Gut feeling: How Google CEO valued YouTube deal

October 7, 2009

Eric Schmidt, Chairman and CEO of Google, sits for an interview at the Newseum in Washington on Oct. 2, 2009Let the second-guessing, the mock horror, the disbelief, the crowing begin.

Google CEO Eric Schmidt has acknowledged he realized upfront that he was overpaying to acquire YouTube, to the tune of $1 billion, judged by any conventional measures.

The many critics of Google’s $1.65 billion deal to acquire the video-sharing site three years ago will claim this confirms everything they have always said about the deal. Not quite.

In fact, not really at all.

Schmidt came clean in a deposition by lawyers in the Viacom copyright lawsuit that there was very little revenue coming into YouTube to justify the price his company paid.

No surprises here. There were intangibles to consider:

1. YouTube’s popularity was sky-rocketing, making it the runaway market leader among video-sharing sites.
2. It was crushing his company’s own site, Google Video.
3. YouTube was up for auction and would be sold to a competitor unless Google jumped first.
4. Google overbid to ensure YouTube didn’t fall into rival hands.

The Google CEO said he told his company’s board of directors that the 18-month-old video-sharing site was worth $600 million to $700 million, according to CNet, which obtained a transcript of his testimony. Of course, he fails to mention the potential costs of copyright lawsuits that already loomed for YouTube.

“In the deal dynamics, the price, remember, is not set by my judgment or by financial model or discounted cash flow. It’s set by what people are willing to pay,” Schmidt says.

So the real justification for the 150 percent premium Google paid was in derailing, or at least delaying, the rise of a potential competitor. Of course, Google has faced a long struggle to find ways to make advertising work on the site in order to pay the costs of free video. Only last quarter could Google say YouTube would be profitable in the “not long, not-too-distant future.”

Of course, all the fuss over YouTube’s valuation is not really Google’s problem. The real issue is the extrapolation of valuations of all the Web 2.0 companies since then which have used the YouTube price as the benchmark for all the other-worldly valuations of their unproven business models.

Here are the relevant excerpts from Schmidt’s deposition by Viacom lawyers, via CNet:

Viacom attorney Stuart Jay Baskin: And what was management’s valuation?

Eric Schmidt: Much lower than we paid for it.

Baskin: And how was that communicated to the board?

Schmidt: I told them.

Baskin: So why don’t you tell us what you remember telling the board in connection with the valuation?

Schmidt: I believe YouTube was worth somewhere around $600 million to $700 million.

Baskin: What methodology did you use to come up with that number?

John P. Mancini, an attorney working for Google, objects.

Schmidt: My judgment.

Baskin: Was it based on cash flow analysis? Comparable companies? What were you using as the basis for your judgment?

Mancini objects.

Schmidt: It’s just my judgment. I’ve been doing this a long time.

Baskin: I’m not very good at math, but I think that would be $1 billion or so more than you thought the company was, in fact, worth.

Mancini objects.

Schmidt: That is correct.


(Photo credit: Reuters/Jonathan Ernst)


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Why would he answer after his attorney objects? And why is Viacom asking irrelevant questions? Viacom and WMG should go back to their respective sandboxes and fondal each other. Has the the court not ruled on these silly games already? YouTube is not liable for what users post, the day it gets completely locked down is the day it goes under and the saga continues on other sites.VIACOM, WMG you cannot win, neither can the RIAA so F U!

Posted by observer | Report as abusive

“In the deal dynamics, the price, remember, is not set by my judgment or by financial model or discounted cash flow. It’s set by what people are willing to pay,” Schmidt says.

circular logic at its best

Posted by yr | Report as abusive

Real tale of Life

$1,845,700,000.00 plus all legal fees on or before november 20th, 2009 or double it.

There’s only one YouTube and there’s definitely only one Google. As it happens, they do things their way, which I for one find a rather charming or at least refreshing one. As in, when you’ve got it, go for it, you’ve got it.

In that sense, they’re old-school American entrepreneurs from whom certain others would do well to learn. Anybody is welcome to look at them but looking askance at them for what they’ve done so far is, in my estimation, barking up the wrong tree.

One thing you don’t expect Eric Schmidt to do is come out and tell everybody exactly how they’re going to monetize their – very strong – joint position before they’ve done so. To his credit, so to speak, Schmidt didn’t show his hand. He’s solvent, so really doesn’t need to.

But I have no ties to either Google or YouTube and can divulge, even safely predict, this much: when cable TV companies estimate their loss in advertising value from subscribers who only want broadband services (but no broadcast-like or [gee, look at it] lousy, piecemeal “HD”) to be knocking on $1,000.00 per viewer per year, then a historic turning point is nigh and Eric Schmidt’s position is very likely to be viewed as pristine by all the 20-20 hind-sighters.

All YouTube has to do is – and it’s really not difficult – to balance discreet advertising technology with the lively spirit in which their grand media experiment was started.

YouTube can slash cable-advertising rates in half or less and still be looking at many billions of dollars in annual revenue that have yet to be tapped into. Their priorities ought to involve keeping targeted sponsorships appropriate and, basically, not screwing up.

At that point you’ll be saying, Google only looked as though they were overpaying to acquire YouTube. That odd recent billion will be like a drop in the virtual bucket.

Even now, before full-on monetization, Google and YouTube have something to show for their efforts, by the delivery of satisfaction to an immense population of users. Which is more than can be said of most corporations on the Dow.

If the real issue is certain other companies having done nothing besides wildly over-valuing themselves, period – that’s not following Google’s lead. It’s just plain wrong. Those certain other companies need to be deposed. Grilled, even. Let’s see what their excuses, er, lawyers sound like…

Posted by The Bell | Report as abusive

I agree with Eric Schmidt, CEO of Google and his overall assessment of YouTube’s valuation. Price is what a willing Buyer(Goggle)will pay to a willing Seller (You Tube)at any given time. Obviously, Mr. Schmidt knows a lot about intangibles as a Buyer and, coupled with a hot internet brand in a window of time to act, the valuation is right on the money for what You Tube is worth.

Bob Singh, President
An Investment Banking Services Firm
2540 Huntington Drive
San Marino, CA. 91108
(323) 283-7531

Ok. First off Eric “irrelevancy is relevant” Auchard. The whole point of your story here is that supposedly more was said than “we bought it for more, just cause.” So then why when leaving “relevant” excerpts would you not give us the excerpts that support your 1-4 aforementioned “intangibles”. Perhaps its just me, but maybe I’m asking too much since we all know “Commentaries” = bad journalism and lack of real facts. Perhaps you’re opinion is right. So use the excerpts that prove it so I don’t have to waste my time complaining about your poor sourcing.

Pricing is probably the most difficult taks. As Schmidt says, the price is set “by what people are willing to pay”. Google was willing to pay $1 billion, so that was the right price.

Just because your CEO and can manage a business does not mean you are a visionary like a Steve Jobs. Eric Schmidt is no visionary. He was interviewed in Business Week recently and while Google’s biggest broadest push is Mobile with Android, Eric sounded like someone who doesn’t even use a cell phone never mind a web enabled or smart phone. He babbled about serving a pizza ad to your phone in case you want pizza! So of course he blew it with You Tube.

That all being said luckily Google has some visionaries including those who developed Android and chose to go open platform. Trust me Eric had no part in that!


Interesting news on Youtube!

Posted by Bob Chan | Report as abusive

Just to answer a question out there, objections occur often during deposition, but participants are still expected to answer questions. The objections are to sort out what is usable at trial.

Posted by Ben | Report as abusive

Too frequently senior executives are permitted to make acquisitions based on “strategic fits” and “gut feelings” or “minimize competion.” Too frequently they add a tremendous amount of debt and eventually the company is forced to shed assets. We never seem to learn!

Posted by TooMuch | Report as abusive

Yet, the author fails to mention perhaps the most important reason Google bought YouTube– to defend online content.

If Google’s objective is eyeballs– and we can all agree that it is– then it would benefit Google to have Internet users across the world being able to infringe copyright, i.e. upload copyrighted movies, tv shows, and clips.

At the time of Google’s purchase, the number one threat to YouTube’s success were lawsuits from copyright holders.

Without having the resources and clout of a serious parent company (i.e. Google, Microsoft, Newscorp, or maybe Yahoo at the time) YouTube would have been sued, and subsequently lost in the courts, therefore, setting a precedent that would have been much more detrimental to online video, and Google’s business, than overpaying for YouTube. Even at a price of more than $1.5 billion.

Don’t be fooled, Google knew exactly what it was doing when it agreed to pay more than 1 billion extra than it had “valued” YouTube, which was, reducing a threat to its business- which isn’t search, but rather attention. skh

Posted by Sam | Report as abusive

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