I think the need to fully understand the basics of the Google Business model are in order here, so indulge me for a second as I won't be able to explain this in a few sentences.
I??ll start in 2005: From the Google and Yahoo home pages alone, there were approximately 2 Billion searches a month in 2005.
Approximately 14% of those searches turn into a paid click (advertisers pay money to be at the top of the search engine results to increase clicks, and 14% of the time searchers clicked the link and did ??something? that qualified as a paid click). The average rate for advertisers in 2005 was 50 cents per paid click (some were higher, some were lower depending on the item being sold/searched).
So let's do the math: That??s approximately 280 Million paid clicks, or roughly $140 Million a month in revenue split between Google and Yahoo, depending on traffic. And that was 2005, before MySpace really took off and Google started really dwarfing the search competition.
With internet usage expanding, and the ad-click model being expanded from the Google home page and onto social networking sites (like myspace, friendster, facebook), the numbers in 2006 will be astounding. The Social Networking phenomenon is a marketers dream because users are astoundingly willing to reveal a tremendous amount of personal information, most notably likes and dislikes. Google now supplies ad-clicks on the side of users homepages based on those likes and dislikes, in addition to searches. This creates a virtual network of people with similar likes and dislikes looking at specific ads on each others (??friends?) web pages.
The advertisers see this as a new ad route that may be more effective than trying to pin down a certain demographic that would normally watch a television show. And TiVos are hurting that market more than anybody thought.
Rupert Murdoch spent $580 Million on Myspace and MySpace is now the largest outside source of search traffic and ad-clicks for Google, accounting for over 8% of their inbound traffic as of early May 2006. That essentially means that MySpace is responsible for about $400 million of Google??s annual revenues. Knowing this, MySpace held an auction for its search business. Google won the bidding war to the tune of $900 Million for the right to be the sole search function available on MySpace web pages until 2010. Less then 6 months after buying MySpace for $580 Million, Murdoch guaranteed himself at least $900 Million in revenue from one source for the next four years.
It's important to point out here that Google could have bought MySpace for $270 Million and passed. Less than a year later is cost them $900 Million in shared revenue, which they??re still thinking they can make money on, but it could have been so much more.
So maybe YouTube is over valued, but Google took the chance that video is the future of the internet, and YouTube is the largest source of video traffic, with numbers around 72 Million.
And here's why Google thinks it can avoid the lawsuits on Copyright materials. It plans to share add revenue with the sources. The companies don't want their materials to not be shared - they just want a cut of the action. And that's exactly what Google and YouTube have teamed up to do. If someone posts a CBS show on the site (or better yet, CBS posts high quality video on the site on its own), then CBS gets a cut of any ad revenue from those pages (the only question is what Google plans to do with embedded links on other pages?). It's a win-win here. This isn't Napster any longer - it's the partnerships and revenue sharing model that are going to allow the user to have a better experience and allows technology to grow, while providing revenue streams to copyright holders.
So the real gamble - video not being the future of the internet. But given YouTube's rising success (from 2.1 million audience to 72.1 million in a year), this is a smart move, and saavy investors see it.
