With YouTube, Google puts its competitors in a jam

Build off what they have, or buy a second-tier site? For Microsoft and Yahoo, there's no easy way to make the Internet video market a horse race.

With its planned $1.65 billion acquisition of the video sharing Web site YouTube, Google may well have its big Internet search competitors in a jam.

YouTube has a 45 percent share of the online video market, which is more than its top four competitors combined, according to market trackers at Hitwise. It has mainstream cachet, as page one stories about the impending Google deal in both The New York Times and The Wall Street Journal aptly demonstrated. And, not even two years old, it has a start-up momentum unheard of in any Internet company not named Google.

Responding to this combination is going to be tough for Google competitors like Microsoft and Yahoo. Should they build on the video services they already have? Should they make their own acquisitions? Either way, there's no easy answer.

"There doesn't seem to be an obvious property out there for Yahoo or Microsoft to go after for an acquisition," said Troy Mastin, an analyst at William Blair & Co. "I think an obvious response does not exist outside further investment in their internal properties."

"I'm scratching my head trying to figure out who they (Microsoft and Yahoo) would buy," added Danny Sullivan, editor of search industry blog site Search Engine Watch. "I think Microsoft will try to build up their existing video service and make it as strong as they can. I expect Yahoo will do the same thing."

That would mean a serious uphill climb. Social networking site MySpace, which is owned by News Corp. and has an advertising and search deal with Google , is ranked second for online video search, with more than 20 percent market share. That's followed by Google Video (which will continue to exist after the YouTube deal is completed) with about 10 percent share, Yahoo Video with 6 percent and MSN Video with nearly 6 percent share, according to Hitwise.

Yahoo declined to comment on its plans in light of the Google-YouTube merger, while a Microsoft spokeswoman said the company would focus on its in-house efforts with its Soapbox on MSN video sharing site, which it launched in beta form last month .

"Microsoft evaluated acquiring this type of technology several months ago, and decided to build our own offering, focused on driving better customer and advertiser experiences through integration with Microsoft assets and services that reach an estimated global audience of 465 million consumers," said spokeswoman Whitney Burk in a statement. "We are excited about the potential we are seeing in the beta of Soapbox on MSN and believe building our own solution is a more cost-effective way to compete in this new space."

Microsoft is getting some outside help, though. On Monday, video search provider Blinkx said it signed a deal with Microsoft to power video search on parts of MSN Internet sites and Live.com .

Still, Karl Heberger, advertising director for eBaumsWorld, a video site that offers homemade movies as well as games and other content, predicted a gloomy end for anyone trying to compete directly against YouTube.

"Competitors who rely on the same setup as YouTube," said Heberger, "where it's all user-generated content, they might be in trouble facing a Google-YouTube team."

Of course, baked into all these predictions is the assumption that online video really is the next big thing in Internet content and that its popularity can translate into advertising sales. Certainly, Google's executives think that's the case and were willing to spend big on YouTube, despite having their own video service and a reputation for steering clear of major acquisitions.

"Microsoft already signed a deal with Blinkx, and (Yahoo Chief Executive Terry) Semel is a movie guy," said Stephen Arnold, author of "The Google Legacy." "Google was the odd guy out (in content). Now it's not."

Google has the data centers that can help cut YouTube's prodigious bandwidth costs and is likely better equipped to solve technological hurdles related to filtering out copyright and pornography.

"Google has the infrastructure and bandwidth to drive down those costs, and Google has a way to monetize it," said Arnold. "It produces an upside in revenue with no significant cost impact."

Small YouTube competitors--either because they think they're now great acquisition targets or just because they love being underdogs--profess being excited about the Google acquisition.

"These are exciting times," said Steven Starr, CEO of Revver.com.

Entertainment conglomerates have already shown a willingness to shell out big bucks for some of YouTube's competitors. In August, Sony paid $65 million for Grouper, a company with no profits and less than one percent of market share.

That acquisition led many to speculate that YouTube would easily fetch $1 billion. Turns out, that was a lowball estimate. Now the value for every other video-sharing company is rising with the purchase of YouTube, said analysts.

"I would think now companies like Guba and Revver may get purchased in a reactionary move," said Josh Martin, an analyst with the Yankee Group.

"Other media companies aren't just going to cede (the market) to Google because it bought YouTube," said Greg Kostello, CEO of video-sharing site vMix. "I think they are going to be willing to pay a premium for companies with either traffic or the tools to compete with Google."

"This is the first time in history where people can shoot, edit and distribute video," Kostello added. "Video is the most powerful mass media there is. (Google's CEO Eric) Schmidt said that Google will continue to make acquisitions in video, so Google isn't finished here. I think this is very, very early (in) Internet video."

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