Google, the internet search giant, has agreed to acquire YouTube, the California-based video start-up, for $1.65bn in an all-stock transaction that will turn Chad Hurley and Steve Chen, the company’s 20-something co-founders, into instant multi-millionaires.

The deal makes YouTube – which has yet to turn a profit but which has grown into one of the most popular internet destinations with 100m daily video viewings – the first site dedicated to user-generated content to be sold for more than $1bn, setting a new price level for the sector.

“The YouTube team has built an exciting and powerful media platform that complements Google’s mission to organise the world’s information and make it universally accessible and useful,” said Eric Schmidt, Google chief executive. “Our companies share similar values; we both always put our users first and are committed to innovating to improve their experience. Together, we are natural partners to offer a compelling media entertainment service to users, content owners and advertisers.”

Google said the start-up would retain separate offices and all its 67 employees.

In spite of YouTube’s popularity there have been questions about the sustainability of the company in light of the large amount of illegally copied material viewed on the site and limited advertising revenues to date.

However, YouTube has struck deals with big US media companies to legitimately distribute their video content – three were announced on Monday – reducing the threat of copyright lawsuits.

Mr Hurley, YouTube chief executive, said the acquisition would allow the company to “sharpen our focus” in working with content providers to overcome the copyright issue.

In addition, Google’s technical expertise and clout with advertisers could turn YouTube into a highly profitable venture, especially as advertisers increasingly look to target the young audience which is spending less time watching television and more time watching videos on sites such as YouTube.

“Large advertisers are looking to spend more money with Google,” said Ben Schachter, analyst at UBS. “Video is a major focus, and YouTube increases [Google’s] inventory.”

The deal is one of Google’s biggest acquisitions in its eight-year history. It marks a tacit admission by Google that the search group’s own video site has failed to gain the same traction among its audience as YouTube.

“When we looked at the marketplace, there was a clear winner in [the] networking and social networking side of video,” said Mr Schmidt.

The deal follows the acquisition last year by Rupert Murdoch’s News Corp of, the social networking site, for $580m in cash, at the time considered a hefty price for a media start-up but now widely regarded as having been a good investment in order to tap the online youth audience.

Facebook, another social networking site which has also grown hugely in terms of its online audience, has also had talks with media and internet companies about a possible acquisition.

YouTube signed deals on Monday to offer music videos from Vivendi’s Universal Music Group and Sony BMG Music Entertainment, as well as television content from CBS, sharing any related advertising revenue.

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

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