[Courtsey: Wall Street Journal]
With its $1.65 billion agreement to acquire YouTube Inc., Google Inc. may be able to broaden its online-advertising business and boost its video offerings to meet the rapidly changing viewing habits of consumers.
The all-stock purchase announced yesterday of closely held YouTube, a 19-month-old, San Bruno, Calif., startup with 67 employees, highlights users' growing consumption of video online and the booming sales of Web advertising. The hefty price tag also reflects the interest of other media and technology companies in acquiring YouTube as a way to jump-start their online-video efforts.
The deal -- the largest in Google's eight-year history -- marries Google's massive collection of computers, data lines and systems for serving up online ads from hundreds of thousands of advertisers with YouTube's leading position in playing videos for users on the Web. It could transform Google, of Mountain View, Calif., into a bigger power broker for the distribution of video online, following the mixed track record of its own online-video efforts. YouTube has said that consumers view videos through its service, ranging from homemade videos to movie clips, more than 100 million times daily.
"This is going to allow us to continue to develop features for our community and our partners, allow us to sharpen our focus," said YouTube Chief Executive Chad Hurley in an interview. "We'll be able to leverage the technology and resources of Google to supercharge our efforts in those areas."
The acquisition could also boost Google's ambitions to significantly broaden its ad-brokering activities beyond simple text ads on Web pages to larger amounts of video advertising online. The Web-search company places ads, often targeted by specific keywords such as "Chicago hotel," on its own and partner sites using an automated online system and has said it intends to also broker ads in radio, print media and television.
"We believe the combination of Google and YouTube will create this very new and interesting global media platform for users, content providers and advertisers all around the world," said Google CEO Eric Schmidt during a conference call announcing the deal.
Yahoo Inc., News Corp. and Microsoft Corp. were among the other companies that expressed interest in acquiring YouTube, say people familiar with the matter. YouTube had earlier passed on a lower offer from Google and held acquisition discussions with Yahoo, which tendered an offer in recent weeks, say people familiar with the matter. Yahoo's offer, valid for 24-hours, expired amid its concerns about copyright- and revenue-related issues though talks continued after the expiration, one of the people says.
A Microsoft spokeswoman said the company "evaluated acquiring this type of technology several months ago" but decided to build its own service, a test version of which opened recently.
Meanwhile, Google significantly increased its offer and deal talks between the two gathered intensity late Tuesday, when Google's Mr. Drummond and YouTube Chief Financial Officer Gideon Yu drafted a term sheet, a person familiar with the matter says. In parallel, the two companies worked to complete content and ad-revenue-sharing partnerships with the major music companies and CBS Corp. that were announced yesterday morning.
News Corp. sniffed around YouTube as recently as last week, but never made a firm offer because the start-up said it was not for sale, say people familiar with the matter. On Friday, when the news of the Google negotiations surfaced, News Corp. sent a letter to YouTube asking for an opportunity to participate in the sale process, according to the familiar people. YouTube didn't respond, these people said. Behind the scenes, Google's deal to purchase YouTube is threatening to create a rift between Google and News Corp., which jointly made headlines in August with an ad-brokering deal under which Google guaranteed revenue of $900 million over three and a half years to News Corp. for its MySpace social-networking service and other sites.
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