Finance

The acquisition of YouTube by Google came as a no surprise to many analysts in the technology industry. Google has developed a habit of buying companies that are based on a great idea and have a potential of becoming cash cows in the future once their development costs are recovered. Or in Googles case once the acquisition costs are covered these companies stand to benefit Google immensely.

On a strategic level Google has been successful because they know that re-inventing the wheel is a far more difficult and expensive task than just buying the whole idea from another creator. It has few basic advantages firstly it reduces competition and secondly it is a quick way of getting into a market. The 1.65 billion dollar move to buy YouTube might look expensive for the year 2006 but what Google knew about YouTube was more then what others could eve think about.

Lets see what YouTube offered Google when it might have thought of acquiring the company. In our opinion YouTube had a lot in common with what Google did a few years back when it was starting up. YouTubes simple and powerful idea of video-sharing allowed customers to challenge norms and interact with the world in an absolute new way such that just a click on upload will let their videos be seen by anyone else in the world. Just like Google the simple concept of video-sharing and giving power to the customers led to a phenomenal growth in the customer base of YouTube secondly because of the potential of the service we saw that a number of brands were attracted to sponsor YouTube.

Although this basic understanding of how Google and YouTube have similar business models is good for both the companies in terms of compatibility and direction but one wonders that to keep the creativity juices going how the working arrangements will be developed between these two companies Luckily for both the firms when Google was buying YouTube the deal was measured in Google stock and the Google management also announced that YouTube will continue working just as a separate company though Google will provide technological support to improve YouTubes ability to handle more powerful camera videos and other technological challenges.

Such an arrangement is of great help and strength for the YouTube management as they keep the all important product development and idea creation departments in their control the subsequent advantage of such a move is that Google is spared the need for hiring and nurturing a brand new team for YouTube. All Google needs to do is to keep the current YouTube employees happy and give them enough control and autonomy that are interested in staying with both the brands.

Another important aspect that justifies the price tag for YouTube is the similarity between Google and YouTubes revenue models. Both the companies rely on their large and growing customer bases and their potential ability of viewing in-text advertisements. By acquiring YouTube, Google gave a huge boost to its already massive customer base. This fundamental reason will ensure that the Google and YouTube relationship will bear great fruit for both the companies in the near future.

It must be understood here that certain industries have a unique growth model compared to other industries. The technology sector requires firms to grow at a phenomenal pace in order to survive competition and continue making revenues. The birth of Google was one of the greatest inventions of our time though we can not expect another similar product from the creators therefore to keep the company liquid and moving the firm has to expand its product base and either buy new ideas or create further ones.

The advantage that Google has is the huge clout over the internet market and its massive financial backing therefore buying a reasonably successful idea in its early years is a very good way of expanding Googles business interests. Just look at how an acquisition by Google of YouTube in 2006 will lead to future cash inflows that will cover all costs and result in profits as well. According to one analyst revenues from YouTube will come at a 7.5 million per month after the acquisition. Another independent analyst puts these revenue forecast figures at 150 million annually.

The benefits that Google has achieved from the buyout of YouTube more than compensate for the costs this is because a company like Google is dependent on customer base for revenue generation and YouTube has exactly been the product lately which has attracted large amounts of customer and fan base. The revenue sharing model between customers uploading videos and YouTube has given the companys revenue generation ability a completely new dimension.

We also must understand why YouTube has a long-term sustainability factor such that revenues will increase in the next few years. Firstly, YouTube offers customers the ability to watch what they like and search using filters and other options. Secondly with the stepping in of Google we see that YouTube has become more users friendly and accessible from a number of different sources. YouTube videos have become more searchable and through search engine optimization and other related technologies Google has strengthened the technology side of YouTube.

What we gather from the Google strategy here is that acquisition is the next big way in the technology sector for expanding and diversifying customer base. But a worrying aspect is that will companies like Google, Yahoo and Microsoft eventually become the big three of the industry and stifle competition and start on aggressive buyouts and increase barriers to entry. This can be detrimental to the technology industry since it thrives on the inventions and product-led approaches of many of the start-up entrepreneurs.

Analysis
Googles buyout of YouTube has set a major pattern in the technology sector. Companies like Yahoo, Microsoft, and Google are all vying up to buy successful startups and extremely good prices. This is an encouraging sign for many of the developers and investors who see the emergence of a potential exit strategy though we must ask crucial questions about the aggressive nature of these takeovers and is this acquisition model sustainable in the long-run

On a strategic level a company like Google wants to buy a company like YouTube, even at a higher than expected price tag, because the benefits in the future are so large that todays cost would look very small after a few years. In the technology sector it is all about the market share and how much money one can gain from each increasing customer. The media involvement and the entertainment aspect to the internet have increased so rapidly in recent times that we might see forums like YouTube take over the television market as well. This is because YouTube plans to launch major sporting and other events on YouTube which will not only give people the liberty of watching whenever they want to but also the ability to select different versions and quality offerings.

Another crucial aspect of the Google-YouTube deal was the way control and management would be run and organized. We believe that Google took a great step by deciding on only acting as a technology supplier and back-stage actor for YouTube and allowed its management the right to product development and other aspects that control creativity of YouTube. By adapting such a methodology both the companies have led the path to a new sort of partnership and understanding of how to solve each others problems and cater to each others needs. The strategy would have long-lasting impact on the motivation levels of the management as well as the specialization of both the companies as providers of certain specific services to each other. Google stated after the acquisition that it would want YouTube to continue working as an independent organization this was a great boost to a company like YouTube which is far smaller in size and financial strength than Google.

We also see that Google has understood the strategic importance of acquiring reasonably successful start-ups which have been regarded as acceptable by the market. Google buys such companies for a premium price although this strategy will work for the company but it also needs to focus on its core competencies and develop powerful products that could counter some of its rivals such as Yahoo and Microsoft. Product development is considered extremely crucial in the long-run since that would determine the rate at which the company has successfully generated returns from retained or invested profits. Another important aspect to product development is that fact that most technology products have a short life span which leads to the need for greater development of products and services.

From the standpoint of finances this was a good move because even forecasted revenues are such that the return would be eminent within 5-7 years. This total return of investment also highlights an important factor during this time Google has lessened an important competitor for the all important customer base that is so dear to companies like Google. Essentially, what Google has achieved is a way of going forward which has its pros and cons but so far it has been an effective way of staying ahead of competitors such as Microsoft and Yahoo.

In the near future what we can expect from these stalwarts of the technology sector is a trend toward more aggressive buyout strategies and a possibility of synergies across different industries which might require technological products offered by some of these companies. Partnerships and strategic alliances across industries and within industries seem to be the future way forward for companies in the hi-tech sector.

This is because in the technology sector the need for higher profits means that better products are produced at lower prices so that more and more people leave older products in favor of these new products. This is a crucial factor in the technology sector that companies must defeat the market of their own products with the inventions and development of new products. We also must realize that mergers and acquisitions in the technology sector are important way of providing exit strategy for entrepreneurs and start-up owners.

Google has given a lot of product developers and entrepreneurs a new reason to develop a business that Google might buy and they subsequently will become billionaires such a dream is well worth the try for most entrepreneurs. This is precisely the reason why we might see a large number of start-ups in the near future that stands to benefit the technology sector and increase the ability of new ideas to be given an opportunity to develop.

Another important question that one must ask is the fact that Google will continue to grow by acquisitions but does that mean that a decade later we have monopoly like situation in the internet arena. Well for some this might not be a problem but for the others this means that the revolutionary path of improvement and better products might just fade away as a result of a shift from total competition in an industry to a form where Google dominates everything in the technology sector.

Whichever way we look at it Google is moving from strength to strength and it will continue doing so as more new businesses are up for grabs which offer better customer base and product idea that is much like that of Google.