After days of rumors, Google has confirmed that it has paid $1.6 billion for YouTube, a tiny video startup that has never made a cent and that has only 67 employees. What is Google buying? In a word, eyeballs. Google's own video venture has been a huge flop, so the company had just two choices: abandon the lucrative advertising potential of free video, or buy the market, which is basically YouTube.
In just a couple of years, YouTube has become a cultural phenomenon and a political force, along with being a huge time waster and a terrible drag on office productivity. Instead of standing around the water cooler talking about what was on TV last night, office workers talk about what is on YouTube, then go right back to their cubicles and watch instead of working, and driving up the company's cost of bandwidth at the same time.
Google is looking more and more like Microsoft. Like Microsoft, they were not the first with a product (Apple introduced windows to computers before MS), but like Microsoft, they were able to capture a big chunk of the market through good marketing. Windows has consistently lagged behind competitors in terms of quality and features, just as Google's search is also long in the tooth. And like Microsoft, the company has had more hits than misses; Google's social software has flopped along with it's video. So the company now has to buy innovation from others. That has rarely worked well for Microsoft, which has lost billions in acquisitions of brilliant software that then quickly disappeared.
YouTube is not likely to disappear, but the transition to becoming part of the Google empire will open up opportunities for video competitors to gain marketshare. And in the search market, competitors are becoming more aggressive; last night, I saw a very hard-hitting Ask.com ad on TV. Google could fall even more quickly than it has risen, as ad dollars can be redirected with a few mouse clicks.