Two companies born in a garage. Two destined to dominate the net. When Google agreed to pay $1.65bn (€1.31bn) for the video website YouTube, it cemented its place as the leading force in the market and took out its main competitor in one shrewd — and expensive — gamble.
Chad Hurley, 29, and Steve Chen, 27, who set up the site in a California garage, said they were attracted by the prospect of adding Google’s cutting-edge search technology to enable users to access videos more accurately.
Under the deal, YouTube will remain a separately branded entity. Google will pay for the company entirely in shares.
Mr Hurley predicted that Google’s financial resources would help to build a business model able to attract media companies keen to publicise licensed clips and to avoid a possible mountain of copyright litigation.
“We’ll have the resources to build systems so that copyright holders can benefit from the site,” he said.
About 65,000 clips are uploaded on to YouTube every 24 hours and the monitoring agency Hitwise says the site accounts for 60% of all videos viewed on the net.
Google’s chairman, Eric Schmidt, said there were similarities between the two companies.
“Chad and Steve remind me, when I first came to Google, of what Larry Page and Sergey Brin were like. What tipped us over was not the business relationship here, but their vision.”
He described the merger as “the next stage in the evolution of the internet”, with communication moving from words to video streaming.
Shares in Google, the most-used internet search engine, rose after the deal was announced. The stock rose $3.35 to $432.35.
In less than two years, founders Hurley and Chen built YouTube into an internet icon. Google’s largest purchase underscores the pressure on the company from startups such as YouTube and friend-finder Facebook.com, which are creating new markets for film clips and social networking. The deal is also part of Google’s strategy to add video content to attract advertisers.
“This is the quick entry for Google into becoming Google TV,” said Allen Weiner, an analyst at market researcher Gartner.
YouTube is “this huge TV-like platform that includes a significant amount of content”. Mr Schmidt said the companies will build a “global media platform” by combining features of the two sites. Google’s video site has fewer than than half the users of YouTube, according to Nielsen/NetRatings.
YouTube’s business fits Google’s strategy of using internet content as a platform to sell ads.
In December, Google agreed to buy 5% of Time Warner’s AOL to show ads to AOL search users. Google agreed in August to provide search and keyword advertising for News Corp’s MySpace.com.
Advertisers and media companies are piling into sites like YouTube and MySpace.com to reach more users. YouTube viewers on average spend 26 minutes on the site each month, according to Nielsen/NetRatings. YouTube already uses ads sold by Google.
“If Google takes a hands-off approach, doesn’t change the user experience in any meaningful way, the ownership change won’t do anything to harm YouTube,” said Greg Sterling, an analyst at Sterling Market Intelligence.
It also emerged yesterday that YouTube reached a deal to license content from two major record companies just hours before it agreed to be bought by Google.
YouTube reached deals with Vivendi’s Universal Music Group and Sony BMG Music Entertainment that will let the website post music videos and content from users that includes copyrighted material in exchange for sharing ad revenue.
YouTube had been under pressure to avoid a copyright infringement fight with the entertainment industry while negotiating with Google.
“Having these licensing deals at least lowers substantially the downside risk,” said Rob Enderle, an analyst for the Enderle Group.