'Makes a lot of sense'
"Strategically, it makes a lot of sense for Google because of the traction YouTube has with video," said hedge-fund manager Thomas Vincent of Acero Capital Management. "The question from the financial community is how much do they pay for it; what will they be able to justify."
News of the YouTube talks was first reported Thursday night on Michael Arrington's TechCrunch blog under a headline of "Completely Unsubstantiated Google/YouTube Rumor." The Wall Street Journal followed up later in the day with a web story that cited one person close to the talks as having confirmed that discussions were taking place.
YouTube's user-friendly model has proven so popular that its market share eclipses that of all its rivals combined. For the week ending Sept. 30, YouTube was responsible for a full 47% of all visits to video websites, according to Hitwise. YouTube's No. 1 share was more than double that of MySpace Videos, which had a 22% share. Google Video ranked came in with a puny 11% share.
Chad Hurley and Steve Chen, the founders of YouTube, have said they remain firm in their intention to grow their own business since launching the site a year and a half ago. Just last week, Mr. Hurley said in an interview with Advertising Age that he had no intention of selling the company.
Google has already shown its willingness to invest in Web 2.0 newcomers. In August, the company agreed to pay News Corp.'s MySpace at least $900 million for the privilege to display search results and sponsored adverting links on the site.
Notably, the venture-capital firm Sequoia Capital helped both Google and YouTube get off the ground. Last year, YouTube received around $11.5 million from Sequoia, while Google received an estimated $12.5 from the firm. A sale of YouTube for $1.6 billion would be a virtual windfall for Sequoia.
YouTube's average session time is double that of Google Video's, at 18 minutes, 33 seconds in the month of September vs. 9 minutes, 9 seconds for Google Video.
Sending traffic along
Google is YouTube's second most important source of traffic other than MySpace. In September 2006, 10.7% of YouTube's upstream visits came from Google, while MySpace accounted for 16.2% of YouTube's upstream traffic.
During the last several months, YouTube has been busy fleshing out sustainable ad models -- as in those that don't scare away users -- and licensing deals meant to fend off persistent legal issues. What is not clear is whether an acquisition by Google would scare away some of the 34 million consumers who flock to YouTube each month.
Two programs recently introduced on YouTube point to the type of marketing the video-sharing site is exploring. Cingular Wireless recently agreed to back a search for the YouTube's most talented unsigned bands -- a promotion that struck at the core of rival MySpace, which was founded on the premise of exposing unsigned artists to large audiences online. Walt Disney Co.'s ABC will feature the finalists on "Good Morning America" in November.
YouTube also struck a revenue-sharing deal with Warner Music Group, which will distribute and license its copyrighted content through the site.