Video services

Google on YouTube: It'll Ad Up

Google (Nasdaq: GOOG) executives put some color around their decision to buy the video sharing phenom YouTube during its quarterly earnings call with analysts Thursday. (See Google Reports Q3.) Google announced earlier in the week it would pay $1.65 billion in stock for YouTube. (See Google to Buy YouTube.)

After reporting surprisingly strong third-quarter earnings, much of the discussion on the analyst call turned to the use of video advertising to ensure Google's future growth.

Google execs explained that they believe many products sell better if they can be shown in action on video. "This may sound like heresy for Google, but search isn't always the best way to learn things," says Google co-founder Sergey Brin. "If you want to learn a sport or learn how to build a house, video is the best way to do that."

Google VP of product management Jonathan Rosenberg was a little more specific. "One of our customers sells a guitar tuner, and it’s a cool product, but the only way to see how the product really works is to watch it being used, and the only way to do that is with video."

Asked why Google did not pay cash (instead of stock) for YouTube when the price of Google stock is still perceived as undervalued by the company and many analysts, Rosenberg said the stock transaction was a "one-off" and may not be repeated in future acquisitions.

Still, Rosenberg defended the use of stock. "We have been able to do some really interesting deals, and what we've found is that in our partnerships that work the best, both partners have a share in them."

Analysts also expressed concern over the copyright liability of some video content shown on its new YouTube property. Copyright protected video can easily be published at YouTube, but the company has fashioned its policies around the safe harbor provision of the Digital Millennium Copyright Act to avoid legal trouble. (See Will Content Deals Save YouTube?)

Google lawyers are apparently satisfied that YouTube has limited its exposure. "We did a lot of research on the company as part of due diligence and we were satisfied with what we saw," Rosenberg said.

Investors liked what they heard Thursday. In mid-day trading Friday Google shares were trading up $29.17 (6.85%) at $455.23. The shares had closed the day Thursday at $426.06, and Wednesday at $419.31.

Some analysts agree that Google has the best chance of anybody to make YouTube a big bread winner. "In our view, YouTube is in better hands with Google than with a big media company (difficult to sign content deals) or other Internet media company (less traffic monetization), so Google was in a position to be the highest bidder," writes Merrill Lynch & Co. Inc. analyst Justin Post in a recent investor brief.

Hitwise says Google Video and YouTube collectively attracted 57 percent of all September visits to video sharing sites, while rival Yahoo Video won only about 5.6 percent of the visits.

Google reported a strong third quarter as revenues rose 10 percent from the previous quarter, fueled by steady international ad sales. (Google Press Release)

The search giant earned a third-quarter profit of $733 million, or $2.36 a diluted share, on revenues of $2.67 billion, compared to with earnings of $381 million, or $1.32 per diluted share, on revenues of $1.58 billion during the year-ago quarter.

Google's numbers came in well above Thomson analysts' expectations; they'd expected Google to earn $2.42 per share on $1.81 billion in revenue.

Google's ad business has grown 60 percent this year and is expected to grow 30 percent next year. Most of that revenue comes from search-based advertising. "Advertising continues to grow and this is likely just the beginning of what is likely to be a very transformational industry," Google CEO Eric Schmidt told investors Thursday.

— Mark Sullivan, Reporter, Light Reading

Be the first to post a comment regarding this story.
Sign In