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March 5, 2007

Some acquisitions take time, usually years before they show their real value or lack thereof. As of today, Google is still operating YouTube with a deficit.

Last week, Bear Stearns issued an analyst report that suggests YouTube had revenue of $15 million last year, which means Google paid more than one-hundred times the video site's annual intake. But don't panic, at least not just yet.

"Generally speaking, it's still way too early to guess if the acquisition has been successful or not," said UBS analyst Benjamin Schachter. "Overall, Google is building itself for the long term and this is one piece in building that."

But it is clear that Google's backing has opened doors for YouTube and made it an even more formidable contender in the world of media content than it was before.

To be sure, take last week's deal with the NBA, which created a channel of about 30 authorized clips on YouTube. Negotiations with YouTube stemmed from the basketball league's original partnership with Google.

"Obviously, we came to the deal through Google," said Steve Grimes, NBA's v.p. of interactive. "Would we have ended up here any other way? It's certainly possible. However, the Google connection is what made it happen in the time frame it did."

In 2006, Google and the NBA have paired up in a one-season deal, in which Google sold NBA games on video.google.com for $3.95 each. Though that service has ended, the NBA has since moved on to be part of a new advertising test with the search giant.

Google is taking videos made by the NBA, as well as Sony BMG Music Entertainment, Dow Jones, Conde Nast and others, complementing them with commercial advertising and distributing them to a network of Web sites.

In the three-tier deal which began in February, Google supplies a Google-branded video player that runs both the clips and the advertising itself. For example, viewers can watch NBA clips on the basketball site www.bball.com. Once the clip plays, a commercial airs. Each time it's watched, the advertiser pays Google, which then shares the revenues with the NBA and www.bball.com.

So far, no such deal exists with YouTube. However, it's not too much of a stretch to imagine that, if Google's experiment goes well, YouTube might adopt a similar model. For now, YouTube and the NBA have agreed to share advertising that runs alongside the NBA clips and videos of fans showing off their best basketball moves.

"We are very committed in supporting this medium with advertising," said Chris Maxcy, YouTube's head of business development.

In an emailed response to questions, David Eun, Google's v.p. of content partnerships said the merger has been going smoothly so far.

He added "both Google and YouTube are exploring a wide variety of ways to monetize online video content and the early results have been very encouraging."

However, greatly complicating matters are ugly copyright issues. Pirated clips began appearing on YouTube almost since its inception in 2005. One in particular, a "Saturday Night Live" skit, even helped put the site on the map.

Now that Google has paid $1.65 billion for YouTube's ownership (this brings with it legal liabilities of all kinds) YouTube is under more pressure than ever before to strike deals to publish those clips legitimately, and to remove the ones that it dosen't have permission to republish.

For a long time, media companies have been frustrated by the endless cycles of pirated clips. Even as one is taken down, another one pops up in its place. YouTube has developed filtering and content identification tools to specifically locate inappropriate videos, which it has been offering to its partners and rolling out in parts.

For example, the NBA said it plans to work with YouTube's filtering system to take down the game clips that it didn't authorize to be on the site.

The copyright battles came to a head last month when Viacom, after unsuccessful negotiations with YouTube, ordered the company to remove more than 100,000 copyrighted clips from its site, including popular snippets of "Chappelle's Show" and "The Colbert Report."

Just a few days later, it struck a content-sharing deal with rival Joost. The move underscored the tension between YouTube and the content companies as they try to find common ground.

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Source: SF Gate