Video site buying spree in the offing?

Some observers wonder if more deals will follow Google's acquisition of YouTube.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
3 min read
Mary Hodder certainly wouldn't mind seeing Google's purchase of YouTube prompt other companies to open their wallets.

That's because she's the CEO of Dabble, a site that serves as a TV guide for Internet video.

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"It causes people to look at our value, and who has what video where," she wrote in an e-mail. "All of a sudden lots of people who didn't get Dabble are popping us and realizing the value we provide with search and social discovery."

The $1.65 billion acquisition, announced Monday, represents a high-water mark in the Web 2.0 world. For the past two and a half years, large outfits like Yahoo, Google and others have been snapping up small, fast-growing Web companies to round out their product portfolios. One of the more cited examples is Yahoo's acquisition of Flickr in 2005.

Most of these companies, however, have sold in the under-$100 million range. The YouTube deal exceeds those others and has prompted some to speculate that the tech world could be on the verge of another buy-purge cycle similar to the one that occurred in 1999 and 2000.

Will the YouTube acquisition set off a buying frenzy? If so, there are a number of small video sites out there, such as Dave.TV and MetaCafe, that could be bought.

One that's already been snapped up is Grouper, which Sony's Hollywood studio bought in August for $65 million. With that deal, "they get a user base, they get talent, and they get technology," said Tom McInerney, CEO of Guba, a small video company that has a separate relationship with Sony.

Venture investors contacted, though, weighed in on the side of caution. One thing that makes the YouTube deal different is the singular nature of the two companies involved. Google has been raking in billions in revenue and profit.

"As a percentage of Google's market cap, it (the price) is negligible. When you have a surplus of overvalued currency, you can afford to overpay for assets," wrote Pete Sinclair, a partner at Leapfrog Ventures, a VC firm specializing in early-stage companies. "Let's hope the rational minds prevail. The industry can do without another overinvestment cycle crash so soon after the last one."

Sinclair also noted that Google's success has taught companies and investors that eyeballs and current viewership don't necessarily equal revenue or brand loyalty. Google, after all, came to prominence after Yahoo, Alta Vista and others had supposedly locked up the search market.

Thus, it's hard to say how YouTube will do in the future, and estimating the value of smaller competitors is far more risky. Asked how to estimate the future value of a consumer Web company, particularly one at a very early stage, one venture capitalist pantomimed shooting craps.

YouTube, meanwhile, holds the lead in the Internet video market by a wide margin. Some analysts estimate that YouTube serves up more than 100 million videos a day and accounts for more than 46 percent of the Internet video out there. In a sense, that makes the deal somewhat similar to eBay's $4 billion acquisition of Skype; similar services existed, but none with Skype's reach.

Jeff Clavier, an early stage investor, noted that the traffic margin between YouTube and its nearest competitors is so wide that it's not clear how the value of a No. 2 or No. 3 would be affected.

"But I am sure that there are some conversations going," Clavier added.