Google buys YouTube and both sign new media deals

It turns out the rumours are true. According to CNNMoney, Google is buying YouTube for around $1.65bn. This deal is bound to have a dramatic impact on the online media landscape. This announcement comes hot on the heels of announcements of deals between YouTube on one side and CBS, Universal and Sony BMG on the other:

The separate agreements with CBS, Vivendi’s Universal Music Group and Sony BMG Music Entertainment come less than a month after YouTube reached a deal with Warner Music Group Corp. On Friday, Google Inc. was reported to be in talks to acquire the video site for $1.6 billion.

And it isn’t just Google who is coming out on top with this deal. According to TechCrunch:

One source close to YouTube tells us that founders Chad Hurley, Steve Chen, and Jawed Karim each stand to make between $100 and $200 million from the deal. How much will Sequoia take?
Sequoia was among YouTubes first funders, providing $11.5 million in two rounds. When $25 million more was rumored to have come from parties unknown this April, Michael Arrington wrote that Sequoia likely did whatever it could to maintain its equity share in the company. He estimated that share was between 25% and 30%.
What does this mean? If Sequoia put in $11.5 million for 30% of the company, and if in fact YouTube is being acquired for $1.6 billion then Sequoias stake translates into approximately $480 million (subject to a slight adjustment upwards if Sequoia had what is known as participating preferred stock). Thats a multiple of more than 41 times what was invested in a company founded in February 2005. It may not upend the recent argument that the VC model is broken, that there are few huge exists available and not much else, but its certainly interesting to consider.
These numbers beg comparison with Sequoias investment in Google. According to Bill Burnhams respected analysis last summer of Sequoias take from the Google IPO the fund turned a $12.5 million investment in 1999 for 10% equity into roughly $4.7 billion. That was at much lower stock price at IPO; the stock initially sold at $85 per share, today its up to $430 per share on a $131 billion market cap.
So Sequoia wont make a Google-like return on their YouTube investment. But a 41x return on an investment made a year ago isnt something to sneeze at, either.

That is not too bad going.

Aside from the monetary consequences of the deals, the new media space is going to become a pretty interesting space with all of these deals and Google sitting on top of it all. I am curious how this will pan out. Will Google fold YouTube into Google Video; keep YouTube more or less as is or will something else happen? Ultimately these deals are likely all about advertising revenue and Google taking a bigger slice of the AdSense pie. After all, these deals are worth a fair amount in advertising revenue alone. They remind me of what I read somewhere about TV being an advertising medium and all those programs we watch being the means to get us in front of those ads.

It is going to be pretty interesting to see what other players in the market do now. Here I am referring to Yahoo!, Microsoft and MySpace in particular. Very interesting indeed.

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Paul
Enthusiast, marketing strategist, writer, and photographer. Passionate about my wife, Gina and #proudDad. Allergic to stupid

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