Google may buy YouTube for US$1.6B

Google's reported interest in YouTube would reflect a sense of urgency on the part of the search engine giant to improve its position in the red-hot online video market

Google is in discussions to acquire YouTube for about US$1.6 billion, although the deal is far from done and the talks could collapse, The Wall Street Journal reported on Friday, citing an unnamed source familiar with the matter.

Google's reported interest in YouTube would reflect a sense of urgency on the part of the search engine giant to improve its position in the red-hot online video market.

Google entered the market in early 2005, at about the same time YouTube was founded. But so far the success has gone to the scrappy startup, not Google.

In September, YouTube nabbed almost 46 percent of all U.S. visits to video Web sites, while the video section of News Corp.'s MySpace.com came in second with 21.2 percent, according to Hitwise. Google Video came in third with 11 percent, followed by Microsoft's MSN Video with 6.8 percent and Yahoo's Yahoo Video with 5.6 percent.

YouTube, in typical startup fashion, approached the market aggressively, opening up their service to anyone wanting to upload their videos, and quickly became a phenomenon. It embraced tagging and sharing features, creating the most popular online video community.

Meanwhile, Google took a much more conservative approach, at first only featuring videos obtained through formal agreements with professional production houses. Consequently, users had to pay to view many of the videos in the catalogue. Months later, it added an upload feature for regular users, but closely policed submissions. It wasn't until recently that it opened wide the service's door and added tagging and sharing capabilities.

Yahoo, Microsoft and AOL are also playing catch-up to YouTube, whose model these large Internet companies are adopting.

Google, Yahoo, Microsoft and AOL need a strong position in this market, due to the increasing popularity of online video. Collectively, traffic to the top 10 video Web sites increased 164 percent between February and May of this year, according to Hitwise. As traffic to online video sites increases, so does the interest of advertisers, who in turn generate most of the revenue for Google, Yahoo, Microsoft and AOL.

For many years, online video remained an unfulfilled promise, hobbled by high broadband prices, inferior image quality and reluctance by TV networks and film companies to put their shows and movies on the Web. However, in the past 18 months, video on the Web has gained momentum, helped by a critical mass of users with broadband access, improved quality and a willingness by production companies to distribute their films and programs online.

The deal clearly would strengthen Google's position in online video, but it might also saddle Google with potential copyright liability issues, said analyst Greg Sterling of Sterling Market Intelligence, in an interview.

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