Google bets on YouTube

Andrew Metrick looks at YouTube and sees more than a quirky web-based video site.

He sees a television network.

“This YouTube model is the same model as the one introduced by broadcast television years ago,” says Metrick, a Wharton associate professor of finance. “People are going to look at the content [on YouTube] and, because of that, you can sell ads based on people who come look at it. It’s a model we understand.”

Executives at Google Inc. apparently agreed. Last week, the web search leader announced it would buy YouTube for a staggering $1.65 billion. Befitting their reputation, YouTube’s 20-something founders, Chad Hurley and Steve Chen, posted a video on their site after the deal was announced to explain the move to their customers (watch it at: www.youtube.com/watch?v=QCVxQ_3Ejkg).

Founded just last year, YouTube has become the dominant player in the burgeoning web video market. The company says more than 100 million of its videos are watched each day, and despite its youth, YouTube has fought off challenges from several other web video sites, including one launched by its new parent company, Google.

“The fact that [YouTube] is not making money is not the issue,” Metrick says. “From a financial perspective, it’s not clear to me that the market leader in this niche is not worth $1.65 billion. There are reasonable-looking numbers for which this is not a nutty purchase.”

Metrick praises Google for not only seeing the value in YouTube, but also recognizing that, despite its efforts to get into the web video game, it was getting beat by a better product. The combination of Google’s dominant technology and growing business acumen, says Metrick, makes the company “scary.” “They want to be a market leader in all these things on the Internet,” Metrick says. “But it’s clear they were losing to YouTube. It shows a great amount of maturity by Google.”

Originally published on Octotber 19, 2006.

Originally published on October 19, 2006