Thursday, October 12, 2006

YouTube acquisition, and what social networking means

Back in 2006, when Google acquired YouTube and Newscorp bought MySpace, social networking was still new.  With MySpace's search deal up for renewal, it's interesting to look back.  Whilst YouTube has been wildly successful in audience terms, it's revenues are still yet to make a dent in Google's investment - MySpace on the other hand is looking tired and losing ground; but Newscorp recouped the entire cost of the deal through an adsense deal with Google just months after they bought it.

With Google’s £803m acquisition of YouTube, NewsCorp’s £310m buying of MySpace and the recent rumoured interest in Facebook at over £500m, the market is taking web2.0 seriously and deals are starting to flow.

But what is web2.0, and what makes it different to websites that have gone before?  Why is there so much interest in this sector and how is it that two lads in their twenties from California created a website and sold it to Google for $1.6bn in just 18 months?

The traditional media world is one where power is concentrated in the hands of the few.  The capital cost of starting a new channel/magazine/station is huge, and only those with very deep pockets could afford to participate, because building distribution and an audience took a long time. 

The internet has challenged this.  The capital cost of creating a website is a fraction of that needed to create a newspaper.  New business models based around revenue sharing have enabled those without access to marketing budgets to secure distribution across a wide swathe of the web, and build audience quickly.  Sites like Yahoo, MSN and Google are not simply the biggest websites for audiences, they’re amongst the biggest media properties in the world.

Back in 1998, Geocities was the third most visited website on the internet – a site where people could manage their own personal webpage – putting their pictures up, their favourite bands, films and commentary.  Yahoo bought it in May 1999 in a deal then valued at $3.6bn.

Yup.  $3.6 billion.

This was a good price even for bubble time, and yet we’ve not heard much from Geocities since, although it’s still there.

So what’s different about MySpace and YouTube now that makes them worth the money being thrown at them?

Social networking.  Unlike Geocities, where putting up your webpage was a largely solitary affair, sites like bebo, MySpace and YouTube allow you to share your work with others.  You can connect your page with friends’ pages, leave comments on theirs and see when they’re online. 

This ability to share and connect with other users is the defining characteristic of Web2.0, and it’s a global phenomenon.  Mixi, the so-called Japanese MySpace debuted on the Tokyo stock exchange last month, valued at £1 billion. 

In South Korea, where broadband connectivity is around 70%, social networking has become a national obsession, with a set of social codes evolving around it governing behaviour on Cyworld, the Korean version of MySpace.  It’s considered rude in the extreme to visit someone’s Minihompy (Cyworld’s term for a homepage) without leaving comments, and real pride is taken in how you decorate it.

Deutsche Telekom has partnered with Cyworld to launch in the German market, and it has ambitious expansion plans.  Finally, believe it or not, Dogster (a social networking site for dogs) and Catster (I know, I know) have just secured a round of angel funding to develop the site further, although they claim already to be profitable.

So around the world, whilst the applications and the customs within the sites might vary, the empowerment of people to connect with each other and share their thoughts, photos and videos has proved a potent formula.  The audiences to these sites are truly massive, and the level of participation awesome.

YouTube gets 65,000 videos uploaded a day, and 100 million video plays – and it’s this audience that’s made it an attractive proposition for Google, whose Google Video proposition had failed to gain significant traction with audiences.

If (and it’s a pretty big if) YouTube can address the issue of copyright material being uploaded to the site and thus avoid a lawyers’ feeding frenzy, this could be a great deal for Google.  The bigger issue on the valuation is the loyalty of the audience.

If a site can grow in 18 months to these levels of traffic, then it can happen again.  And if the audience moves on, that valuation’s going to start to look a little salty.

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