$1.6B-Merger: What's so Great About YouTube?

YouTube caught our eye in June with the surge of the "Bus Uncle" video, which generated more than five million downloads:

By mainstream media standards, Bus Uncle's rapid rise makes no sense. It meets few of the traditional criteria of broadcast media in that it is not news, it has no celebrities and it is not scripted. 

What do these amateur videos on YouTube have that mainstream media does not? 

• Immediacy;
• Drama;
• Relevance to normal lives;
• Social commentary;
• Universality.

Is that worth $1.6 billion? No, because YouTube has no substantial base of paying customers. For all the hype of Web 2.0 and other nonsense, there is no better indicator of a bad business than an absence of paying customers.

As Peter Drucker wrote in 1973: "There is only one valid definition of business purpose: to create a customer."

YouTube has a tremendous potential. We think it could become as important as CNN. And it may become an advertising venue. But so far, this is all only potential, no more converted to reality than a four-year-old girl's potential to become a princess. The challenge ahead is for Google to convert a potentially disruptive form of media into a real business.

Some of the questions Google and any other buyer of a mega-acqusition must ask itself:

• What is it about this merger target that consumers value and pay for?
• What are the special attributes of this business that advertisers value and pay for?
• Apart from the target being a "first mover" is there any sustainable competitive advantage it holds?
• Does this target allow us as a strategic buyer to unlock any new value in our other businesses?
• If we were paying real cash, would the same price seem valid and defensible to the owners of our business?

**Late Addition/Other Views**

Two readers pointed out that YouTube has paying advertisers, estimated at a current run-rate of $2M per month.

Blog Maverick Mark Cuban, who managed to sell his own dot-com business to Yahoo at the peak, says Google is crazy to buy YouTube because of users' flagrant copyright violations.

Om Malik seems to imply that Google is trying to buy growth, or perhaps popularity.

Author Andy Kessler casts some doubt on the deal as a sign of weakness: "Maybe it will just be an expensive sandbox to play in."

Comments

[Ian Delaney]

YouTube does have paying customers - NBC, Warner, UA and others. Plus potentially, every current television advertiser. Of course, $1.65bn is wealth beyond my wildest dreams, so it's hard for me to say what is, or isn't, worth that money.