues: YouTube has grown from 12 million unique users (in May 2006) to more than 100 million users just in the United States. Every minute, more than 10 hours of video is uploaded to the site. But Google is also fighting a $1 billion copyright lawsuit with entertainment giant Viacom, which claims that YouTube encouraged users to violate its copyright. On top of that, the company is still trying to figure out how to turn its prize acquisition into a profitable business.

YouTube managers have toiled to find the right way to generate revenue, experimenting with a wide range of advertising methods and models--everything from prerolls to overlays. Perhaps most importantly, managers changed their approach to copyright owners.

Whereas Hollywood executives once called YouTube a "rogue company," the video site can now boast numerous partnerships with top entertainment companies, including as Walt Disney, CBS (publisher of CNET News), Sony Pictures, and Metro Goldwyn-Mayer. YouTube also has deals with all four major music labels. And YouTube's finances may finally be turning the corner: company representatives have hinted in the past several months that it's on the road to becoming the kind of revenue generator that Google always envisioned.

Whether Google paid too much for YouTube then is a sort of barroom debate among media analysts, not unlike arguing whether the New York Yankees overpaid on free-agent ballplayers in the off-season. James McQuivey, a digital-media analyst at Forrester Research, said that if he were in Schmidt's shoes, he would have made the same deal.

"It actually becomes worth the additional value because Google can tie all of its advertising expertise and search traffic into YouTube," McQuivey said. "It's not like it's going to pay back that $1.6 billion any time soon, but what it does is, it ensures that these millions and millions of viewers are coming to a Google-owned site rather than someone's else's site...As a loss leader goes, if it never makes its money back, its still going to be worth it."

McQuivey acknowledged that those focusing only on hard business numbers are probably not going to agree with him. Count Josh Martin among them. Martin, a research analyst, was an early skeptic of YouTube's profit potential, arguing on behalf of Yankee Group Research that Google overpaid.

"I don't think Schmidt is wrong in assuming that someone would have overpaid for YouTube," Martin said. "If Google was willing to overpay for it, then someone else would have too. But it was a bad business decision for Google. We said it at the time, and three years later, we have been proven right."

Martin said that when Google priced YouTube, it should have deducted heavily for the legal liabilities, as well as for the company's ability to draw an audience, if it couldn't offer pirated content.

"You go back to the reason why YouTube was popular, and it was because of (the 'Saturday Night Live' skit) Lazy Sunday," Martin said. "That is what put YouTube on the map. So it was popular because it had access to content that it shouldn't have had and that you couldn't get elsewhere because no one else was willing to put it up illegally...Clearly, (Google's leaders) needed to understand what was driving momentum behind YouTube."

The following is an edited excerpt of Schmidt's deposition:

Stuart Jay Baskin, a Viacom attorney: And what was management's valuation?

Schmidt: Much lower than we paid for it.

Baskin: And how was that communicated to the board?

Schmidt: I told them.

Baskin: So why don't you tell us what you remember telling the board in connection with the valuation?

Schmidt: I believe YouTube was worth somewhere around $600 million to $700 million.

Baskin: And you communicated that to the board?

Schmidt: I did.

Baskin: Of Google?

Schmidt: I did.

Baskin: What methodology did you use to come up with that number?

John P. Mancini, an attorney working for Google, objects.

Schmidt: My judgment.

Baskin: Was it based on cash flow analysis? Comparable companies? What were you using as the basis for your judgment?

Mancini objects.

Schmidt: It's just my judgment. I've been doing this a long time.

Baskin: So you orally communicated to your board during the course of the board meeting that you thought a more correct valuation for YouTube was $600 million to $700 million; is that what you said, sir?

Mancini objects to characterization of the testimony.

Schmidt: Again, to help you along, I believe that they were worth $600 million to $700 million.

Baskin: And am I correct that you were asking your board to approve an acquisition price of $1.65 billion; correct?

Schmidt: I did.

Mancini objects.

Baskin: I'm not very good at math, but I think that would be $1 billion or so more than you thought the company was, in fact, worth.

Mancini objects.

Schmidt: That is correct.

Later...

Baskin: Can you tell us what reasoning you explained?

Schmidt: Sure, this is a company with very little revenue, growing quickly with user adoption, growing much faster than Google Video, which was the product that Google had. And they had indicated to us that they would be sold, and we believed that there would be a competing offer--because of who Google was--paying much more than they were worth. In the deal dynamics, the price, remember, is not set by my judgment or by financial model or discounted cash flow. It's set by what people are willing to pay. And we ultimately concluded that $1.65 billion included a premium for moving quickly and making sure that we could participate in the user success in YouTube.

Time Warner is not interested in a bidding war for NBC Universal, according to Jeff Bewkes, CEO of the media conglomerate.

Bewkes, who was being interviewed Friday for The Atlantic's First Draft of History conference at the Newseum in Washington, D.C., said big media mergers hardly ever work.

Jeff Bewkes, Time Warner chairman and CEO

(Credit: Time Warner)

"Some deals work in media, but most have not," he added. "Over the past 10 to 15 years, there is a very low percentage of deals that have delivered what they would deliver, in terms of return on investment."

After the interview, which was streamed live online, Bewkes told a Reuters News service reporter why his company isn't interested in bidding for NBC Universal. Earlier this week, reports surfaced that Comcast, the largest cable operator in the United States, is in talks to buy a controlling stake in the media company, owned by General Electric and Vivendi.

"There's no real need or benefit for us to take on the various aspects of NBC," Bewkes told Reuters in an interview at the conference. "We have a lot of good things, and so we don't see that as particularly attractive."

Time Warner knows a thing or two about failed mergers. In 2000, it acquired AOL in a stock deal that was valued at the time at about $160 billion. When the merger was first announced, it was hailed as a major milestone, a historic marriage of online media and print and broadcast media. But only a few years into the merger, it became apparent that the deal was doomed. By 2008, Time Warner had confirmed that it was dumping AOL altogether.

Since taking the helm as CEO of Time Warner in 2008, Bewkes has tried to keep Time Warner focused on its core business of creating content. Instead of acquiring new properties and diversifying the business, Bewkes has made cuts. Besides spinning off AOL, he also shed the company of its cable division.

While Bewkes may not see a need to merge with another big media company, he does see the importance of partnering with other players, such as Comcast. Earlier this year, the companies announced that they were testing service that allows Comcast cable subscribers to view online TV shows and movies from several Time Warner cable channels, such as TNT and TBS.

Bewkes said expanding access to TV shows and movies online will actually grow the audience for its content.

"With HBO, we learned that putting shows on demand increased viewership," he said. "So viewership goes up, and viewers get to watch (what) they want, when they want. And they get to select their favorite shows from their favorite channels."

Other changes in the media business that Bewkes predicts includes the end of print magazines and newspapers. Instead, he envisions people using e-readers such as the Amazon.com Kindle to get access to periodicals. He said that soon, many manufacturers will have e-readers on the market and that these devices will be much more affordable for average consumers.

Separately, Bewkes told Bloomberg that the company was not interested in selling its Time Inc. magazine unit.

Cable giant Comcast is reportedly in talks to gain a controlling stake in General Electric's NBC Universal, in a deal that would help shape Comcast's online-content strategy and help NBC Universal keep pace amid the shifting market.

According to a Wall Street Journal report, Comcast is hoping to form a privately held joint venture that would include NBC's media content. Comcast would control the venture with a 51 percent stake, and GE would own 49 percent of the new company.

Combined, the new jointly owned media company would own more than two dozen TV networks, including NBC, along with several cable stations, such as USA Network. Comcast already operates some of its own cable networks, such as E!, the Style Network, and G4. The new joint venture would also own NBC Universal studios, plus 10 local NBC TV affiliates in cities such as New York and San Diego.

This isn't the first time Comcast has gone looking for a big media company. Five years ago, the company tried to acquire Walt Disney for about $66 billion. In the years since that failed attempt, the media and video distribution landscape has changed dramatically.

Television networks are struggling to keep advertising revenues up, and movie studios are under pressure to prevent digital piracy from eating into their profits. Meanwhile, Comcast, which is facing more competition from phone companies and satellite providers in its TV business, is also trying to figure out how best to use the Internet to deliver video content.

Individual TV channels have been putting their own TV content online for consumers to access for some time. This initially troubled cable operators such as Comcast; they saw the free delivery of video content for which they pay a hefty price as a threat to their business.

NBC and News Corp., the owner of Fox, have made a splash with online service Hulu, which offers TV shows and some movies on demand. Other media conglomerates, including CNET News publisher CBS, have made similar moves.

Comcast, too, is starting to embrace online video, teaming up with media conglomerate Time Warner earlier this year to test a new service offered by Comcast called On Demand Online. The service allows Comcast cable customers to access some of Time Warner's most popular TV shows from its TNT and TBS networks at no additional charge. Its plan is to provide TV networks and movie studios a secure way to distribute their movies and TV shows to a wider audience via the Internet.

The Wall Street Journal said that talks between Comcast and GE could still fall apart. Comcast is looking to pay as little as it can up-front. And there is an issue about what to do with Vivendi, which has a 20 percent stake in NBC Universal.

commentary Global Gaming Factory X, the little Swedish software company dogged by controversy, is facing another deadline to complete its acquisition of The Pirate Bay.

Hans Pandeya, Global Gaming's much maligned CEO, has said the deal would be completed by Wednesday.

Typically, in anticipation of a big acquisition story, I'll collect background on the companies the night before so I can have a few graphs ready when the deal is announced. The only things I'll collect Tuesday evening is a nice piece of salmon and bottle of white wine.

That is because there's a better chance that the salmon will leap from my plate and produce a signed contract with The Pirate Bay guys than there is that Global Gaming will complete the transaction. Anybody who has followed Global Gaming's story knows how truth-challenged the company has been.

Here's my prediction for tomorrow's events: Pandeya will issue yet another press release claiming his company's acquisition of The Pirate Bay has been held up yet again. Expect him to blame the latest delay on the persecution he and his company have suffered at the hands of the media, former business partners, the stock exchange it was formerly listed on, etc.

He may set another deadline.

If he does, it will be at least his third. When Global Gaming, a Swedish software maker and Internet cafe operator, announced in June that it would acquire The Pirate Bay--one of the world's most popular and controversial BitTorrent search engines--Pandeya said the deal would be completed in August. But August came and went without producing a deal.

The Swedish stock market where Global Gaming's shares once traded booted the company off for providing false information. According to the stock exchange, Global Gaming said it had the money in place to complete the acquisition (false), licensing deals with entertainment companies (false), and it had investors (if they existed they never appeared).

Here's an example of how Pandeya's view of the facts can be fluid. Over the weekend, I learned that a Swedish court had taken control of his personal assets after a former business partner claimed Pandeya owed him money.

I e-mailed Pandeya to tell him I was writing about the court's decision and asked him if he wished to comment.

"I can assure you that I will take legal action against CNET if you spread these lies," the CEO wrote.

Lies?

I e-mailed to him a copy of the court order. From Pandeya came only silence for a while and then a statement slamming his former business partner and the claim that the acquisition will be completed on Wednesday.

To tell the truth, from a strictly storytelling standpoint, I've found the Global Gaming fiasco amusing.

It can't be funny, however, to investors in Global Gaming who lost money.

The caption running over a photo of Global Gaming CEO Hans Pandeya reads: "Pirate Bay Sold"

(Credit: Di.se)

Update: 8:22 a.m.PT To include news of board vote and reports that Global Gaming's stock may not resume trading for weeks.

As expected, Hans Pandeya, CEO of Global Gaming Factory X, told reporters in Sweden on Thursday that his company's acquisition of The Pirate Bay will go through.

Everyone reading that statement should take it with a grain of salt, or maybe a whole shaker full.

Global Gaming, a Stockholm-based software maker and operator of Internet cafes, stirred up a media storm in June by announcing that the company, which only generated about $800,000 in revenue in 2008, planned to to buy The Pirate Bay for about $8 million. The company's board voted to go ahead with the plan.

Click the image to see a roundup of recent Pirate Bay stories.

Of the many challenges that threaten the deal, Pandeya has still not produced the money to pay for the site. While the company voted to go ahead--Pandeya controls 60 percent of the stock--a final acquisition still appears unlikely.

The Pirate Bay is a BitTorrent search engine that helps users find .torrent files. These files are very often pirated films and music. The site has attracted a massive global following, but a long campaign by the music and film industries has led to a jail sentence and nearly $4 million judgment against the site's founders. In the wake of last April's verdict against the men, The Pirate Bay was put up for sale. The founders say they have not owned the site since 2006.

In June, Pandeya provided few details about how he was going to come up with the funding needed to complete an acquisition, as well as the other $14 million to buy peer-to-peer technology company, Peerialism. Using Peerialism's technology, Pandeya said he would build a new P2P platform for a revamped Pirate Bay site.

Prior to Thursday's meeting of Global Gaming's shareholders, of which only two showed up, the company issued a press release saying that all the funding for the acquisition was in place and that software maker was close to striking a licensing deal with one of the four major recording companies.

But as he headed into the meeting, Pandeya told reporters that his original investors, the ones he refused to identify to Swedish exchange authorities, had backed out because of all the recent scrutiny of his company. He said he has new investors, and guess what? He's not naming them either.

Nor has he named which one of the four major labels he's allegedly close to cutting a deal with. He hasn't named a Russian investor that allegedly bid to buy The Pirate Bay from him once he acquired it. The only person associated with the deal Pandeya has named is John Fanning, who co-founded Napster with nephew Shawn. Pandeya said in a press that Fanning offered $10 million to buy The Pirate Bay from him, just as the mysterious Russians had, once he obtained the company.

Fanning denied it.

Everything is fine, Pandeya told reporters.

Pandeya will guarantee the investors' money with his own cash. But Pandeya owes the Swedish government back taxes. In addition, Global Gaming's former CTO has also filed claims with the government alleging the company and Pandeya personally, owe him over $800,000.

Perhaps Pandeya can sell some of his Global Gaming shares to pay his debts?

That won't work either. Because of suspicious trading associated with the company's stock--it spiked right around the time the company announced it would acquire The Pirate Bay--Swedish exchange officials have halted trading. A criminal investigation has been launched.

Swedish Web news site E24.se reported that Pandeya demanded that AktieTorget, the Swedish exchange where Global Gaming's stock is offered resume trading.

An official for the exchange said that won't happen until he is convinced that the company possessed the money when it said it did and also must check out whether the bids from Fanning and the Russians were legitimate. The official said it could take several weeks.

MySpace CEO Owen Van Natta has confirmed in a Wednesday conference call that the News Corp.-owned social network has "entered into an agreement to acquire iLike," following rumors earlier in the week.

iLike's co-founders will remain at the company and stay headquartered in Seattle; the service will be "unaffected by the acquisition" in the short term.

Van Natta explained in the conference call that the acquisition is on behalf of MySpace Inc. rather than its MySpace Music division, a joint venture with the major record labels, because the company plans to extend its technology to other areas of entertainment such as gaming and possibly film. He highlighted the "discovery" technology that iLike has built and suggested that MySpace planned to integrate it into some of its other properties.

No terms of the deal were disclosed, but reports have indicated that iLike was sold at quite a bargain--something in the neighborhood of $20 million total--because its ad-supported, streaming music model failed to rake in the profits that investors hoped it would.

Van Natta denied that the deal had been delayed due to iLike board disputes or tax issues, as some reports had suggested.

But it's unclear as to how the deal will affect iLike's relationship with Facebook. The social network's developer platform has been home to much of iLike's activity, and now that it will be owned by Facebook's closest rival, there's a chance that Facebook could restrict or block the app. Van Natta, Facebook's former chief operating officer, said that iLike's apps are part of "a lot of different social networks' experience. We're excited about just continuing to expand that experience to other areas of entertainment that MySpace has assets in."

Meanwhile, Van Natta claimed that MySpace Music is "doing extremely well" and that "we absolutely expect MySpace Music to be an important part of MySpace...for years to come." Several months ago, rumors were swirling around the music industry that its performance hadn't been up to expectations.

This post was last updated at 12:13 p.m. PT.