% fortune -ae paul murphy

Googling YouTube

I want to start this comment on Google's $1.65 Billion buyout of YouTube by admitting a personal grudge here. Back in 2001 some friends of mine were trying to start a web video company - here's part of something I wrote at the time:

The suggested amendments to the business plan:
  1. expand the mission by adding services to the iMovie community; and,

  2. embed three assumptions:
    • that the advertising industry will react to technologies, like those from Sonic Blue, that allow commercial free TV viewing mainly by blurring the distinction between the entertainment and commercial content of programming;

    • that the cost of data transmission will continue to fall; and,

    • that the cost of on-line storage will continue to fall.

Apple's iMovie software is rapidly gaining market momentum as people begin to experiment with the technology. To support that, and boost Macintosh sales, Apple has been running a number of TV spots one of which is illustrative for our purpose here.

In this TV spot, a couple video tape their wedding, cut a DVD from the digital image file produced, and mail the DVD to their parents along with a hand-written note. This commercial unintentionally shows that:

  1. for most people, distribution of their laboriously crafted iMovie is limited to a few friends and relatives;

  2. for most people physical distribution still means the USPS; and,

  3. that, for most people, getting out the message that their video is interesting and deserves attention is still a matter of leveraging an existing personal relationship.

To change all of that, [our company] will offer users of iMovie or other digital video technologies the opportunity to upload their products to widely accessible servers subject to a standard agreement on intellectual property rights and related issues.

Depending on specific license terms chosen by the property owner at upload time, [our company] may use the material on its leased cable network, distribute the material in DVD form, or simply allow internet access to all or part of it.

In doing this [our company] will be creating the market; its supporting advertising and related infrastructure; and, the distribution channel, for these video materials. Others will, of course, copy this approach but [our company] will have a significant first mover advantage in creating a fully integrated exchange for digital video materials.

The proposal failed to attract adequate financing - because the experts said it didn't make sense, wouldn't make money, and couldn't be done anyway.

So what do I think? I think it'd be nice if I could now bill those idiots for my 10% of google's $1.65 Billion dollar payment for YouTube.

Unfortunately experts are never really accountable for their opinions - particularly when those opinions boil down to "it can't be done next year because nobody did it last year."

And that's exactly what's wrong with google's decision to spend the money - YouTube made sense as a startup in 2002/3, is peaking right about now, and probably has a lifetime of less than three years left to it.

On the other hand you can bet that google's financial experts valued it at a discounted present value of an imaginary revenue stream -net of no lawsuit losses, of course- for at least 15 years, on the same grounds that they rejected our project: i.e. that someone did it last year so it must be worth doing forever or, at least, until 2021.

Unfortunately a basic analysis based on a a realistic rate of change in the industry lops off about 80% of that lifespan and thus produces a financial value estimate in the range of 25% of what Google paid.

So what's going on? Well, two things: first google's IPO and subsequently hyped share price have left it with far too much cash for the available brainpower and not nearly enough places to park it while management skills and "bandwidth" build. To them, spending $1.65 billion to inherit a first mover advantage in a market where the next phase is already obvious isn't a problem because it's all funny money anyway.

Equally importantly, however, there actually is a vision behind this: one that focuses on building volume in the same way that the blitzkrieg idea focuses on claiming territory before the enemy can react. From that perspective, spending an extra $1.2 billion to cut perhaps eight or nine months out of a growth process makes perfect sense because it's all in the eyeballs - and they've got to get the network computing dream working before too many people get too deeply hooked by Vista, viiv, and Wintel's attempt to match the entertainment features offered with MacOS X/PPC in 2001.

Paul Murphy wrote and published The Unix Guide to Defenestration. Murphy is a 25-year veteran of the I.T. consulting industry, specializing in Unix and Unix-related management issues.