21 Comments

Summary:

Ever since YouTube’s CEO Chad Hurley participated in Herb Allen’s annual Sun Valley media mogulfest, there has been much speculation about who will acquire the young online video phenom. If the chatter in the blogosphere is a reliable indicator, many believe it will be Rupert Murdoch. […]

Ever since YouTube’s CEO Chad Hurley participated in Herb Allen’s annual Sun Valley media mogulfest, there has been much speculation about who will acquire the young online video phenom. If the chatter in the blogosphere is a reliable indicator, many believe it will be Rupert Murdoch.

After all, with MySpace under his belt, it’s certainly logical for him to want to combine his 80% market share of social networking with YouTube’s 60% market share of online video… giving him clear dominance within the rising social media industry. But it’s not likely to happen, and here’s why.

If rumors are true and YouTube is valuing itself at $1 billion, they have essentially out-priced themselves for Murdoch. As I experienced personally when I negotiated the sale of Delphi Internet to Murdoch, he prefers to use hard cash as his deal currency, not News Corp stock (maintaining his ownership interest and avoiding dilution are key drivers). Therefore, the prospect of laying out $1 billion in cash for an operation with negative cash flow, particularly after spending nearly $600 million for MySpace, is a highly unlikely scenario. And even he wants to, Wall Street won’t let him risk his balance sheet without repercussions.

The only practical way for Murdoch to go after expensive deals like YouTube or FaceBook would be to create an alternative form of currency… by spinning off Fox Interactive Media (“FIM”). With FIM publicly traded, he would then have the currency to do such bubble-type valuation deals on an apple-to-apple basis. I’m sure Murdoch would love to have YouTube, and it must be frustrating to have your hands tied.

For this reason, I would attach a very high probability of an FIM spin off. So with Murdoch effectively out of the picture in the near term, which of the other media conglomerates like Viacom/MTV or the Internet giants like Google are possible suitors. From the perspective of Wall Street, the most likely contender is NBC Universal.

With parent company GE sporting a market cap of $340 billion, structuring a billion-dollar deal, using stock as currency, is actually quite feasible. In fact, I would even go as far as to say that NBC’s recent promotional deal with YouTube is essentially a form of due-diligence for an acquisition.

Robert Young is a serial entrepreneur who played a major role in the invention & commercialization of the world’s first consumer ISP, Internet advertising (pay-per-click ads), free email, and digital media superdistribution.

  1. Great journalistic poignancy with that subject line.

    Share
  2. sorry… something strange in the way the headline code was set up.

    Share
  3. Interesting you say that given what happened last time round. Okay it’s News International, but still…

    http://www.revolutionmagazine.com/news/index.cfm?fuseaction=ViewNewsArticle&newsID=129952

    Share
  4. Sorry guys – I was so moved by Om’s piece I posted my reply twice.

    Share
  5. Jacob Varghese Monday, August 7, 2006

    Robert,

    You don’t see any interest by Yahoo. This would be a great purchase to complement their other community-type initiatives.
    Om, posed the question of who would win the online video market a few months back. Maybe some of these guys feel that the market is too young to have a clear winner.

    Share
  6. There is a complete misconception of what YouTube does and why it is popular. YouTube is not online video of any commercial sense. YouTube is popular because 1) porn sites post teaser videos (free porn), 2) its a social networking site where teen-age girls post videos of themselves dancing in their underwear (free soft porn) 3) its a place where people post copyrighted material thats funny (to be cracked down on once copy right holders catch up with the technology).

    This is not to take away from the splendid technical job the developers have done with the site. The video is very responsive, the player is intelligent (if a video is running and you use the scroll bar, it will pause until you are done.)

    I can’t see this as a legit business, just as Myspace is not a real business. After the dangerous underbelly is cleaned up people will lose interest in BOTH Myspace and YouTube. I mean come on, can any legitimate big entertainment mogul own a web site that post videos of underage girls showing off their thong, college students barfing on each other and people reciting poetry while they sit on the toilet.

    Already people have started to move on from Myspace, the generation and type of people that use it are very fickle, last year’s Myspace replaced the year before’s Friendster and is now being replaced by Facebook and who knows what is next.

    Nobody smart would buy the site, which doesn’t mean somebody won’t.

    Share
  7. To me, it would make more sense to ask the question–who needs online content fast? The answer is the Bells. They’re rolling/going to be rolling out IPTV everywhere, and they need “their own” content to fill slots.

    YouTube would be a no-brainer to them, and YouTube’s biggest concern–bandwidth costs–just go away because the Bells own the tubes.

    They’re already complaining about other video providers getting a free lunch on their side of the Internet connection–why not own one of the competitors? Maybe even give them preferential bandwidth to the users?

    Besides, Murdock already has what he came for–the bazillion MySpace members, and he hasn’t figured out what do do with them yet. And he’s already got all the content he wants.

    Share
  8. It would be in any would-be acquirers best interest to wait and see how the market develops. Youtube REALLY should only be considered a user-generated sharing service, yet the content that has made it popular is rarely user generated (or at least the user-generated content is only made popular by sitting alongside illegal content). There’s no indication that the future of entertainment is me sitting in front of my computer watching people on their webcams produce 5min videos. So, if that’s not the future, but rather just ‘aol chatrooms’ (sticky as hell) of the modern day, then it would be prudent to see how this all pans out. I’d be afraid to acquire anything that’s being used primarily by the teen demo that’s only been popular for a year. just IMO.

    Share
  9. i agree with “theviewer” up above – youtube’s content is rife with soft porn, copyrighted material, no validation of appearances of minors ‘kept on record’ in sexually suggestive materials and overall a cornucopia of legal issues (just wanted to use that word)…this presents, imho, something akin to the original napster – in which case a purchase makes no sense, particularly given elgoog’s recent announcement to distribute for mtv (and others), along with torrent’s infrastructure services…

    youtube is simply a novelty, as is their porn clone ‘pornotube.com’ and like napster, i suggest that all users enjoy while it’s still throwing waves because within the next year or so, people are going to realize that just having a lot of eyeballs is in fact not enough, not without actionable clicks through to purchase or something for sale…

    Share
  10. A billion dollar YouTube huh. That means the founders will become millionaires with net worths of somewhere north of 50 million each. Then what? It’s still YouTube, except somebody paid one billion dollars for it. And the founders are L O A D E D!!!

    Is that how one creates wealth? Build something that is really expensive to run and makes no money to get as many users as possible within 18 months of burning glory? Then someone gives you and your buddies about a hundred million dollars each for it? Awesome!

    This is the new economy – millions of myspace retards who consume pointless videos all day. I call this the retard economy. It’s obviously the future.

    Share

Comments have been disabled for this post