A profitless Web site started by three 20-somethings after a late-night dinner party is sold for more than a billion dollars, instantly turning dozens of its employees into paper millionaires. It sounds like a tale from the late 1990’s dot-com bubble, but it happened yesterday.
First a Message from Chad and Steve 😉
Google, the online search behemoth, agreed yesterday to pay $1.65 billion in stock for the Web site that came out of that party — YouTube, the video-sharing phenomenon that is the darling of an Internet resurgence known as Web 2.0.
YouTube had been coveted by virtually every big media and technology company, as they seek to tap into a generation of consumers who are viewing 100 million short videos on the site every day. Google is expected to try to make money from YouTube by integrating the site with its search technology and search-based advertising program.
But the purchase price has also invited comparisons to the mind-boggling valuations that were once given to dozens of Silicon Valley companies a decade ago. Like YouTube, those companies were once the Next Big Thing, but some soon folded.
Google, with a market value of $132 billion, can clearly afford to take a gamble with YouTube, but the question remains: How to put a price tag on an unproven business?
“If you believe it’s the future of television, it’s clearly worth $1.6 billion,” Steven A. Ballmer, Microsoft’s chief executive, said of YouTube. “If you believe something else, you could write down maybe it’s not worth much at all.”
In a conference call to announce the transaction yesterday, there were eerie echoes of the late 1990’s boom time. There was no mention of what measures Google used to arrive at the price it agreed to pay. At one point, Google’s vice president, David Drummond, gave a cryptic explanation: “We modeled this on a more or less synergistic kind of model. You can imagine this would be hard to do on a stand-alone basis.”
The price tag Google paid may simply have been the cost of beating its rivals — Yahoo, Viacom and the News Corporation — to take control of the most sought-after Web site of the moment. It was also perhaps the only price that two YouTube founders, Chad Hurley, 29, and Steven Chen, 28, and their big venture capital backer, Sequoia Capital Partners, were willing to accept, given that they most likely could have continued as an independent company. A third YouTube founder, Jawed Karim, left the company to pursue an advanced degree at Stanford.
The deal came together in a matter of days. After rebuffing a series of other overtures, YouTube’s founders decided to have lunch on Wednesday with Google’s co-founder, Larry Page, and its chief executive, Eric E. Schmidt. The idea of a deal had been broached a few days earlier. The setting was classic Silicon Valley start-up: a booth at Denny’s near YouTube’s headquarters in San Bruno, Calif. The Google executives threw out an offer of $1.6 billion and autonomy to continue running the business.
That set off a marathon of meetings and conference calls over the next two days, which kicked into even higher gear on Friday, when news of the talks began to circulate, putting pressure on Google to sign a deal before a rival bid emerged. In fact, the News Corporation sent a letter to YouTube seeking to start talks but never received a response.