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Last Updated: Tuesday, 10 October 2006, 01:48 GMT 02:48 UK
Now on YouTube: Google's gamble
By Tim Weber
Business editor, BBC News website

Screengrab of a film about Google on YouTube
YouTube has a Google investment to show off

Google is buying video-sharing website YouTube for $1.65bn (883m) in shares. So is this is a gamble or a winning investment?

Is this the best business model for an internet start-up? Have a clever idea, build a large audience while burning through lots of money, and wait to be bought by Google?

It has certainly worked for 29-year-old Chad Hurley and 27-year-old Steven Chen, the founders of internet phenomenon YouTube.

Showing videos on the internet is nothing new. Their clever idea was to create a model that makes it easy not just to watch the films, but also to share them.

YouTube dynamics

Want to show a film on YouTube? You don't have to mess about with video standards. Just upload your film and the website does all the heavy lifting.

Just make sure you have labelled the clip correctly, so that the rest of the world can find it.

Watching is just as easy.

YouTube founders Chad Hurley, 29, left, and Steven Chen, 27
It's pay day for YouTube founders Chad Hurley and Steven Chen

No worries about having the right video player. Plus you can rate films, recommend them to friends, comment on them - and even integrate them into your own website, without any technical knowledge.

Little wonder that YouTube has been a huge success.

In August 2005 the site had a measly 2.8 million users a month. One year later YouTube's audience had grown to 72 million people.

This has created its own dynamic. People will post their films on YouTube because that's where the audience is, and the audience will grow ever larger because of the extra content.

It's social networking in overdrive.

YouTube is not MySpace

A few months ago the number of YouTube users overtook that of the web's other great networking site, MySpace.

Last year, MySpace was snapped up by old media giant Rupert Murdoch and his News Corporation for $580m.

This, though, is not about who paid more for how many eyeballs. It's about the underlying dynamics.

Google user at the Frankfurt bookshow
Google's brand won't show on YouTube's website

MySpace depends on lots of its members finding each other interesting. But what was once a place to hang out if you were online and aged between 15 and 25 is rapidly going mainstream and becoming a middle-aged society.

That is just, like, so uncool.

Add to this the fact that spammers and scammers are beginning to make their mark on more and more MySpace pages, and it is easy to envisage users simply abandoning the site as if it were last year's fashion item.

YouTube, in contrast, is content-driven. Users tailor the site to their needs, searching and finding the content they want regardless of interest or age.

Whose film is it anyway?

So why is it that some people ponder whether Google's $1.65bn investment is a gargantuan folly or the niftiest investment this side of the internet boom?

For starters, so far YouTube's real business model doesn't make a lot of money - yet.

Google hopes that by using its advertising savvy it can generate juicy revenues.

But much of YouTube's content is not exactly advertiser friendly.

Which mainstream company really wants to advertise next to a film that sets scenes from a violent video game to heavy metal music, or clips of giggling youngsters in various stages of undress?

The biggest problem, though, is YouTube's prime attraction: its content.

Beyond the deluge of mildly amusing home movies of mishaps, mayhem and moping teenagers, YouTube's servers offer plenty of professionally produced and copyrighted content.

The snag is that YouTube doesn't own the copyright.

In other words, this website is a gigantic law suit waiting to happen.

So far there was little point in sending the lawyers after YouTube, especially as the company was burning through its money at a rapid rate.

Now that rich and famous Google foots the bill, copyright lawyers can start rubbing their hands.

Boom or bust?

Still, the venture is not doomed to fail.

Google and YouTube have struck a series of rapid-fire deals with old media giants like Universal Music, Sony BMG and CBS.

That gives them both (some of) the rights they need and the content their audience craves.

According to the theory of the long tail - where niche content can attract relatively large audiences by being findable and available on demand - it could create a win-win situation.

Old media conglomerates can finally reach the audiences that have abandoned them for the on-demand world of the internet.

And a new media giant like Google secures yet another revenue stream.

The fear factor

Google's success is not guaranteed, though.

For starters, even with Google's search technology, YouTube will find it tricky to organise its offering in a meaningful way that persuades users to do more than just watching three short clips.

And to really make money YouTube still has to solve the problem of how it can make the jump from the computer in the study, and on to the TV in the living room.

Finally: Will content providers really play ball? They have seen Apple dominating the market for music downloads.

This time they will try to make sure that the combination of Google and YouTube has plenty of viable competitors.

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