Google changes tack in media universe

As YouTube founders Chad Hurley and Steve Chen stepped into the spotlight this week, it served as a reminder of how fast the world has been changing for two other internet arrivistes.

No longer as young or fresh-faced, Sergey Brin and Larry Page were sounding this week like old hands in the online world.

Having themselves resisted being bought out by Microsoft and other potential acquirers in their early days, they are now in a position to pick up the hottest new internet property of the moment.

That makes the $1.65bn all-stock purchase of YouTube a striking new development in the evolution of Google, and one that raises fresh questions about its place in the new media universe.

For one thing, it shows that Google is prepared to buy audience share online, and to use its highly-rated stock as a competitive weapon to outbid other media and internet companies in the process.

Other acquisitions it has made until now have been for cash, and have focused on new technologies or new products to fill out its own range of services.

With audiences turning en masse to new destinations such as social networking or user-generated content sites like YouTube, however, Google felt the need to change course – a fact conceded by Mr Brin, who said that the company needed to be part of this “next generation” of internet sites.

Another message brought home by the YouTube deal is that Google’s phase of rapid new product development may be changing course. The two years since the company’s initial public offering have been characterised by a spate of new online services, from email to spreadsheets and a payments system.

Google has now sent the signal that, where its own services are not successful, it is prepared to make acquisitions.

The company’s own video service “has definitely improved – but the trouble is, it’s a network effects business,” says Mark Mahaney, internet analyst at Citigroup. Having lost the audience early on to YouTube, it is very difficult to win it back now.

While generally giving Google high marks for the new services it has introduced, Mr Mahaney adds that similar forces may hamper it in other areas. “They face the same problem with Gmail,” he says.

The lackluster performance of Google Video and Orkut, a Google social networking site that has succeeded in Brazil but is barely used elsewhere, also points to another reality about online social behaviour that is reflected in the YouTube deal.

“Social networking is like catching lightening in a bottle,” says Roger McNamee, a partner in Elevation Partners, a media private equity firm “Only a couple of people have been able to do it.”

Perhaps the most striking thing of all about the YouTube deal, however, is what it says about Google’s relationship with the established media industry.

In recent months, the search engine company has been at pains to paint itself as an ally of other media companies.

As a mechanism for other companies to “monetise” their online content, its AdSense advertising system has become a familiar part of the internet media landscape.

A landmark alliance recently with MySpace, the News Corp social networking site, brought home the importance of AdSense as a tool for other media companies.

The YouTube purchase appears to follow that pattern, but with a twist.

“YouTube is, for all practical purposes, like AdSense,” says Rishad Tobacowalla, chief innovation officer of Publicis Groupe Media. As a site where other media companies can find an audience to display their content, with Google selling the adverts, it could become an important platform for internet video.

Whether the other entertainment companies will be happy to see Google step into this position, however, is a different question.

“It’s the Microsoft and Intel strategy,” says Mr Tobacowalla. According to this view, a “Google Inside” strategy puts Google’s advertising system at the heart of the online media industry. “They can monetise [online traffic] better, more efficiently,” he says. “They’re becoming the operating system for the next generation advertising industry.”

What happens, though, when Google itself – through YouTube – becomes an important online destination for audiences looking for broadband video? How will other media concerns - particularly MySpace, which has come to regard YouTube as an arch enemy – react?

According to some observers, this complex mix of partner and competitor already existed before Google’s YouTube acquisition. “Google already had Google Video – it had already crossed the line,” says Mr Mahaney at Citigroup. “I don’t think this is a big change.”

Watch the video and read the transcript of the FT’s interview with Google CEO Eric Schmidt

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