The Citizen Media Gold Rush is in full fury, with Google’s buyout of YouTube as Exhibit A.
YouTube has been a fantastic success, and deserved a big payday. Is it worth $1.6 biilion, though?
I doubt it, and I think Google doubts it, too. Consider that Google paid with stock, not cash. Google’s stock looks overvalued from here, and if it is, the deal isn’t worth $1.6 billion. But it’s still worth a whole lot of money.
The deal reminds me of something from the 1990s: AOL’s buyout of an Israeli company called Mirabilis, which came up with ICQ, by far the most popular instant-messaging system of its day. Mirabilis had no revenues, much less profits. Its business model was to collect users, which it did brilliantly, and then to sell — for about $400 million, back then a phenomenal payday — those users’ attention and passion to a company that did have revenues and profits.
ICQ’s founding investor, my friend Yossi Vardi, is perhaps most famous in industry circles for a line he uttered during those bubble days. Asked what the business model was for a company with lots of users but no money coming in, he said, “Revenues are a distraction.” In his case, he was right. In lots of other cases, that line proved to be the anthem of the bubble-driven outfits that, for the most part, flamed out and took billions of investors’ money with them.
The network effect worked brilliantly in the ICQ case, as it has for YouTube. The more people who used the service, the more it was worth, in part because of switching costs: If you wanted to use a different instant-messaging service, you had to convince your friends to do so as well.
Ultimately, AOL didn’t make very smart use of ICQ. And smart tech developers found ways to collect various instant-messaging systems under one application (I use something called Adium on my Mac, and can see my various contacts who use various IM services in a seamless way.)
YouTube has a number of advantages. One, not sufficiently appreciated by non-techies, is the ease of use. YouTube makes it dead easy not just to view videos, but also to post them and to use the videos — via cutting and pasting snippets of code — on other websites. Just like that, you can have a YouTube video playing inside your own blog.
The other main value of YouTube is its celebration of human creativity — the rest of us, not just the entertainment industry — compounded by community. Do not underestimate the community that has sprung up around these videos. Other companies are providing similar (and in at least one case better) services, but they’re not close to duplicating the critical mass that YouTube has engendered.
YouTube also has some problems, including one that Mark Cuban has flagged: the utterly blatant copyright infringement taking place on the site. Sure, YouTube is making some deals with content providers, but one of its greatest values is the ability to find that video you missed yesterday; some of those videos will either disappear soon or be viewable only if you watch an advertisement first, which viewers will not enjoy.
In the end, this deal does look awfully pricey. Google has the stock to spare, and can outbid the competition in much the same way high-flying tech companies used stock to buy smaller companies in the 1990s. Will it all end in tears?
I can’t tell you which specific deals will come to grief. But anyone with common sense can feel the bubble mentality returning.