Why Did Google Buy YouTube?

One word: Community.

Here's how Merriam-Webster Dictionary defines community:

An interacting population of various kinds of individuals (as species) in a common location.

In a world were there is too much information and too many options people will cluster into communities. And, brands can play a significant roll in becoming facilitators of  such communities. Just look at Harley-Davidson and H.O.G.(the 1 million member Harley Owners Group) or Lego and it's various clubs with over 8 million members, both on and off line.

If you don't form a community around your brand, chances are you'll loose your customer's attention to somebody else. The rule is: Stay engaged or die!

Comments

[GrahamHill]

John

And how exactly do you value a "community"? Is it the number of members? Is it the number of linkages between members? Is it the number of linkages to non-members? Or is it something else?

With HOG or other purchase-related communities it may be relatively easy, but what about communities that have never made a sale, or don't even have a sale in sight?

It is too easy just to use the C-word and say it's all about community. That sounds a lot like saying it's all about "eyeballs", a nebulous concept that lead to a well publicised boom & bust not so long ago.

Graham Hill

[John]

Graham -

Great points.

I've tried not to use the C-word lightly. To me, YouTube is much like a plaza in a town. It's a venue for people to congregate and share wares and ideas. For people to play, discuss politics or anything else they want to do. At least that’s how I use YouTube.

Value is in the eye of the beholder.

I had lunch with my dad who shared with me that someone had just purchased the ranch next to theirs in Wyoming, paying 4.5 times more than any other transaction for a ranch in the area.

A friend reminded him that the new owner had recently retired from Goldman-Sachs with $500 million in his pocket. Dad's friend added that the new owner really liked view.

Whether it’s a ranch or a start-up internet company the value is what someone is willing to pay for it. And, Google was willing to pay a lot. With $11 billion in cash Google can afford to pay a lot.

[GrahamHill]

John

You Tube is nothing like a ranch in Wyoming.

Google has shareholders who expect a risk-adjusted return on their shareholdings in the company and bondholders who expect their loans to be repaid with specified interest. Without an adequate basis for Google's investment in You Tube, Google's ability to pay both dividents and debts is reduced.

A rich ex-banker buying a ranch with a nice view above market-price is nothing to campare with Google's purchase of You Tube. Or at least it shouldn't be. Not in the real world of corporate finance.

I repeat the question and elevate it to a challenge to you: How exactly do you value a community? Is it the number of members? Is it the number of linkages between members? Is it the number of linkages to non-members? Or is it something else?

Graham Hill

[John]

Graham -

From a financial point of view, I'm not sure there is a standard metric to value a community. After selling a few companies myself and getting wildly different bids from numerous investors, the value of a company is still very subjective.

Just look at the stock market. Why is GM worth $18.28 billion with 2005 revenues of $192.6 billion while Google is worth $131 billion with 2005 revenues of $6.1 billion? Sure, Google is growing it's revenues and earnings rapidly but no matter how fast it happens investors view Google in a subjectively different light than GM.

Bottom line is that investors feel that Google has a brighter future than GM and are willing to place a financial value on the unknown future.

So, all that said, how do you financially value a community? Again, it's what someone is willing to pay. I'm sorry I can't get more specific than that.

Graham, do you have a method to value a community?

[Jake]

How do you "value" community? How do you value ethical business practices? A friendly handshake at the beginning of a sales call? A willingness to pass along a sales lead for a friend?

Value of community is like value of anything else in business - pointless to discuss without appropriate context. Community value is, or at least should be couched against the larger business objective. Google has a desire to connect the YouTube content to the larger picture of their desire to connect all pieces of content. Why did they buy Blogger? It connects them to content.

We don't know much about their bigger plans, really. It'll play out.

John's point is a good one, but it's not one of value specific to the community alone. YouTube wasn't bought for its community. Well, not only because of it. It was bought because their community had helped drive it faster, further, and better than their competitors.

[Jake]

By the way, Robert Cringley had thoughts on this purchase too:

http://www.pbs.org/cringely/pulpit/pulpit20061013.html

[GrahamHill]

John

Of course, you are right.

Having scoured social network analysis sources (which is the best way to look at the commmunity part) and intangibles valuation sources (which is the best way to look at the valuation part), I came to the conclusion that there isn't a reliable way to value a community.

There is something in the number of community members. But we must remember that not all members are equal. Some are more equual than others.

There is something in the number of links that members have between each other. But we must remember that some members are better connected, are better salesmen and know better what is going on than others.

There is something in the number of links that members have with non-mermers. But we must remember that not every non-member can be turned into a member.

Perhaps the biggest unknown is in thinking how Google will turn You Tube into the same sort of two-sided market that it has for its own search/personalised-ad business model. I am reliably informed that video searching is much harder than text searching. So the personalised-ad side of the market will be harder to generate.

Whatever Google decides to do, the problem of valuing a community remains. And the problem is going to get bigger. So a valuation approach needs to be developed and formalised. Just expecting or hoping it will "play out" isn't adequate in these financially careful times.

Graham Hill

[John]

Graham -

That's great analysis. I agree with you that a valuation needs to be developed.

John

[Greg]

In searching for a way to make sense of the Google/YouTube purchase (and others like it, where a Deep Pocket purchases a company with no direct source of revenue), I came across your dialogue and read through it. Very interesting insight with regards to the potential of placing a tangible value on a community. However, my question is still not really answered, which is this: Aside from the massive marketing they received due to the rather large purchase sum, how does this purchase make Google more money? what specifically is in it for them?

Sorry for branching off, but here's a less related question that just came to me: Skype. This service offers free voice and video calls (via VOIP). The only revenue attempts I've seen are with regards to allowing users to call traditional phone lines from their Skype account. They also don't do external advertising. My question is, what's their business model? how do/will they make money?

Greg