Were you one of the many who back in 2006 wondered why on earth Google was paying $1.65 billion for YouTube, a site with no revenue and a ton of problems? Then you weren’t alone because even Google CEO Eric Schmidt thought it was overpriced.
YouTube Is Go
In February of 2005, a site popped up on the Internet that would cause a massive shift in how video is served on the Web. It would ease the process, and provide a platform for video of all kinds, mostly user-generated content.
Its name, if you hadn’t already guessed, was YouTube. And it has grown in the last four years to become one of the biggest and most popular sites on the Web, with millions of people from all corners of the world visiting and using the site on a daily basis.
Google Come Sniffing
In November 2006 when Google decided to buy the site, it was only a relatively small success, and it had a bunch of problems. The main one, of course, was the amount of copyrighted material turning up on the site. Viacom got so annoyed with this that it’s suing for $1 billion.
Google paid $1.65 billion for YouTube, a figure which made most people do a double take. Many thought the sale would start the Web 2.0 bubble, and it kind of did, but no site has sold for quite that amount since, especially one which was still in its infancy.
Schmidt Comes Clean
Now it has emerged that even Google CEO Eric Schmidt thought YouTube was overpriced at $1.65 billion. In fact, he considered the site to be worth in the region of between $600 million and $700 million. Meaning Google paid around $1 billion more than it should have.
According to CNET, Schmidt revealed his thoughts on the matter in May during a deposition he gave as part of the Viacom lawsuit. He said:
“I believe YouTube was worth somewhere around $600 million to $700 million.”
“This is a company with very little revenue, growing quickly with user adoption, growing much faster than Google Video, which was the product that Google had. And they had indicated to us that they would be sold, and we believed that there would be a competing offer–because of who Google was–paying much more than they were worth.”
“In the deal dynamics, the price, remember, is not set by my judgment or by financial model or discounted cash flow. It’s set by what people are willing to pay. And we ultimately concluded that $1.65 billion included a premium for moving quickly and making sure that we could participate in the user success in YouTube.”
Conclusions
Clearly Google wanted YouTube and didn’t want anyone else getting hold of it. And they were willing to pay a premium for the site. Which they definitely did. But has that price now justified itself?
In terms of revenue, no, although Google is still experimenting with options for making money from YouTube, and so it could end up paying out. But in terms of getting millions of people visiting a Google branded site every day, yes, very much so.
