Colleen McAndrew June 3, 2010 TVMN 740 Final Project Google: YouTube In 2006 the announcement that Google

would be acquiring YouTube hit the Internet like a storm. After a stock-for-stock transaction for $1.65 Billion the deal was complete, but the next step for Google was how to make that money back. Larry Page and Sergey Brin, PhD Candidates at Stanford, looking to organize the worlds information and make it universally accessible and useful, created Google in 1996.1 After many years of building, developing, and gaining wide interest, 2004 marks Googles Initial Public Offering of 19,605,052 shares of Class A common stock takes place on Wall Street on August 18, with the opening price of $85 per share.2 Compare their opening price to their current stock price of about $500.3 Their stock price is almost double that of Apple and not even comparable to similar companies.4 In a 2009 comScore Search Engine Rankings, Google Sites comprise of 65.4% of searches, with second place going to Yahoo! Sites with 18%.5 Google holds more share of the searches than the next four search engines ranking below them. With all this web traffic they make their money through their AdSense program where outside vendors display their advertisements on Google content and get paid on a cost-per-click base. Depending on the traffic on the website and the cost-per-click, these numbers can accrue into a profitable business. In 2009, Google had made just under $23 Billion in advertising Revenue alone.6 This revenue accounted for about 96% of Googles total revenue for 2009.7 In 2006 this percentage was higher, at 99%, but since then Google has expanded into other businesses and licensing deals to make a small amount of revenue in other ways.8 One example of this is their acquisition of YouTube. YouTube started in February 2005 and made history 8:27pm on April 23, 2005 with the first video ever being uploaded.9 It was a 20 second clip of one of the founders at the San Diego Zoo and has gathered almost 3 Million views.10 The social impact created by this site where you can upload, share, and watch videos is unprecedented. "Whether you were an aspiring filmmaker, a politician, a proud
http://www.google.com/corporate/ "Google Milestones." Google - Corporate Information. Web. 01 June 2010. <http://www.google.com/intl/en/corporate/history.html>. 3 "Google Inc." Google Finance. Web. 01 June 2010. <http://www.google.com/finance?q=NASDAQ%3AGOOG>. 4 "Google Inc." Google Finance. Web. 01 June 2010. <http://www.google.com/finance?q=NASDAQ%3AGOOG>. 5 "ComScore Releases November 2009 U.S. Search Engine Rankings." ComScore, Inc. 16 Dec. 2009. Web. 01 June 2010. <http://www.comscore.com/Press_Events/Press_Releases/2009/12/comScore_Releases_November_2009_U.S._Search_Engine_Ra nkings>. 6 "2010 Financial Tables." Google - Investor Relations. Web. 01 June 2010. <http://investor.google.com/financial/tables.html>. 7 "2010 Financial Tables." Google - Investor Relations. Web. 01 June 2010. <http://investor.google.com/financial/tables.html>. 8 "2010 Financial Tables." Google - Investor Relations. Web. 01 June 2010. <http://investor.google.com/financial/tables.html>. 9 "Google Milestones." Google - Corporate Information. Web. 01 June 2010. <http://www.google.com/intl/en/corporate/history.html>. 10 Me at the Zoo. Prod. Yakov Lapitsky. Perf. Jawed Karim. YouTube. 23 Apr. 2005. Web. 01 June 2010. <http://www.youtube.com/watch?v=jNQXAC9IVRw>.
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parent, or someone who just wanted to connect with something bigger, YouTube became the place where you could broadcast yourself,"11 the team at YouTube said. Popular videos have made appearances in television shows, been the basis for television shows, and have been referenced in other media. In May of 2010, YouTube stated the number of videos watched daily at the website has broken the two-billion mark as the service begins celebrating its fifth birthday.12 According to the comScore report stated before, YouTube ranks third in Expanded Search Queries in 2009, only below Google Sites and Google.13 Alexa, a web information company, ranks YouTube third in web traffic, trailing Google and Facebook.14 Only after one year in existence, YouTube was acquired by Google for $1.65 Billion in stock. According to Google, this combination will created new opportunities for users and content owners.15 The companies share similar values; both always put [their] users first and committed to innovating to improve their experience. Together, we are natural partners.16 Google already has an international reach, but with the addition of YouTube it will branch out to the consumption of entertainment by their users using a next-generation platform for serving media worldwide."17 One of the most important terms of this agreement is YouTube will retain its distinct branding that had become a household name at this time.18 It continued to operate independently, which helped preserve the success and the community they had build for themselves. The following table summarizes the allocation of the purchase price for YouTube (in thousands):19

Goodwill Patents and developed technology Tradename, customer contracts and other Net liabilities assumed Deferred tax liabilities Purchased in-process research and development Total

$1,134,687 24,000 153,000 (45,027) (72,240) $1,194,420

Chapman, Glenn. "AFP: YouTube Serving up Two Billion Videos Daily." Google. 16 May 2010. Web. 01 June 2010. <http://www.google.com/hostednews/afp/article/ALeqM5jK4sI9GfUTCKAkVGhDzpJ1ACZm9Q>. 12 Chapman, Glenn. "AFP: YouTube Serving up Two Billion Videos Daily." Google. 16 May 2010. Web. 01 June 2010. <http://www.google.com/hostednews/afp/article/ALeqM5jK4sI9GfUTCKAkVGhDzpJ1ACZm9Q>. 13 "ComScore Releases November 2009 U.S. Search Engine Rankings." ComScore, Inc. 16 Dec. 2009. Web. 01 June 2010. <http://www.comscore.com/Press_Events/Press_Releases/2009/12/comScore_Releases_November_2009_U.S._Search_Engine_Ra nkings>. 14 http://www.alexa.com/ 15 "Google To Acquire YouTube for $1.65 Billion in Stock." Google - Press Center. 9 Oct. 2006. Web. 01 June 2010. <http://www.google.com/intl/en/press/pressrel/google_youtube.html>. 16 "Google To Acquire YouTube for $1.65 Billion in Stock." Google - Press Center. 9 Oct. 2006. Web. 01 June 2010. <http://www.google.com/intl/en/press/pressrel/google_youtube.html>. 17 "Google To Acquire YouTube for $1.65 Billion in Stock." Google - Press Center. 9 Oct. 2006. Web. 01 June 2010. <http://www.google.com/intl/en/press/pressrel/google_youtube.html>. 18 "Google To Acquire YouTube for $1.65 Billion in Stock." Google - Press Center. 9 Oct. 2006. Web. 01 June 2010. <http://www.google.com/intl/en/press/pressrel/google_youtube.html>. 19 "10K For the Fiscal Year Ended December 31, 2006." U.S. Securities and Exchange Commission. Web. 01 June 2010. <http://www.sec.gov/Archives/edgar/data/1288776/000119312507044494/d10k.htm>.
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Goodwill is not deductible for tax purposes. The developed technology, customer contracts and other intangible assets have a weighted-average useful life of 4.5 years from the date of acquisition. The amortization of these intangibles is not deductible for tax purposes. Acquiring YouTube may have been forward thinking for Google, but how quickly will they make back their $1.65 Billion? In their 2006 Annual Report there is a section headlined acquisitions could result in operating difficulties, dilution and other harmful consequences.20 Previously stated in this same document, Google identified that their main source of revenue was through their AdSense program, and it could be potentially less profitable if it was deemed ineffective from the advertisers.21 They continue by mentioning they do not have a great deal of experience acquiring companies and acquisitions or dispositions could also result in the incurrence of debt, additional equity or debt financing, which could harm our financial condition.22 Finishing up my mentioning the anticipated benefit of an acquisition may not materialize, as they have yet to realize significant revenue benefits from YouTube.23 One would next expect them to realize profits within the same year of acquiring a company, but this line was repeated in the 2007, 2008, and 2009 annual reports.242526 Many of the specific financials for YouTube are not broken out in the public filings as the company states YouTube's revenues last year were "not material" in a regulatory filing.27 Anton Denissov, an online video analyst with the Yankee Group, stated "I'd be surprised if they broke $20 million in revenue in '07.28 Only after a year, this is a small fraction of the cost also considering they invested research and development money as well as time and energy into figuring out how to make this new acquisition profitable. In their 2009 Annual Report, they open stating YouTube has been making a lot more money for us and our partners with content partner ad revenue more than tripling in 2009.29 Again, they never break these out along with all their other endeavors so it is difficult to say if this statement is true to the extent they mention. One thing to mention through is their Google Content Network, which is an extensive collection of partner sites on which they run their ads from the network.30
"10K For the Fiscal Year Ended December 31, 2006." U.S. Securities and Exchange Commission. Web. 01 June 2010. <http://www.sec.gov/Archives/edgar/data/1288776/000119312507044494/d10k.htm>. 21 "10K For the Fiscal Year Ended December 31, 2006." U.S. Securities and Exchange Commission. Web. 01 June 2010. <http://www.sec.gov/Archives/edgar/data/1288776/000119312507044494/d10k.htm>. 22 "10K For the Fiscal Year Ended December 31, 2006." U.S. Securities and Exchange Commission. Web. 01 June 2010. <http://www.sec.gov/Archives/edgar/data/1288776/000119312507044494/d10k.htm>. 23 "10K For the Fiscal Year Ended December 31, 2006." U.S. Securities and Exchange Commission. Web. 01 June 2010. <http://www.sec.gov/Archives/edgar/data/1288776/000119312507044494/d10k.htm>. 24 2007 annual report 25 2008 annual report 26 2009 annual report 27 Yen, Yi-Wyn. "YouTube Looks for the Money Clip." CNNMoney.com - Fortune - Techland. 25 Mar. 2008. Web. 01 June 2010. <http://techland.blogs.fortune.cnn.com/2008/03/25/youtube-looks-for-the-money-clip/>. 28 Yen, Yi-Wyn. "YouTube Looks for the Money Clip." CNNMoney.com - Fortune - Techland. 25 Mar. 2008. Web. 01 June 2010. <http://techland.blogs.fortune.cnn.com/2008/03/25/youtube-looks-for-the-money-clip/>. 29 2009 Annual report 30 2009 Annual Report
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Google is building their network and is drawing from 94 of the Ad Age top 100 advertisers.31 They are also developing interest-based advertising, which helps deliver ads tailored to peoples interest.32 The fees charged to advertisers each time an ad is displayed on the YouTube site was and still is recognized as revenue by Google. There are five identified ways stated in the 2009 Annual Report which could contribute the change of revenue and motion forward to recovering the investment in YouTube. 33 YouTube is now offering video ads solutions to advertisers that provide advertisements with a way to promote their content to the YouTube community as well as associate themselves with content being watched by their target audience.34 The following are the five key solutions provided by YouTube: Promoted Videos, YouTube Homepage Ads, Engagement Programs and Contests, Display and Linear Ads, and Click to Buy. 35 These new strategies could have helped predict the projected revenues by Forbes.com that YouTube would generate $200 million this year and possibly grow to $350 million the next year.36 Although considered large numbers by other businesses, to Google that is still only accounts for 1% of sales.37 It is no doubt that Google is continuously making increasingly more revenue each year, along with drawing in more advertising revenue as well. Their profits were not as effected by the recession as other companies but they did slow their growth down as reflected by their stock price following the market trend. In YouTube's early days the main objective was to get eyeballs. Now it's to get ads. Web video ad spending will climb from $775 million last year to $1.35 billion this year, estimates Emarketer.

2009 Annual Report 2009 Annual Report 33 2009 Annual Report 34 2009 Annual Report 35 2009 Annual Report 36 Hardy, Quentin, and Evan Hessel. "GooTube." Forbes.com. 16 June 2008. Web. 01 June 2010. <http://www.forbes.com/forbes/2008/0616/050.html>. 37 Hardy, Quentin, and Evan Hessel. "GooTube." Forbes.com. 16 June 2008. Web. 01 June 2010. <http://www.forbes.com/forbes/2008/0616/050.html>.
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