Shares of Google Inc., the most-used Internet search engine, rose in Europe after the company agreed to buy YouTube Inc. for $1.65 billion in stock to add the largest video-sharing Web site and an audience that watches more than 100 million clips a day.
Google shares rose as much as $4.86, or 1.1 percent, to the equivalent of $433.86 in Germany, from yesterday's close of $429 in the U.S. The stock traded at $430.41 as of 10:09 a.m. in Frankfurt. YouTube, with 67 employees, will run as an independent company, Mountain View, California-based Google said yesterday.
In less than two years, founders Chad Hurley and Steve Chen built YouTube into an Internet icon with 34 million monthly U.S. visitors. Google's largest purchase underscores the pressure on the company from startups such as YouTube and friend-finder Facebook.com, which are creating new markets for film clips and social networking. The deal is also part of Google's strategy to add video content to attract advertisers.
"This is the quick entry for Google into becoming Google TV," said Allen Weiner, an analyst at market researcher Gartner Inc. in Scottsdale, Arizona. YouTube is "this huge TV-like platform that includes a significant amount of content."
Google Chief Executive Officer Eric Schmidt said the companies will build a "global media platform" by combining features of the two sites. Google's video site has less than half the users of YouTube, according to Nielsen//NetRatings.
"There was a clear winner in the networking and social networking side of video," Schmidt, 51, said yesterday on a conference call. "That's what really drove us to begin the conversations with YouTube."
Spending more than $1 billion on an acquisition is a departure for Google, which has typically bought smaller startups such as mapping software maker Keyhole Corp. and Upstartle, creator of a Web-based word processor.
YouTube's business fits Google's strategy of using Internet content as a platform to sell ads. In December, Google agreed to buy 5 percent of Time Warner Inc.'s AOL to show ads to AOL search users. Google agreed in August to provide search and keyword advertising for News Corp.'s MySpace.com.
Before today, shares of Google had advanced 3.4 percent this year in Nasdaq Stock Market composite trading.
The amount of stock Google issues will be based on the average 30-day closing price of its shares two days before the purchase is completed. Using current prices, Google would issue 3.85 million shares, or 1.8 percent more than the 219.2 million outstanding. The sale is tax-free to YouTube owners.
"There is some very slight dilution but we think this was a good structure," Google Senior Vice President David Drummond said on the call.
Advertisers and media companies are piling into sites like YouTube and MySpace.com to reach more users. YouTube viewers on average spend 26 minutes on the site each month, according to Nielsen. YouTube already uses ads sold by Google.
"If Google takes a hands-off approach, doesn't change the user experience in any meaningful way, the ownership change won't do anything to harm YouTube," said Greg Sterling, an analyst at Sterling Market Intelligence in Oakland, California.
Before yesterday's announcement, Google and YouTube separately struck agreements with three of the world's largest record companies to add music videos on their Web sites.
Universal Music Group, the largest music company, and Sony BMG Music Entertainment, the second-largest, agreed to let people watch their videos on YouTube. In addition, CBS Corp. agreed yesterday to distribute television shows on YouTube.
Before the purchase, Google ranked seventh in online video traffic, according to ComScore Networks Inc. in Reston, Virginia. Video is emerging as an Internet service comparable to e-mail and Web search, Anthony Noto, a Goldman, Sachs & Co. analyst, said yesterday in a note to investors.
Google began accepting user-generated content for its video search engine last year and will continue to run that service. Yahoo! Inc., the most-visited U.S. Internet site, started in May. Redmond, Washington-based Microsoft Corp., the world's largest software maker, began testing its service last month.
Microsoft said in a statement it considered buying video- sharing software and chose to build its own. The company didn't say if it looked at YouTube. Joanna Stevens, a spokeswoman for Sunnyvale, California-based Yahoo, declined to comment.
The sale is a windfall for Sequoia Capital, which has invested $11.5 million in YouTube since November, according to YouTube's Web site. Menlo Park, California-based Sequoia also invested in Google and Yahoo, owner of the second-most-used search engine.
YouTube was founded by Hurley, Chen and Jawed Karim in February 2005. Hurley, 29, chief executive officer, is a fine arts graduate from Indiana University of Pennsylvania. Chen, 28, chief technology officer, studied computer science at the University of Illinois. Both men worked at PayPal, where Hurley designed the company logo. Karim left YouTube to study at Stanford University, the Web site said.
YouTube didn't disclose the founders' holdings. If Hurley and Chen retained as much YouTube stock as Google co-founders Sergey Brin and Larry Page did before their company's share sale, the pair may be worth about $250 million each. Brin and Page each owned about 15 percent of Google stock before the initial public offering in August 2004.
Technology that allows people to easily upload and share videos has spurred YouTube's popularity. The most-viewed clip at the site is "Evolution of Dance," a 6-minute film of a dancing man that has been seen more than 33 million times.
More than 65,000 videos are uploaded to the YouTube site every day !!! Isnt it amazing??
"With YouTube's traffic and buzz, Google could quickly try to build its position as the video advertising clearinghouse online," UBS AG analyst Ben Schachter wrote today in a note. "It's just the kind of bet we'd expect from Google."