Tuesday, October 24, 2006

Google and YouTube

How could I possibly leave this story unmentioned on my blog?

Around September 28th, 2006,

Mark Cuban: Only a ‘Moron’ Would Buy YouTube

Cuban said "anyone who buys that (YouTube) is a moron" because of potential lawsuits from copyright violations.

Fast forward to October 9th, 2006,

Google To Acquire YouTube for $1.65 Billion in Stock.

MOUNTAIN VIEW, Calif., October 9, 2006 - Google Inc. (NASDAQ: GOOG) announced today that it has agreed to acquire YouTube, the consumer media company for people to watch and share original videos through a Web experience, for $1.65 billion in a stock-for-stock transaction. Following the acquisition, YouTube will operate independently to preserve its successful brand and passionate community.

Remember, Google is the only stock I own. I am 8% Google and 92% cash. That covers everything, including retirement accounts.

So is Google a Moron as Cuban exclaimed?

Right now, nobody knows. Only time will tell. The blogosphere is abuzz with discussion of this deal, much of it very detailed. A good place to start is actually Mark Cuban’s blog, blogmaverick.com.

Be sure to read the comment thread if you’re interested in the business angles of the GooTube combination. Lumpen posters bring up some very interesting points such as:

How can YouTube sell ads in block when the advertisers won’t know what's going to be on the clips. What image conscious corporations want their to be placed above the popular soft porn clip-o-the-day? (Then again, Desperate Housewives has no shortage of sponsors)

Will Google fight with or try to share revenue with Big Media content holders claiming copyright infringement?

Will YouTube start sharing ad revenue with the amateur video posters?

Couldn’t YouTube just make uploaders personally liable for any copyright infringement? In that sense, make YouTube just a hosting site?

Also Forbes published a very edifying article on YouTube just before the deal was announced.

Here’s my take.

First of all, as a Google shareholder, I am getting sick and tired of these share dilutions. Pay cash for YouTube or borrow the money to buy it. Every chance these guys get they float more stock. The YouTube deal is at least the third, if not the fourth dilution in the past couple of years. Furthermore, I don’t have the hard numbers to back this up, but I hear that Google recklessly doles out stock and stock options to its employees. I don't look forward to them having to buy back stock at $1,000 per share to stem option dilution. Prior world conquering tech giants like Microsoft climbed a lot more than Google’s 400% before their management started acting so arrogant.

Google’s market cap is today $145 billion, so the $1.65 billion YouTube dilution is statistically insignificant. I just don’t like the arrogance too easily inferred by many of the Google headlines these days. Google's conceit has grown from noticeable to palpable and now to edible!

The core of Google’s biz is and will remain paid search. That story is still in tact and so far nothing has swayed my contention that,

I figure about one in twenty people I know googles regularly. The people that do google constitute a young and growing demographic, those that don’t are obviously the dying geriatric Luddites. In five years, I don’t think it is an outrageous prediction to think that three out of 20 people I know will be googling regularly. That conservative forecast would triple the number of googlers and I believe it would also increase the price-point of all keywords. Let me reiterate, three in twenty googling would be extremely conservative – almost to the point to certainty.

Google was around $420 per share when the deal was rumored and then shortly thereafter announced. Today it’s $477. Now does that mean the market believes GooTube will be a powerful combination?


The stock may have been itching to go up anyway. The overall market has been strong. Also Google’s earnings continue to surprise on the upside. So ignore the knee-jerk media reactions and prognostications.

Remember AOL/Time Warner hit near $110 when that merger was first announced (before falling to almost $10).

Has Skype paid off for eBay? Remember they shelled out $2.6 billion.

I once called Mark Cuban intellectually incontinent. But it may be more accurate to say he is an intellectual playboy. He shoots from the hip, never bogging down his thoughts with formalities like topic sentences followed by supporting evidence. One has to glean his points and profundity - but they're there. He has the Perma-Credibility inherent in owning a very successful sports team and sitting on billions in cash. Like Hugh Hefner, many a young man dreams of being Mark Cuban. Heck I wouldn't mind doing an asset swap with him myself.

Cuban certainly has firsthand knowledge of worthless billion dollar acquisitions. Click here if somehow you don't know his story - then, crawl out from under that rock.


Tax Shelter said...

How come you are 92% cash, but still trading? Does it mean that you don't count the equity used for trading as a part of your portfolio?

Google has to buy YouTube, it has no choice. Why? Because it would be cheaper to buy it now, then risk competing against it later and losing its shirt. This would be the equivalent of if Yahoo bought Google for $1 billion a few years ago, or IBM bought Intel in the 70s, or United bought Southwest in the early 80s, etc.

The YouTube deal showed that the Google management is smart. But to me, the important implication of this deal is that it seems that the innovation engine at Google is either no longer working, or working not as well, or as hard. It should be clear that with all the perceived talent at Google, it had no answer for YouTube. It just could not find ways to match YouTube's technology. How could this be possible? One explanation is that when it comes to technology, Google is just not as talented as people think. This would explain why Google has been using complicated tests as filters to look for people with superior IQ. Only a company that either lacks real talent, or doesn't know how to identify real talent, would turn to those tests. Not a comforting thought for Google investors.

I would not take Mark Cuban's investing advice too seriously. Yes he is a billionaire, but what's his return on investment after he sold his business? I bet it's closer to the rate on the long bond.

CaptiousNut said...

I trade with a miniscule amount of money because of leverage. In one stock trading account I get 15-1 leverage (some traders get 30 or even 50-1) and my futures account is inherently highly levered. For example, I think oil futures only require 5% margin. Ninety percent of my trades are in futures these days. Since you forced me to do the math, overall right now only 4% of my money is in active trading accounts. I hope to do a thorough post soon on my trading.

I honestly think Google video would have caught up soon but Schmidt didn't want to wait. Such is the luxury of being flush. The more I think about it, the more I am worried about management arrogance. That edible link is out of control. Pellegrino on demand?

So now they are running stories on Google’s hiring practices….that is funny. I remember reading how advanced Microsoft’s hiring practices were in Businessweek, 6-8 years ago.

I am thinking about lowering my August 2010 price target from 3000 to 2000.

The reason Google is all I own has to do with my pedigree. I started out as a trader eleven years ago and only recently learned enough to comfortably invest for the long term. Not only is Google all I own, it’s really the first stock that I bought with the intention of holding for an indefinitely long time.

There is so much more money in trading than investing and less risk if done properly.