Insightful analysis and commentary for the US and global equity investor
Contributors: Douglas McIntyre Jon C. Ogg

Previous Posts

Monday, October 09, 2006

YouTube: Google Wins The World Series Of Poker


Wall St. loves the guys who bet big. Especially if they have brains. Ted Turner. Rupert Murdoch. Sam Walton. Back when the super-store and the 24-hour news channel were the phantasms of the demented minds of men locked in wards with padded walls, these men were considered insane.

There are not many rules of thumb in The World Series of Poker. But, keen observers will note that a shrewd player with a big lead will bet big on the next decent hand the comes his way. He know that if he wins, anyone else who stays to see the last card gets wiped out or falls further behind. The rule cuts another way. A player who is behind bets whatever chips he has on the next good hand. If he wins, he can draw even with the winner. If he loses, he probably has reached the inevitable end more quickly.

Google's bet in buying YouTube is actually relatively small. Based on media reports, YouTube visitors view 100 million videos a day. The combination of YouTube with Google video will account for 60% of the video traffic on the internet. If video is the "next big thing" on the internet, the $1.65 billion Google paid is cheap. If it is not, Google has gambled a relatively small part of its chips.

The biggest knock against YouTube is that the site aid and abets copyright violations. Google's lawyers undoubted looked at this. And, they are probably as bright as the lawyers at AOL, News Corp, MSN, of Yahoo!. Google took the risk that things could be worked out with big content providers. The rest of the crowd cowered on the sidelines.

AOL, MSN, and Yahoo! needed YouTube more than Google did. Wall St. could make the argument that Mr. Murdoch and News Corp have already bought the other big user-generated content site, MySpace.

But, Google is in first place, in search, in revenue growth, and in market cap. With a market value of $131 billion, Wall St. values it well ahead of all of AOL's parent, Time Warner, which has a market cap of $77 billion, and Yahoo! with a cap of $35 billion. At $276 billion, Microsoft's value is ahead of Google's, but most of that value is attributed to their huge cash- generating operating system business. In terms of the value of online properties, Google is ahead by a mile. And, YouTube puts it further ahead. If video advertising takes off, the game is Google's to lose.

AOL, MSN, and Yahoo! are now playing for second place in the value of their online businesses. They are looking at a player whose pot just got much bigger. The chance that any of them had to even up the game is probably gone. Buying YouTube would have been risky.

But, Wall St. loves guys who bet big.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

Powered by Blogger