Google and YouTube

So, the big news of the week is that Google has bought YouTube for $1.65 Billion, and Chad and Steve are ecstatic. Everyone is asking: Why would Google pay so much? After all, every web developer on the planet is looking at YouTube and saying to themselves, ‘I could have built that’ and YouTube has yet to find a workable business model to exist at all!

Well, when I look at a purchase like this, there are two questions to ask. What did they get, and what did they pay? My view is that Google won from both of these perspectives.

First, what did they get? According to the Alexa Web Rankings, YouTube has a Daily Reach of about 65 Million. Neilson Television rankings for the highest primetime shows show a reach in the 20-30 Million range. Google got a site that puts it in the same league as any of the Major Broadcast Networks, yet these broadcasters have Market Caps in the tens of Billions of dollars. Google didn’t buy the technology or a group of engineers, they bought a brand.

Here’s the kicker: What did they pay? Well, everyone knows the purchase price was approximately $1.65 Billion, right? Well, sortof. YouTube recieved $1.65B worth of Google Shares. No cash actually changed hands. You would think that the release of that many shares would dilute the value of the existing shares, but in the two days following the announcement of this deal, Google’s shares jumped by 4.2%, increasing its market cap by about $4 Billion. Based on this, they actually increased the value of Google by over twice what they paid!

As the dust settled, they ended up getting $2.3 Billion in net value, plus the YouTube brand. No matter which way you look at it, they won.