Did Google overpay for YouTube?

Absolutely. $1.65 billion is some money. And for a company like Google which is right at the innovative edge, who can seemingly do anything (that' what people are betting right?), to shell out that much for some company which is not even profitable, is less than 2 years old and has significant legal issues the price is way way too much.

Then why did Google pay that up? The answer can come from this link where just last year Google raised about 4 billion in by selling new stock, just one year after it went IPO. Phew! IPO price $85, secondry price $396. Wow! So people were ready to shell out significantly more quite soon. And Google realized that it better cash in when the time is opportune. When they raised the money they had no clue what to do with it! Other than to say they would use it for operations and aquisitions. But investors did not care. They thought Google will use their money wisely. Time will tell whether that was a good use of the money.

So Google sitting on that cash pile started to do what they wanted. To Innovate. And came Google Video, Google Checkout, Google Finance, Google Books etc. etc. But probably none caused any stir up. All the new things they did are far from even coming close enough to give the next boost to Google compared to the cash cow Adsense.

So now what do they do. Obviously find for aquisitions. They found one by taking a 20% stake in AOL. But isn't AOL a forgotten story? So what next? Aah! they found that in YouTube. But why would have Google hastened to buy YouTube rather than to improve upon it's Google Video? Don't they have a strong enough brand that can attract all sorts of demographics to come to them. Don't they have the most powerful tool today on the internet that nobody does better? What happened to their innovation, all the smart people they hired?

The answer is multifold -
* Google had no clue before and probably still does not about what would and would not work. If they knew why didn't they buy YouTube last year when they just raised cash and YouTube was less than a year old? That would have got them a great deal right! This highlights tells us the contantly evolving and extremely noisy atmosphere that the web has created. It is a ever changing place. What works today may not work tomorrow. And what seems useless today may become extremely valuable tomorrow. And that is one rational that I give in saying why Google overpaid. The risk is too high for so much price to pay.
* Another one is MySpace. MySpace showed Google that they are not invincible. And when analysts started rumbling that MySpace could be worth billions soon, Google executives probably thought that if they wait now it may be too late. Just as what happened with Microsoft and Yahoo who could have bought Google ultimately cheap in its early days had they realized its potential.

Looking at all this the picture is quite clear. Google had to buy YouTube at whatever price it gets it due to pressure to grow, not lose the boat and use it's (seemingly) easily obtained cash pile. YouTube was bought using those investors money who payed $396 for Google last year. The stock today is $420, a mere 5% appreciation. The market is up more than this return.

What does that tell for Google's future? It tells that things are going to get a lot tougher for Google and the heat is now on and is only going to get stronger. What YouTube is giving Google is more Ad space. That Google has to shell so much money tells that Ad Space is getting very expensive. Are there going to be equivalent revenues (increases) to justify this? The other thing Google will soon have to learn is that even if it could have innovated one great thing, it is very difficult to constantly keep doing that in as profitable a way as people are expecting from it.

All this said, Google is still a great company with a lot of smart people. They are with us and will be with us for a long time to come. Innovation is what brought them to life and that is what will keep them alive. They are not on a path that is impossible. It is only a little harder and going to get so more in the future. I wish them all the best in their journey!