UPDATE 2: Google to acquire YouTube in $1.65 billion deal

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UPDATE 2: Google to acquire YouTube in $1.65 billion deal

Mountain View (CA) – Google confirmed speculations and announced that it will acquire YouTube in an all-stock deal valued at $1.65 billion. The deal, announced shortly after market close on Monday, aims to combine “one of the largest and fastest growing online video entertainment communities” with Google’s “expertise in organizing information and creating new models for advertising on the Internet.”

In an initial statement, Google said that the combined companies will focus on providing a “better, more comprehensive experience for users interested in uploading, watching and sharing videos, and will offer new opportunities for professional content owners to distribute their work to reach a vast new audience.”

“The YouTube team has built an exciting and powerful media platform that complements Google’s mission to organize the world’s information and make it universally accessible and useful,” said Eric Schmidt, chief executive officer of Google, in a prepared statement. “Together, we are natural partners to offer a compelling media entertainment service to users, content owners and advertisers.”

During a conference call Schmidt said that Google will continue to operate its video site side-by-side with YouTube, which will retain its logo, brand and will be positioned to “complement” Google’s own video business. While Google Video, however, will be tightly integrated with Google two core areas, search and advertising, YouTube will remain – at least on the surface – an independent service that will introduce Google features over time. Google co-founder Sergey Brin mentioned that YouTube will get Google search features and become part of the site’s advertising network. He described video as being at the center of a media “revolution” that will offer new opportunities for advertisers, and open new revenue streams.

The number of Google shares to be issued in the transaction will be determined based on the 30-day average closing price two trading days prior to the completion of the acquisition. Both companies have approved the transaction, which is subject to customary closing conditions and is expected to close in the fourth quarter of 2006. Google said that the two firms chose an all-stock transaction in order to keep the deal tax-free for YouTube shareholders.

Recently, Comscore Media Metrix released a study that showed that YouTube and Google both fall behind Yahoo and MySpace with regard to online video streaming.

The results showed that YouTube brought in about 30.5 million unique streamers in the month of July. The aggregate of all applicable Google sites ranked in with 7.5 million. Yahoo and MySpace both reached just less than 38 million unique streamers. With the combination of Google and YouTube, whose individual numbers combined topple all their competitors, there lies the potential to climb to the top. Google chief executive officer Schmidt declined to comment on YouTube financials, including the cost of operating the business. In a very blurry statement, he simply stated that “the YouTube founders have not spent a lot of money” so far.

Google’s acquisition of YouTube could also possibly help the latter with its recent legal headaches. Because of pressure from copyright holders like NBC and Universal Music Group, whose content was illegally being posted on YouTube, the San Bruno, Calif.-based site was forced to initiate a project that would systematically check for and prevent copyrighted videos.

This big decision comes at a time when content companies have embraced YouTube, most likely because of the Google acquisition murmurs. Just today, Sony BMG, CBS, and once-nemesis Universal Music Group, all announced partnerships with YouTube. Under the music company deals, users have permission to use Sony and Universal music in their own videos. The CBS partnership will give the network station its own “channel” on YouTube.

Google also announced details of a partnership with Sony BMG today, as well as a new deal with Warner Music Group. Google worked out a deal with copyright holders immediately at the launch of Google Video. Through its video service, Google allows users to pay a specified amount to access a copyrighted video. It also allows integration with other Google Account features.

Google Video also allows a handful of features for user-generated content that YouTube has not yet implemented. For example, they allow the infrastructure to add closed captions to a user’s uploaded videos. Google also has more refined filtering and video sharing options.

However, of course, YouTube has the sheer volume of videos and users that Google has long been trying to attract. That, combined with Google’s know-how for generating Internet-based revenue, means the new merger could bring together the best of both worlds. Google and YouTube did not provide details on what that could mean in detail and said that “there is no shortage of projects in the weeks ahead.” However, Sergey Brin left no doubt that the integration of Google Search and Advertising into YouTube will be at the top of that list.