Wade Armstrong

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Why I Like Google's YouTube Purchase, But Not Yahoo's Rumored Facebook Acquisition

Posted Monday October 16, 2006 in Business

The big tech business news in the last week has been Google’s purchase of YouTube and Yahoo’s rumored acquisition of Facebook. It’s an interesting set of stories, one that parallels the two companies’ moves in the last few years. For Google, it’s a smart strategic acquisition that moves the company aggressively forward in several key ways; for Yahoo!, it’s playing catch-up and fleshing out a portfolio without being aggressive. Not to put too fine a point on it, I like Google’s move and I think Facebook would be just as well off on its own.

Google and YouTube

What Does Google Get?

This is an easy question: Google gets the #1 (despite the valiant efforts of Google Video Search) video sharing site and a large library of content.

The Strategic Fit

Google has a very consistent and clear set of overall strategies, briefly:

• Search everything
• Appropriate ads everywhere
• Fight Microsoft by moving applications onto, and otherwise leveraging, the Internet
• Develop licensing arrangements that make protected IP findable
• Develop and maintain diverse and highly-motivated development teams, and use these to
• Disrupt, disrupt, disrupt

The YouTube acquisition supports all of these:

• It provides access to more content that can be searched.
• It puts Google’s ads on YouTube’s videos — a win-win situation, because Google either makes money off of advertising next to the videos in the near term, or gets a months- to years-long head-start on its rival in running experiments to discover how to make money off of videos online.
• It puts Google in front of both Microsoft’s upcoming Soapbox, which hasn’t even been launched yet and thus doesn’t have proven infrastructure, content, or customers, as well as positioning Google to compete with Windows Media Center, the home digital entertainment hub Microsoft has been trying to push for years. Windows Media Center assumes that users will purchase content online, play CDs and DVDs, or record content using a Tivo-like interface; YouTube gives Google the chance to provide competing free, ad-supported in-browser content to any PC, whether it’s a laptop or the Mac Mini plugged into your LCD TV.
• It gets Google more licenses for more new kinds of content than it had before; with Google Checkout, can searching for and then buying some of this IP-protected content be that far away?
• It acquires a good team and provides yet another exciting division to attract coders to jobs at Google.
• Given Google’s cash reserve, it’s a moderately affordable way to cause trouble.

The Technological Fit

YouTube has been a quiet technology success story. Despite being a small outsider of a company, it was known from the beginning for having superior video quality to Google, and it’s never had a serious server outage, even as a high-traffic, high-bandwidth site. These are both big-time accomplishments, and suggest that either the YouTube development team has some video-related technical skills that Google doesn’t possess, or that the YouTube has marketing and managerial capabilities that have allowed it to uniquely understand the needs of online video consumers. Both are worth buying.

Yahoo! and Facebook

What Does Yahoo Get?

This is a harder question to answer; Facebook is a top social networking site, but not the top social networking site, and, worse, it’s going through a lot of changes, including a complete change of strategy from being a college-only networking site to being a general-purpose networking site. Yahoo would buy, in Facebook, a solid, revenue-generating company, but a number two in its market that is also in transition — a risky purchase.

The Strategic Fit

Yahoo’s overall strategy is still stuck in the “portal” era — they try to make Yahoo.com a home page for Internet users, even though very few people actually seem to care about home pages. Facebook does offer some added value here for Yahoo, because having information about friends and networks at one’s fingertips would make a home page a more useful “daily dashboard.” But what does Yahoo offer Facebook? Sure, Flickr is better than Facebook’s photo offering, but not that much better. Yahoo Mail is better than Facebook’s e-mail, and most people hate using networking sites’ feature-light e-mail systems, but do people really want to integrate their highly-targeted, high signal-to-noise Facebook inbox with their general-purpose Yahoo inbox? That remains to be seen; users could abandon Facebook when their inboxes become filled with the spam that most free e-mail systems attract. And, again, who uses home pages? The portal wars are over, applications have quit offering home pages that show your options when you open the program, and many computer users don’t know how to set their browser home pages anyway.

The Flickr acquisition suggested that Yahoo might be looking back to its origin as a human-edited directory of Web content, and trying to build ways to make new human-edited directories, this time edited by Web users in general using distributed tagging methods, rather than by specialist editors. Buying Facebook offers little possibility to continue down this alley; Digg or Reddit would be a more obvious acquisition to perpetuate this strategy (I wish they would go with the human-edited approach, because it is one of the few ways in which Yahoo could actually differentiate itself these days).

It’s tempting to see the synergy-free Flickr and Facebook acquisitions as a sign that Yahoo wants to become a diversified Internet conglomerate. Up until the ’70s, diversified conglomerates were successful because they offered the businesses which formed the divisions of these companies two things: better access to scarce capital and better access to scarce managerial talent than small companies could get on their own. Of course, today we have venture capitalists, angels, junk bonds, and tens of thousands of people getting their MBAs every year; if Yahoo hopes to form some kind of diversified conglomerate, it can’t get ahead by offering either of these two classic resources, and it’s not clear that the company has any other kind of unique resources at its disposal. But, then, Yahoo is run by old-economy pro Terry Semel, so you never know.

The Finance Fit (or Lack Thereof)

Yahoo had better be making an all-cash offer for Facebook, because YHOO has declined almost 1/3 in the last year, while GOOG has increased in value 150%. Why would the Facebook ownership team want stagnant-to-shrinking Yahoo stock when they could get either Google stock or IPO themselves?

So What Does This Mean?

Google has a strategy and buying YouTube fits right in. Yahoo is weak on strategy and even weaker on obvious fits with Facebook. After Google came out with GMail, Yahoo tried to fight back by buying Oddpost, purveyor of AJAXy mail goodness; more than a year later, they finally came out with a new Yahoo Mail, which was… like the old one, but more so. Yahoo tries to improve its execution; Google launches GMail and Documents and Spreadsheets and Code Search — it disrupts, and it has institutionalized the freedom to spend time on just anything to encourage development of more disruptive technology. The Innovator’s Dilemma shows us that the disruptor will always win, and that bodes poorly for Yahoo, except as a cash flow play, in the long run.

And What’s Next?

Half of the fun of writing on the Internet is the freedom to make crazy predictions. If my above reasoning is correct, Google will look for more ways to get its hands on IP and will buy a podcasting site, as well as pursue new licensing deals with top publishers; someone who owns a large library of music videos or other 5-minute-long clips would be a top bet. Yahoo will buy 37signals, in order to get the Backpack application so that it can start billing itself as a home page — a dashboard — both for home and for professional use, as well as to get some company that coders might be excited to work for. This is a much less obvious and useful exercise than Google’s purchase, and also is riskier; look for Google to keep executing, and Yahoo to keep missing, for the conceivable future, just like they are doing with YouTube and Facebook, and just like they have done since before the GOOG IPO.