Google Buys YouTube

Have we gone back in time to the late 90's? Valuing a company that's been around for less than two years at over $1.6 billion? Valuing a company at significant risk of lawsuits from the entertainment industry at over $1.6 billion? What lunacy is this?

One of the lessons of the '90s, perhaps not learned, is to look at the business model and make sure it's sound. What's the business model here? The point of viral video is that I can easily embed that video in this blog or some other website. Visitors can then view the video, and share it in their own blog or other site, free of charge, never having to visit youtube.com. So, YouTube is a file hosting system, and little more. Since users never have to visit the site, how would YouTube ever make money?

The Bivings Report says, "YouTube profits are nonexistent, despite all the hype surrounding the website. If the site fails to produce an effective business model complete with actual profits, as opposed to losses, in the near future, this ground-breaking Web dominator could be in serious trouble." Operating costs for the hardware and bandwidth are about $1 million per month. The Economist reports YouTube losing $500,000 per month. Clearly the model isn't working too well.

Certainly there are options, but they risk either eliminating the viral element, forcing users to visit the site, that has made YouTube so popular to begin with or alienating the audience by embedding advertising into the videos. These options would require YouTube to fundamentally alter its modus operandi, which is the very thing that has made the company worth, allegedly, $1.6 billion.

Like Mark Cuban, I think Google is crazy.