Google to Acquire YouTube for $1.65 Billion

Google announced this afternoon that it would buy YouTube, the popular video-sharing Web site, for stock that it valued at $1.65 billion.

Google beat out a number of other YouTube suitors, including Microsoft, Viacom, Yahoo and the News Corporation. By successfully negotiating the deal, Google has once again proved that it is the Internet’s dominant player.

Under the terms of the deal, YouTube will retain much of its identity and will keep its name and its office in San Bruno, Calif., more than 25 miles from Google’s headquarters in Mountain View.

Chad Hurley, YouTube’s co-founder and chief executive, has repeatedly said he would prefer for his company to remain independent. Asked about such comments in a conference call with Wall Street analysts and investors held late this afternoon, Mr. Hurley said his company did want to stay independent, adding that “by working with Google, that’s still the case.”

Steve Chen, also a YouTube co-founder, said, “It is hard for me to imagine a better fit for two companies,” both in terms of technology and company culture.

The rise of YouTube has been meteoric. The Internet start-up has been in operation for less than a year, yet it already has an estimated 50 million users worldwide.

The acquisition of the privately held YouTube will enable Google to thrive in one area of the Internet where it has so far failed to gain footing. According to Hitwise, which monitors Web traffic, has the lion’s share of online video traffic. YouTube has a 46 percent share, MySpace has 23 percent and Google Video has 10 percent.

The deal will also greatly benefit YouTube, which would have Google’s vast resources to help it navigate some sticky legal issues. Copyrighted videos often find their way onto YouTube’s pages despite efforts by the site to prevent it. YouTube could also benefit from a Google alliance as it tries to develop new software to prevent copyright infringement.

These copyright issues have led some in the technology industry to compare YouTube to Napster, the song file-sharing service that eventually had to shut down after a protracted legal fight with the recording industry.

Earlier today, YouTube signed three separate deals that should provide some legal protection from copyright infringement claims. One of the deals will allow YouTube to broadcast CBS programming. In addition, YouTube reached agreements with the Universal Music Group and Sony BMG Music Entertainment that will allow it to broadcast music videos.

YouTube, Google and Napster all share one common thread: a bootstraps success story of young technology buffs who started with nothing. Mr. Hurley and Mr. Chen started YouTube after the two struggled to share videos of a dinner party in January 2005. Still in their 20’s and working from a garage, the two secured $3.5 million in capital from Sequoia Capital, the same firm that helped finance Google when it was still a fledgling company, as well as other Silicon Valley stars like Apple, Cisco, Oracle and Yahoo.

The YouTube deal represents a significant payday for Sequoia Capital, one of Silicon Valley’s most successful venture capital firms. Sequoia invested a total of $11.5 million in two separate rounds and was the only venture firm to invest in the company.

Sequoia’s stake in YouTube has been estimated at approximately 30 percent, which means it would be worth about $495 million based on the acquisition price.

Experts say Sequoia’s go-it-alone investment in YouTube represents the kind of aggressive move for which Sequoia is known. A more typical, and safer, approach would have been to bring in other investors, especially for an early stage investment in a company at risk of becoming the target of costly lawsuits.

"They had an absurdly high level of confidence with what they were doing," said Paul Kedrosky, a venture capitalist and author of the blog Infectious Greed.

The fact that a Sequoia partner, Michael Moritz, sits on the board of Google, while his colleague, Roelof Botha, led the investment in YouTube, could have given Google more insights, and therefore, more confidence, into the legal risks associated with YouTube, Mr. Kedrosky said.

Google has experienced explosive growth in recent years, and in the past two years the value of its stock has more than quadrupled. Today, Google’s shares gained $8.50, or 2 percent, to close at $429 following news reports about a deal with YouTube. The deal was announced after the stock market closed.

Google’s most recent earnings report showed that the company’s second-quarter profits more than doubled from a year earlier. Its employee base has grown by about a fifth during the first half of the year.