Youtube + GOOG ......Totally tubular or down the tubes

My belief is that the youtube purchase is done for 1 of 2 reasons.

1) To compel the investors. There has not been a lot of news from GOOG to stir the markets imagination. This deal does this in a big way.

2) Google wants to remain a leader in search. Google is afraid of loosing it's search share to not only Yahoo and MSN but the upstarts like......My Space, Metacafe, Bolt. I believe that impetus for the interest in Youtube is purely preservationist.

We as investors must view this differently..........

The unfortunate problem with video share is that it has a cult-like existence. This is a place for the teens and early twenties to express themselves. If the format is tweaked, will the users bail?Youtube also has a fad-like existence. What happened to Community Webshots? Well, it is still a valid site but you hardly hear about it any more. With Myspace and Youtube, the aforementioned demographic has another place to go. With the proliferation of other sites similar to Myspace and Youtube, there will be other places that offer just the right mix to make a "community" among their users. Will Youtube's format remain the user choice in the future?

The cost......What does $1.65B represent? Could other companies join in on the frenzy and bid the deal up higher?Google earns roughly 1% per quarter on it's cash. At that point $1.6B, becomes $16.5 million lost per quarter of pretax income due to interest (this would be similar to operating income). At this rate, the combined entity (Youtube + Google video) would have to generate $66 million more in operational income than Google video generates alone. With GOOG's operational income being roughly 1/3 of revenue, the break even of this venture would be $198 million revenue more than Google currently generates from it's video. Even if this deal goes beyond the break even point, could the money been spent another way to produce more growth?

With the potential revenue of video share by 2010 being $2.5 billion dollars, this ought to be a slam dunk....Right?With Myspace etal, Google/Youtube will get a piece of the pie. This is a good deal for now and it could be a real profitable venture..................However...........................

I believe that when we look at the future of deals such as Youtube, we have to be risk aware. The risks of the deal remain:

1) Will Youtube still be the same after it is bought and commercialized and tweaked?

2) Will the current format of video share still be popular1,5, or 10 years from now.

3) How much money will this combination generate? Will the amount of money be sufficient to offset the purchase price?

Even if the combination doesn't make the investor money, this is the type of deal that Google must do. To remain in the lead in search, Google will have to spend. In an otherwise stagnate sphere (GOOG news) , this purchase will give GOOG something to compel the stock until the purchase is closed. For the near term the market appears to like the news. The question is what will the markets perception of this deal be in the future.

Good luck investors