Google Interest In YouTube Is Latest Talk Exciting Prospects Of Social Net Riches

Google, having fumbled in the hot field of social networking, might be ready to spend big to become the Web’s new video star. The Web search leader is in talks to pay $1.6 billion to buy YouTube, the top site for watching videos online, the Wall Street Journal reported on Friday. This comes two weeks after Yahoo (NASDAQ:YHOO - News) reportedly offered $1 billion for social networking site Facebook.

Such sites are places where people meet, virtually speaking, and share content. The field burst wide open when News Corp. (NYSE:NWS - News) paid $580 million for MySpace’s parent last year — a deal now seen as a steal. Since then, MySpace has grown to 50 million users from 19 million. It’s the most visited social networking site.

YouTube — a video-sharing site, which typically is grouped in the social networking category — is No. 2, with 35 million users, but it’s adding new users at a faster rate.

Google (NASDAQ:GOOG - News), Yahoo and Microsoft’s (NASDAQ:MSFT - News) MSN have stumbled in this field. Analysts say the idea now might be that if you can’t beat ‘em, buy ‘em.

Google does have the No. 3 most visited site for video, with 13.4 million visitors in August, up 70% since March, said Nielsen/NetRatings. But YouTube grew 165% to 34 million users in that span.

“Google’s video site is kind of an also-ran right now,” said Greg Sterling, an analyst for Sterling Market Intelligence.

If Google is in talks to buy YouTube, that runs counter to what Google founders Sergey Brin and Larry Page implied at a recent press gathering.

“Both said they don’t want to build new products, and want to focus on existing stuff that already works,” said Rafat Ali, who chronicles the social networking field on his Web side, paidcontent.org.

Ali noted that YouTube has the biggest inventory of video on the Web — but it doesn’t have advertising, the source of nearly all of Google’s riches.

“Who better to sell ads on that site than Google?” he said.

Earlier this year, Google inked a pact to pay MySpace $900 million over three years in return for Google providing ads on that site. Google expects MySpace ads to attract a lot of clicks and thus bring in more than $900 million.

Talk of such a high price for YouTube, a company with little revenue, has sparked talk of a second Internet bubble. Many say $1.6 billion is too high a price.

“This is way too early in YouTube’s life to be getting this kind of valuation,” Ali said.

But valuing such outfits is an inexact science at best.

“Google would be wise to buy YouTube,” said Brad Greenspan, founder of MySpace.com. “If they can take it over and upgrade it to a large community of regular visitors, it could have incredible value. I think it’s definitely worth $1.6 billion, and it could be worth much more than that.”

Google could cash in on a nascent but growing market for online video ads. In 2011, U.S. sales of online video ads are expected to reach $1.3 billion vs. $300 million last year, said JupiterResearch.

Google could also post other types of ads on the site to take advantage of YouTube’s leadership in video, said Phil Leigh, president of research firm Inside Digital Media. “The traffic they are getting, this could be a very profitable business.”

YouTube does come with risks. The company could be sued for posting copyright-protected videos, analysts said.

Despite what could happen, right now YouTube is a juggernaut.

“YouTube has the brand, the traffic and the technology,” said Scott Kessler, an analyst for Standard & Poor’s. “There are a lot of things that companies can do with that at their disposal.”

// October 7th, 2006