Watching the ‘GoogTube’

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Google’s announcement Monday that it will acquire video entertainment site YouTube for $1.65 billion in a stock-for-stock transaction has the potential to hugely increase the search company’s ad revenue in the growing online video market, observers said.

“We may be at a tipping point,” said Gian Fulgoni, chairman of comScore, an online measurement firm. According to comScore, YouTube had 21 million U.S. users in September. “In acquiring YouTube, Google has, in one fell swoop, increased their number of video streams—and potential ad revenue from streaming—tenfold,” Fulgoni said about the deal, which is Google’s largest acquisition to date.

Fulgoni went on to suggest the deal may help move more ad dollars from the “boob tube” to YouTube.

“One of the things that has held back the shift of ad dollars from TV to the Internet, especially if it’s brand-building advertising, is that I think the advertiser wants sight, sound and motion; and video online allows one to get that,” he said.

YouTube—a Web destination launched in a garage by two 20-somethings in February 2005—will operate independently to preserve its brand and “passionate community,” according to Google.

According to Hitwise, the acquisition gives Google/YouTube a combined 60% share of the video advertising market. It also significantly increases the amount of streamed content that Google will now control.

Google Video, its own product currently in beta, streams about one-tenth the amount of video streams provided by YouTube, according to comScore.

However, the combined Google/YouTube, with 700 million video streams, will trail other sites. It will be in third place, behind social network phenomenon MySpace, which has 1.4 billion video streams, and Yahoo!, with 800 million.

The deal, which is being referred to around the Internet as “GoogTube,” concludes a round of discussions with YouTube by other companies. Prior to the Google announcement, YouTube reportedly had been in acquisition discussions with Yahoo! and Rupert Murdoch’s News Corp, which recently acquired MySpace.

“In our view, YouTube, a neutral video network, is in better hands with Google than with a big media company (difficult to sign content deals) or another Internet media company (less traffic monetization), so Google was in a position to be the highest bidder,” wrote Justin Post, research analyst for Merrill Lynch, in the company’s deal analysis report published Tuesday.

“[The] acquisition will put the MSN and Yahoo! ad networks behind Google in video,” Post added. He also noted that the “acquisition is Google’s largest and first major acquisition primarily for traffic.”

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