Why Murdoch Won’t buy YouTube

21 Comments

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.

21 Comments

Alan Patrick

Who will pay $1bn for YouTube? The issue that must face an Apple, Google, Yahoo or News International is the “build vs buy” decision.

Google, Yahoo and NI (with MySpace) have assets they can already use to build out their own Video businesses, very probably at significantly lower costs than $1bn

The Telcos, trying to dive in to IPTV, need content desperately – but why would any one of them acquire it, a partnership deal of some form will do the trick in the early days.

Add to that consideration the fairly low switching costs for any of the social network based services, $1bn seems a very difficult number to justify.

The traditional content players mostly don’t have the financial capability, and Disney or NBC would be very wary of taking on some of the content and rights issues YouTube comes with.

Apart from News International, the only player who so far has shown a willingness to pay top dollar for these sorts of businesses is eBay with its acquisition of Skype. Maybe they need a Video service to go along with their VoIP?

jasonB

GoFish seems to be taking the monetization around user gen video in a new direction. They have launched a program that is modeled after reality TV, getting users to create content specifically around a reality show concept – which means all this user gen content is channeled around a specific topic area. It’s certainly a concept that has worked well on TV – dating. It’s called America’s Dream Date. People are submitting videos to the contest, ranking and commenting on one another all with the hopes of being one of the finalists who will then be narrowed down entirely by the audience to one guy and one girl and get sent on a “dream date” together in Paris. They have wrapped a sponsor around it and are showing very clearly how a brand can own the show – much the way we see this now happening with brand and product placements within reality on TV. This could be the only way that real media based monetization in the user gen video space happens.

Aly

“retard generation” (brilliant, I love it)

But these retards are going to grow up, and we’re going to hire them. I think a smarter investment would be online communities that cater to professionals. After all, social netoworks are going to be the way that generation communicates, shares knowledge. Might as well use it to better efficiency in the workplace.

The old boys club is going to have to get used to employees blog hopping as a way to get better at their jobs. It’s not just coming from the Wall Street Journal anymore, not for this generation.

liminal

these comments are hilarious. same people i imagine who said that MySpace was not a valid business (and still do above). even after the announce today of a $900m with Google. if MySpace users are fickle (why, because they are young?) then why do their numbers keep growing astronomically?

youtube … it might just be that youtube is another incarnation of the long tail in the user generated world – maybe only 250 people a day want to see someone barfing but by golly, now they know exactly where they can go to see it

all the way to the bank

Jesse Kopelman

TheViewer wrote, “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.”

I guess you haven’t seen MTV lately. The content you’ve described is exactly what they show.

Roopert

“With FIM publicly traded, he would then have the currency to do such bubble-type valuation deals on an apple-to-apple basis.”

Why would you want to do deals that you know are at bubble-type valuations? Inherent in the notion of a “bubble-type valution” is the fact that you’re heavily overpaying for something. Regardless of whether FIM is its own entity or not, how do you justify to your shareholders paying $1 billion for something that has yet to generate a single cent of profit? An independent FIM that owns MySpace, YouTube, etc. might have hot properties and would lure in stupid money for sure. But at the end of the day, the market is going to demand profits. It’s 1999 all over again and the end result will be the same. There is no new economy. Isn’t a valid definition of stupidity “Doing the same thing over and over and expecting different results”?

Throw in…

  1. The legal issues surrounding YouTube’s content.
  2. The fickle nature of its primary audience.
  3. Growing competition from other video startups with actual business models (something YouTube is lacking completely).
  4. The lack of any significant barrier to entry in the space.

… and I think the question becomes “Who would be dumb enough to pay $1 for YouTube?”

hiom

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.

dave

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…

steve_ray

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.

Alex

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.

TheViewer

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.

Jacob Varghese

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.

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