Buy a lawsuit or just the ad traffic?

Mark Cuban has "Some Thoughts on YouTube and Google". Mark is right on target saying Google would be crazy (moronic) to buy YouTube, but brilliant to do an exclusive advertising deal.

Google makes money selling advertisements on web traffic, not just search results pages. All they want from YouTube is traffic so they can sell more ads. They can get that with an exclusive advertising deal with some guaranteed minimums, just like they did with MySpace. Why should they buy YouTube and take on the lawsuit risk?

CREDIT: YouTube image courtesy of ValleyWag. (I don't want any copyright lawsuits)

Acquisition versus Exclusive Deals

In the technology business many times it is better to do a strategic partnership that allows joint selling and revenue splits that benefit both companies, rather than a full blown acquisition. Why? Many reasons that apply to all technology acquisitions, not just YouTube;

1. The incentives to perform are still there for both companies, including their sales people. Once a small company gets acquired by a big company all the fun and incentives go away...and the founders that made it all happen tend to leave.
2. Flexibility to do another deal with an even hotter company that may emerge. What happens if YouTube falls out of favor and another hot company emerges? Google would be stuck with YouTube...and couldn't really compete with itself.
3. Risk is minimized. Anytime you do a technology acquisition there is legal risk for things like patent infringement, copyright lawsuits, antitrust suits, employee lawsuits, etc. Revenue deals provide all the benefits with none of the lawsuit risks.
4. Focus on core business is maintained. Acquisitions take up lots of management cycles and divert attention from your core business. That other business might look interesting but it probably will not pay off like your core business. Conversely, many acquisitions fail because the focus does remain with the core business...and the small acquisition gets no attention...the founders leave...and the small company fades into oblivion.

What is gained by an acquisition? I have been involved in lots of acquisition discussions over the years...on both sides of the table. From the small company perspective there are lots of benefits to being acquired. The discussion is usually only about timing and price.

From the big company perspective there are a different set of questions. I always ask "What will we gain that we don't already have with our strategic relationship?" and "How much is that worth?" and "How will we avoid distraction from our main goals?".

Try before you buy. It is always a good idea to work together in a strategic partnership before jumping into an acquisition. Take some time to make sure your customers see value in the partnership, that your vision and goals line up, that your working styles match, and that the employees, especially the founders, would stay on in the event of an acquisition.

Small acquisitions carry less risk. They cost less money and involve fewer customers and employees. Many times the benefits of acquisition are clear. Small is a relative thing. Paying $1.6 Billion for YouTube is a huge amount of money for a two year old company with no revenue. But for Google it represents a little over 1% of their market cap. Maybe they think it is a "no brainer". They might want to think again about how much the copyright lawsuits might cost.

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Comments

[jeremy]

cant wait to short google.

[alan shimel]

Don- I have to disagree with you on this one. I think the You Tube acquisition is exactly the kind of bold move that will continue to keep the Google guys the company to watch in the Internet sector. I have been on both sides of a few acquisitions myself, but this one is really a no brainer. Would anyone say that News Corp over payed for My Space now. Same thing for You Tube. You Tube is a brand that is not going to be surpassed by any up and comer. Its only competition will come from a Yahoo or Microsoft, two companies Google is not going to buy. I think You Tube is the successor to EBay, Yahoo, Google as the next great Internet brand and if Google can wrap them up early, they should jump on it.

It is not just the advertising revenue itself. You Tube has the potential for revenue beyond advertising. Also, I think the IP issues will take care of themselves. The genie is already out of the bottle for posting videos and there is no turning back. Bold moves are what keeps companies on top (unless they are lucky enough to enjoy a 90%+ market share ;-))

[pwb]

"Strategic partnerships" hardly ever work either. At least with an acquisition you get control. Google's not like most companies that suffocate their acquisitions. Google is the best candidate to work through the licensing issues as its done with cached web pages, images, books and catalogs.

[Doug Karr]

I respectfully disagree. Your perception and Mr. Cuban's are both very narrow and short-sighted.

The value in the YouTube deal is not about future profitability of YouTube, it's about market share and the internet. YouTube controls a very large market share of the net right now - that's worth billions in future market share of internet users and internet advertisers.

If Fox wants ABC viewers, having a strategic partnership would not have near the impact as Fox buying ABC and cross-promoting the content.

This is a proven business model in the media industry, and it will continue to be.

[davis freeberg]

I fail to see how Google picks up liability by acquiring YouTube. Don't they have the same exposure with their own Google video service? Unless I'm missing something about how the technology is different, I would think that Google would face the same risks with their own NSnyc karaoke videos. Maybe people would be crazier to go after a well funded Google then an independent company like YouTube, but If Fox and Google are already able to share user generated content without getting sued, why would the risks be all that much greater? As long as YouTube continues to comply with the C&D request, it's hard for me to see how they are different.

[Lloyd D Budd]

You and Cuban are on the money.

Google's previous actions are the greatest clue to its future actions, and acquisition of this cost by Google is unprecedented.

On the other hand, an exclusive advertising deal is not only consistent with Google's history, I think it is safe to say it is in the works ;-)

[Ron Wilson]

I agree. It does not make a lot of sense to me to acquire YouTube other than Google to say...we own YouTube.

[Scott Quick]

We've yet to see just how enduring the brand equity of these social networks will turn out to be. A strategic alliance pinned to performance metrics is desirable in so far as it allows both companies to stick to their knitting while wringing out all the low hanging value that is truly accretive... something that most M&A fail to deliver on.