Google Buys Reach With YouTube

This week, Google announced plans to acquire YouTube for $1.65 billion, snapping up the video-sharing site where millions of visitors monthly watch videos on just about every inane subject (I’ve seen estimates ranging from 30 million to 72 million, perhaps due to the site’s rapid growth). As Google advertisers and online marketers, we must understand how this acquisition affects us in the short and intermediate terms. We must also plan for the future as video- clip-watching becomes yet another major trend in online user behavior, one that presents additional ad opportunities for the advertisers who embrace video. A bigger question perhaps is whether Google and other search engines should be acquiring online publishers and content aggregators, or whether they should instead ink advertising syndication deals similar to the recent Google/MySpace deal.

Compared to Google’s overall market capitalization of approximately $130 billion, the transaction seems a bargain for the search engine. In just 19 months, YouTube has become the leader in user-generated and user-uploaded video. Like Google Video, though, it wrestles with copyright issues that are significantly greater than trademarked keywords being used to target advertising. Clearly, there are risks associated with video upload sites.

Search engines and advertising networks can either own eyeballs (monthly visitors and page views) or rent them. Google clearly decided that buying most of the same Internet users it already has is worth the price. According to comScore data cited by Bloomberg News, “Google is paying about $23 for each YouTube user, based on 72.1 million worldwide visitors in August… That’s less than the $28 News Corp. paid for each of MySpace.com’s 20.5 million users in July 2005.”

That analysis doesn’t include the fact Google probably touches most of the YouTube users every month at some point, and it simply couldn’t build the critical mass within Google Video, even with YouTube having only a few months’ head start. If YouTube’s reach continues to grow or grows even faster with Google’s help, then perhaps it got a bargain, assuming it can convince us we should advertise on the videos. Currently, Google doesn’t offer standard pre- or post-roll video ad formats. Instead, it has a Click-to-Play Video Ad solution that starts out looking like a static banner until the user selects the video.

This acquisition means Google must quickly innovate video advertising formats and targeting methods. Though text link AdSense ads could certainly be used on YouTube pages, getting a contextually relevant ad on a video page is more challenging than it is for text-filled pages, even if speech recognition software is used to determine what’s said in the clip. Channel-based categorization or viewer tagging might improve relevance for both text and video ads. However, marketers will demand pre-roll video ad formats and would prefer the option of targeting those ads based on behavioral means.

Google has indicated in several venues it doesn’t want to allow behavioral targeting using search profile data (data it has that would allow for the best targeting). In the interim, marketers will have to settle for broader, less accurate channel category levels of targeting for video, unless Google pulls a rabbit out of its hat.

If Google’s rationale for purchasing YouTube is it’s in the best position to monetize the YouTube audience, perhaps we’ll see Google extend that rationale to offline media properties as well. There aren’t many more sites that can deliver tens of millions of page views in one shot. Plus, relationships with larger sites make it easier for a search engine like Google to police click fraud and monitor click quality. Bigger syndication deals are always better than aggregating thousands of smaller sites, with the exception of publishing platforms that don’t compensate the content creators. Blogger and YouTube both rely on user-generated content to create the inventory desired by the consumer.

If Google goes offline seeking more consumers, its options are significant. It could extend the dMarc acquisition in the broadcasting industry with a purchase of Westwood One, Citadel Broadcasting Corporation, or Cumulus Media, all of which have market capitalizations significantly under the $1.65 billion Google is paying for YouTube. Each of these companies already has millions of dollars in advertising revenue.

I can’t see Google aggressively buying offline media assets quite yet, but if it really wants to expand beyond the online-only universe, the same rule applies: it must either rent the audience to which it wants to serve advertising or buy the reach by buying the company that delivers the reach. Either way, Google expects marketers to write bigger monthly checks as its audience reach and breadth of advertising inventory increase.

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