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The Gorilla That Ate the Carriers

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LR Mobile News Analysis
Light Reading
11/28/2006
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Chad Hurley is the sort of Internet entrepreneur who gives established media moguls flop-sweats: the YouTube Inc. founder is young, brash, and enormously wealthy since Google (Nasdaq: GOOG) bought his Internet-video company for $1.65 billion. As of today, with the announcement that Verizon Wireless will give its V-CAST subscribers access to limited YouTube content, Hurley's a bit brasher and bit richer. And Big Media is sweating a bit harder.

The Verizon-YouTube hookup makes perfect sense: Almost from the Net-video company's inception, Hurley and co-founder Steve Chen have made no secret of their desire to go mobile. The bite-sized clips on YouTube are perfect for viewing on the bus, while skipping third-period gym, or while waiting on line at a Raconteurs show. And Verizon, like most carriers, is looking for ways to acquire and distribute cheap, popular content without getting into the content-producing business themselves.

As Gary Adelson, managing director at investment bank Houlihan Loukey, said at an iHollywood Forum conference on "Triple Play and IP Communications" in Manhattan this morning, the history of technology/entertainment convergence is littered with the carcasses of service providers who thought they could become content providers:

"Producing content is a different beast," said Adelson. "It's hard, it's expensive, you have to deal with talent, and you can't just decide you're going to become a content provider."

In that sense, the Verizon-YouTube deal could spell trouble for Hollywood studios and other traditional purveyors of expensively produced, mainstream films and music: Why pay for rights to the new Lindsey Lohan movie when you can get hugely popular, user-generated, relatively inexpensive content that 100 million viewers a day already watch?

In a larger sense, however, the significance of today's announcement may be less about YouTube than the 800-lb. gorilla looming over its shoulder. The Verizon deal represents the latest in a string of carrier deals taking Google into the mobile sphere.

This month alone, Google has expanded its Mobile AdWords trial from the U.S., Germany, Japan, and the U.K. to eight new countries, and launched a Java-powered Gmail client for mobile applications. In July, the Sunnyvale, Calif.-based search giant released the mobile version of its popular Maps feature, including real-time local traffic information.

Speaking at the ThinkEquity LLC Media Convergence Summit in New York earlier this month, John Hanke, product director for Google Maps and Google Earth, strongly emphasized the importance of mobility to Google's plans for world domination.

"We think in many parts of the world, particulary in Asia/Pacific and Latin America, mobile is going to be the dominant way people will interact with our services," Hanke said. "If we want people to use our services, we have to be good at mobile."

Hanke added that allowing users access to videos, music, and other services without the limitations of carriers' "walled-garden" approach to content will be crucial.

"At the same time, we don't want to see really high barriers for people to get access to those applications that require data. With some of the carriers, it's kind of expensive for people to use it. We'd like to figure out ways to drive that down."

Paired with the remark by Google CEO Eric Schmidt that handset costs will be driven close to zero by advertising deals, Hanke's comments raise an intriguing possibility: Will Google, with its $148 billion market cap, simply say "to hell with the deal-making" and buy a carrier?

That's been the rumor swirling about Comcast Corp. (Nasdaq: CMCSA, CMCSK), which is purportedly eyeing Sprint Corp. (NYSE: S), and such an acquisition could make even more sense for Google, which can afford to virtually give away both minutes and phones. Other carriers would then balk at offering Google content and services; but if users are faced with a choice between conventional calling plans, with limited content, and cheap-to-free Google devices and dataplans, that refusal could become suicidal.

This scenario seems far-fetched now; but then the idea that a company that posts amateur video for free viewing would sell for $1.65 billion would have seemed preposterous just a couple of years ago.

In the near-term, the deal could be seen as a shot across the bow of T-Mobile US Inc. , which recently pledged allegiance to the concept of delivering much more user-generated content as it deploys its new 3G network. (See T-Mobile Awards 3G Deals.) There has even been some speculation that T-Mobile has also been working with the video site.

— Richard Martin, Senior Editor, Unstrung

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