Google’s growing video ambitions

Contact: Brenon Daly, Jim Davis

More than four years after Google acquired YouTube, the video content site is either putting up black numbers, or is very close to it. That’s according to hints offered recently by the company, although Google has often appeared unconcerned about the profitability of the wildly popular site that the search giant picked up in its second-largest acquisition. (YouTube could have slipped to Google’s third-largest deal, but it appears that rumored talks with Groupon have come to nothing.)

Just how popular is YouTube? Google recently indicated that a day’s worth of video (a full 24 hours) is uploaded every single second to the site. And while profitability has not been an immediate concern for YouTube, Google has nonetheless demonstrated that it is committed to online video – and that it is willing to put even more money behind the effort. Just late last week, Google picked up Widevine Technologies.

As my colleague Jim Davis notes, Widevine gives Google technology used to underpin both online and broadcast premium TV services through the use of software-based DRM systems. This means the company – with its recently launched Google TV product, as well as Android-powered phones and laptops running Chrome – will be able to offer secure premium content on any of these platforms and enable subscription and video-on-demand services, as an example.

For instance, YouTube could now charge for access to live events that it has broadcast on occasion, including a U2 concert last year and the Indian Premier League cricket matches this year. Until recently, YouTube had used CDN services from Akamai for live broadcasts. But just in the past few months, YouTube has started testing its own live-streaming services platform (and has hired a number of former Akamai employees to boot). If Google continues to develop a secure and scalable content delivery platform, CDN vendors may well feel the pinch.

A first for Google: reaching for a public company

Contact: Brenon Daly

In the five years since Google went public, the serial shopper has picked up some 40 other companies. It has bought its way into security, collaboration software, mapping, video and voice, among other areas. And it has inked deals ranging from the low seven figures all the way up to $3.1bn for DoubleClick. But in all of its shopping, Google had never reached for a fellow public company. That changed Wednesday with the search giant’s announced $106m purchase of Amex-listed On2 Technologies. The transaction is expected to close by the end of the year.

Fittingly for a vendor that hangs ‘beta’ tags on products for years, Google didn’t immediately indicate its plans for On2. But we suspect that the video compression technology that On2 developed could well come in handy to lower bandwidth costs and sharpen up the performance of Google’s YouTube property, for instance. (Whatever the strategy, we’re pretty confident that the deal was a pure technology acquisition. Google certainly didn’t snag On2 for its financial performance. Money-burning On2, which has rung up an impressive $183m in accumulated deficit since its founding in 1992, has had negative working capital so far this year.)

As an aside, we would note that there are actually a few ties between Google’s YouTube buy and its pending pickup of On2. Both transactions are the only ones we’re aware of where Google used its own equity to cover the purchase price. (For those On2 shareholders who might be curious, Google shares have handily outperformed the market since the vendor handed over $1.65bn worth of stock to YouTube owners. Google shares are up about 12% since the company announced the YouTube deal in October 2006, compared to a 12% decline in the Nasdaq over that period.) Also, even though Google rarely uses a sell-side adviser, Credit Suisse Securities banked the search giant in both deals. In fact, we understand that the same banker, Credit Suisse’s Storm Duncan, handled the two acquisitions. Duncan worked across the table from Covington Associates’ Tom Cibotti, who advised On2.