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October 10, 2006updated 19 Aug 2016 10:09am

Does Google’s YouTube buy rekindle dot-com madness?

Is news that Google is buying video sharing website YouTube for $1.6bn the silliest deal since eBay bought Skype for over $2.6bn? Did we learn nothing from the dot-com madness?When eBay bought Skype in September 2005 Skype's annual sales for that


Is news that Google is buying video sharing website YouTube for $1.6bn the silliest deal since eBay bought Skype for over $2.6bn? Did we learn nothing from the dot-com madness?

When eBay bought Skype in September 2005 Skype’s annual sales for that year were expected to be $60m. eBay paid $2.6bn with a potential earnout of another $1.5bn. I’ll let you calculate the price/sales multiple.

So what are YouTube’s revenues? Who knows. But they’re minimal, because the company has for the most part kept its content advertising-free. That’s also helped its reputation, making it seem a little more anarchic, a little more subversive, than rival sites that carry advertising.

This is particularly key for those rebellious teenies — surely YouTube’s biggest demographic? — who never tire of posting videos of themselves or their friends falling off their skateboards and BMXs, or “owning” passed-out room-mates by balancing piles of beer cans on their heads.

Anyway, the argument over YouTube has been whether it would make a good candidate for an IPO. Those in favour came up with various possible models that would see the site add advertising revenue by running short ads before each trailer, running ads at the sides of the movies or whatever. Ad revenue comes from eyeballs and the company claims on its site it serves 70 million videos per day (though at one time a figure of 100 million was bandied about).

Those against point out that much of YouTube’s content infringes its owners’ copyright (though it has been signing deals with content owners like CBS, Universal Music Group and Sony BMG Music Entertainment to try and avoid the trap Kazaa fell into).

They note that it has an unproven business model, just as it was questioned how Skype would turn more of its ‘free’ users into paying users, and that even if it did add advertising, that may turn off many of its current users. They also note that it would then face competition from other sites that have already added advertising.

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Some observers have wondered how much YouTube could make if it did run advertising. Venture capitalist Fred Wilson estimated it could make over $150m revenue even if it paid the content owners for their videos, while others including Matthew Ingram have questioned the underlying assumptions that traffic would remain stable if it added advertising, or that it could sell advertising against every stream.

Even if you take Fred’s figure, paying $1.6bn for a company with possible revenue of $150m seems rather over-zealous. Again, I’ll let you do the multiple.

Then again, Google must know what it’s doing, right? It must have YouTube’s business model all worked out. The deal must make sense. It must add shareholder value.

Anyone remember, or WebVan? My personal feeling is that if YouTube’s founders believed in their hearts that YouTube can turn 70 million streams into 70 million paying customers, or 70 million paid-for adverts, they would have gone for the IPO and built an independent, profit-generating business, and then looked for the sale. Perhaps they thought Wall Street may have been just a little more cynical than Google.

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