Google Gone Gaga

I'm with Mark Cuban on the Google (Nasdaq: GOOG) purchase of YouTube Inc. It's dumb.

I understand it's an all-stock deal, so it's being made with monopoly money. So it might not be quite as silly as the eBay Inc. (Nasdaq: EBAY) purchase of Skype Ltd. , which was done with cash. (See Skype's EBubble.)

As Cuban has said, this is nothing more than a traffic acquisition deal, with plenty of legal liabilities for all of the stolen content that gets posted to YouTube.

But here's the really big question I have: If Google's so almighty, why exactly did it even have to look at this deal? It's a major admission of failure of its own video hosting site -- Google Video. This would be akin to Apple Inc. (Nasdaq: AAPL) launching a video iPod, failing to capture enough of the market, and then going out to buy another consumer electronics company to deliver the product. Wouldn't that be kind of embarrassing for Apple?

Yet the Google/YouTube deal receives the accolades of Wall Street and almost no serious critical thought. It's like journalists and analysts are falling all over themselves to explain how synergistic and explosive the whole thing is. It's soooo 1999.

Here's another thing I don't understand. Why has nobody raised questions about the presence of YouTube's largest investor –- Sequoia Capital Partner Michael Moritz –- on the Google board of directors? Did he participate in the vote? What's his personal take on the deal? Light Reading has put calls in to Sequoia and is awaiting a response. At any rate, it should make for some juicy SEC reading –- conflicts of interest and all. I'm awaiting those documents to be filed.

So, that brings us to the next question: If Google actually has to go out and acquire traffic, does that indicate its own organic traffic growth is slowing down? Maybe, or maybe not. At any rate, this boils down to a simple pay-for-market share deal. According to most reports, Google has gained market share with the deal –- it will now be the second-largest destination on the Internet. By combining Google with YouTube, the two sites would have had 101 million visitors in August, according to Nielsen/NetRatings . Yahoo Inc. (Nasdaq: YHOO) sites had 106.7 million and Microsoft Corp. (Nasdaq: MSFT)'s MSN Internet division had 98.5 million.

$1.6 billion is a lot to pay for second place.

Of course, it's not the first time something like this has happened on the Internet. It goes something like this: 1) New application/property attains critical mass; 2) Traffic explodes; 3) competitors get jealous and overpay.

Think, Time Warner Inc. (NYSE: TWX)/AOL LLC .

And, just as in the Time Warner deal, in the end it wasn't really about the traffic or market share, it was about whether any of it could appropriately be monetized –- and whether too much of the company's stock was given up in the pursuit of money.

Remember, if it sounds ludicrously expensive, it is. And Google has just paid $25 million per employee to acquire YouTube. That sounds pretty expensive to me!

Congrats to YouTube founders Chad "Cash" Hurley and Steve "Cha-ching" Chen –- they have just pulled off the deal of a lifetime.

— R. Scott Raynovich, Editor in Chief, Light Reading