Google + YouTube: Really smart or truly insane?

Posted by Rob Enderle, Principal Analyst, Enderle Group

One thousand six hundred and fifty million dollars. With that, you could buy the latest US nuclear powered aircraft carrier and have $250 million left over to fuel and staff it. You could hire 16,500 people and pay them each $100,000 to work for you for a year. Or, for a firm like YouTube, with 65 employees Google is paying over twenty five million dollars per employee which, coincidently, is the exact amount spent on lap dancers in Los Vegas each year.

Under the term "Outside the Box" should be Google's logo. This company successfully has pulled insane seeming ideas and made them work. When they went public, they refused to provide financial analysts any real direction, something most thought would result in cratered stock and a failed public offering. In addition they set an initial stock price that was crazy high only to watch the stock price go up to astronomic levels.

On the news that they bought a relatively unprofitable 65 person company for $1.65 billion (with a "b") the stock should have dropped through the floor. Instead, Google's shares were up on the rumor and up again on the news.

While this may simply be unbridled trust in a company that can seem to do little wrong, it may also have a very real foundation that could result in a positive investment return. On the other hand, it could also be just plain whacked. Let's look at both sides of this deal.

Google + YouTube: Brilliance squared

What would it be worth to get Bill Gates as a senior employee back in the late 70s? Assuming he was given the tools he needed, clearly his worth, all by himself, would be significantly more than what Google paid for YouTube.

We often forget that often a small number of people can make the difference between a successful company like Google and a failure like Netscape. Google seems to get the power of people; and with the YouTube acquisition, they get a core team that not only made YouTube the leading video site but was also critical to PayPal - another property Google is now competing with.

These people may be serial successes, in other words, folks that simply understand how to do things successfully and can do it repeatedly. If even a small number of the folks they acquired with YouTube are, in fact, the kind of person that can be a Donald Trump, or a Steve Jobs and they can both hold on and provision them to their potentia,l they not only jump to the of the on-line video heap they have the true potential of becoming the next truly big player in technology.

Part of this serial success thing is luck but it certainly looks like both the Google and the YouTube folks have that in spades and the recent deals both have signed with the record labels would indicate that this luck is holding up very well for both firms.

They also did the deal with stock and not cash which should help tie the employees of YouTube to the new combined entity very tightly for awhile.

Now Google is building what amounts to a new TV Network that is based on an Internet delivery model. That is one of the reasons they are renting a large and expensive office building over one of the largest fiber hubs in the world. YouTube now becomes the true foundation for that network. With Google's resources, YouTube is set to do something amazing.

It is funny how often companies, who should know better, forget the value of people. Both Apple and Microsoft have bled an incredible number of incredible people over the years. Google appears to be going the other way and the result could truly be amazing.

Google + YouTube: Netscape revisited

Google often looks like what happens when you get a lot of money over a short period of time and lose your sense of worth. For a company of 65 people making little money, a purchase price of $1.65 billion seems so incredibly high that you have to wonder if someone lost a really big bet and this was the result.

Netscape and a large number of the Dotcoms went down this path of having way too much money and not enough sense in terms of how to spend it. Granted, this acquisition is in exchange for stock and it doesn't reduce Google's working capital, but stock has a price as well and that's a lot of stock going to something that isn't particularly productive yet.

Netscape fragmented badly partially as a result of its acquisitions and partially because its executive staff was simply not up to the job of running a company like Netscape. Google could be overspending its way down a similar path.

For each of the employees Google is acquiring the financial benefits should be significant and the distractions of this newly found massive wealth to the YouTube executives will create a significant problem - one that may be impossible to overcome, particularly if the stock price drops catastrophically before that stock can be sold.

Google's stock is trading in the stratosphere and revenues of the company is still largely based on advertising revenue, which is not the most stable form of income sources. Any major drop - or for that matter increase - could result in distractions that the YouTube folks simply can not overcome to get the job done. Finally, once you get this kind of money you tend to read your own press and think your stuff doesn't stink. In short, key employees may become unmanageable "superstars" who are expensive to maintain and impossible to motivate.

The end result could be the departure of these critical employees to other start ups or simply their virtual retirement - which would render Google's acquisition worthless.

The Result?

Like most things, the result will likely be in the middle. But if these folks could be hugely distracted by wealth, the money they got from the PayPal acquisition would have already shown some of this bad behavior and we wouldn't have a YouTube to begin with. Still, that's a lot of money changing hands and distractions like this don't come around often.

I think we are going to see something amazing out of all of this, not sure whether or not it will work, but the experiment will be worth watching and you have to believe there is an Apple angle in here someplace. In fact, this could be an early test of what an Apple merger might be like though, if Google would give $1.65 billion for YouTube, just think what they might give for that company?

In the end, we will likely get a new network out of all of this and probably more. Given what a pain it is to get content right now, this has to be an improvement we can all look forward to.

Rob Enderle is principal analyst for the Enderle Group. He can be reached at renderle@enderlegroup.com.