Let 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)

-- Eric Auchard is a Reuters columnist. The opinions expressed are his own -- 

By Eric Auchard 

LONDON, Sept 4 (Reuters) - Deja vu, all over and over again. The news is that T-Mobile UK is for sale. Still. 

The Financial Times, citing unnamed sources, says Deutsche Telekom is in "preliminary stage" talks with Vodafone, France Telecom, and Telefonica to sell T-Mobile UK. 

The logic of such a deal seems to be compelling. DT needs to sell out because T-Mobile lacks the scale to gain an edge over its multiple competitors. 

A combination would create substantial value, both for the buyer, and in terms of raising prices in what is one of Europe's most competitive mobile markets. Sanford Bernstein estimates that it could create up to 6 billion euros of value for Vodafone and Telefonica's O2, and up to 5 billion for FT's Orange mobile unit. 

But there's a rub. Although the deal creates a lot of value for the winner, it's also worth a lot just being a free-rider and benefiting from improved industry pricing that flows from consolidation. So the marginal advantage of winning shrinks. Unlike a conventional bid battle, where rivals try to thwart the other guy from stealing the prize, everyone is saying  "after you, Didier" or "No please Julio, after you. I insist." 

Everyone may want the deal to happen without them. 

For FT, Sanford estimates that the deal is worth about 2 billion euros in value creation, but 1.9 billion if it loses. Logically then, it should only be willing to pay an incremental 100 million euros to the estimated 3 billion standalone value of T-Mob, or 3.1 billion euros in all. At the high end, 02 could pay the most at around 3.9 billion euros, Bernstein calculates. That's shy of Telekom's 4 billion euro target.

What's changed since May, when reports first surfaced that Deutsche Telekom was looking for a buyer? Not a lot, in terms of the complexities of making a deal work with any of the three big rivals. 

But a source close to Deutsche Telekom said on Friday that the parent company put out calls to attract interest months ago and that the level of talks hasn't progressed very far since then. 

T-Mobile's own customers represent 15 percent of the UK market. Virgin Mobile, which relies on T-Mobile networks, pushes its total share of the market over 20 percent. But it is by no means clear the government is prepared to see a dominant player emerge in the UK. Regulator Ofcom said in July it sees the competitive landscape of the market as "healthy." 

The context in which merger talks are happening is that Telekom is conducting a strategic review of whether to keep or sell T-Mobile UK. What the 4 billion euro asking price may represent is the benchmark at which T-Mobile decides it might as well push ahead on its own. Or just wishful thinking. 

There's another scenario to consider. The problem with any big-deal scenario is that scale alone won't improve business conditions in the UK market. There is a spoiler involved in any polite effort to consolidate the mobile market -- Hutchison's 3, the fifth-ranked player in the market. Its pricing strategy has forced the other players to slash their own prices and until something changes with 3, conditions won't improve. 

Instead of being sold, T-Mobile UK, acting as a buyer of 3,  would be a more effective way of curing what ails the UK mobile industry. This deal would be less risky than overpaying or staring down the regulatory gamble another big buyer would be taking.

-- At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.—

You can find some of Eric’s previous columns here.

(Photo: Reuters/Stefan Wermuth)

The last thing that the complex negotiations between India's Bharti and South Africa's MTN Group to create the world's third largest mobile phone company needed is more complexity. The existing deal involving an intricate mix of cash and stock is further complicated by currency fluctuations and diverging growth rates between the maturing Indian market and the wide-open African one.

But if a third company, Zain of Kuwait, succeeds in starting up a full-scale bidding war for itself, the Bharti-MTN deal could come off the rails and fall apart.  Zain's CEO told Kuwaiti daily Al-Rai on Monday that it is in talks with three major, but so-far unnamed telecom firms, including one from India. Last month, Zain said it was reviewing the possible sale of its far-flung African operations after French conglomerate Vivendi called off talks to buy a majority of Zain's African business.  A Vivendi spokesman says nothing has changed since then. There's no word yet from other obvious suspects -- France Telecom or Vodafone -- on whether they are interested.

The most likely Indian bidder for Zain looks like Reliance Communications, India's distant No. 2 mobile operator to Bharti. There's history here, as Reliance tried to nab MTN a year ago. That move came after Bharti's first try to strike a deal with MTN, South Africa's second largest operator, fell apart over which company's management would end up controlling the combined entity.

At least temporarily, the only two parties we can rule out as bidders for Zain are Bharti and MTN. The two would be entirely likely candidates, except that they remain locked in exclusive talks with one another until the end of August. Zain's assets make it an obvious alternative should Bharti and MTN fail to make their belaboured third effort to strike a deal work after more than a year of trying. 

There may be too much sheer complexity in merging India's most successful company with the diverse strengths of MTN, a big player from South Africa to Nigeria to Iran and Afghanistan. Both companies have corporate egos to match their roughly US$30 billion market capitalizations. 

The outright acquisition of Zain's comparable assets looks a whole lot simpler. Clearly Zain, valued at around $20 billion on the Kuwaiti exchange, is trying to stoke a bidding war for itself by talking up mystery bidders. Coming just weeks ahead of the Bharti-MTN deadline, the Zain CEO's comments suggest he is trying to entice either Bharti or MTN or both into bidding for it.

Until recently, the two merger speculations appeared to be two separate events that happened to be taking place over some of the same battleground -- mobile phone markets across Africa and the Middle East. Maybe a good old fashioned frontier bar brawl is the easiest way of working this all out. 

(Images: Zain; Reuters: Abed Omar Qusini, Nablus)

Better luck next year for Android
Taiwanese smartphone maker HTC has warned of a revenue shortfall, saying it has too many new phone models chasing too little revenue. Revenue growth will turn negative in 2009, instead of growing 10 percent, as the company had previously forecast.

Chief Executive Peter Chou says: "Momentum on both the Windows Mobile and Android platforms are also turning out to be weaker than expected."

HTC said it is boosting its marketing spending to more than 15 percent of revenue from 13.5 percent to fend off market leader Nokia and the Apple iPhone juggernaut.

My favorite line:  "Investors have been relatively bearish on the company this year, with HTC's shares having risen about 36 percent so far, far lagging the 54 percent advance on the TAIEX share index."

Bharti looks ready to raise price for MTN
Bharti Airtel and MTN have agreed to a month-long extension to merger talks to seal a deal that would create the world's third largest mobile phone company in subscriber terms.

This looks like the prelude to Bharti raising its bid for MTN, answering resistance to the deal by investors in the South African company. It all follows weeks of jockeying by Bharti to line up funding with banks and key shareholders.

The merger appears to be moving ahead despite signs of growing worker unrest in MTN's homeland. Over the weekend, South Africa's Communication Workers Union said workers at the fixed-line operations of Telkom SA will hold a two-day strike this week.

Shareholder alignment
The Times reports that Virgin Media is considering a secondary listing in London, seeking to cure the decade long mismatch between the entirely UK-focused broadband business and its U.S. listing on Nasdaq. It's all a hangover from the American origins of its bankrupt predecessor, NTL.

Communion wafer apology
From Canada, newspaper backtracks on saga over communion wafer.

The saga started here, nearly a month ago.

The newspaper's apology both to Canada's prime minister and to its own reporters:

The apology in context, thanks to Parker Donham and his blog, Contrarian.

(Photo credits: Reuters, Albert Gea, Barcelona; Google Finance stock chart; Reuters/Ajay Verma, Chandigarh)

We’re not entirely sure if the current round of leaks will lift Sirius XM out of its $1.40 per share doldrums, but screenshots of a new iPhone application in development that will let users stream Sirius XM radio stations could put a new shine on the company.

The shots, leaked to Orbitcast, show a login screen that would appear to imply that the service would likely only be available to existing Sirius or XM subscribers or subscribers to the mobile service. We’ve seen various mobile applications that do just that over the years for Windows Mobile phones. But this is the first to offer a common platform for both services — and months ahead of the company’s own timeline for an interoperable receiver.

Citigroup’s Tony Wible thinks the link to Apple “highlight that SIRI’s value lies in its content and not its hardware or infrastructure.” And such applications could help it gain share in the audio entertainment market. “SIRI bears argue that AAPL’s products will take share from SIRI, but we disagree as both MP3 players and satellite radio have unique advantages that leads us to believe both will co-exist. New satellite radio plans create a greater opportunity for synergies between the two,” Wible writes.

We think it could potentially create an ancillary income stream and soften its reliance on automotive contracts at a time when U.S. car sales limp along. Perhaps more importantly, such applications makes Apple, and its ubiquitous devices, a partner rather than a direct rival.

The application, called StarPlayr, developed by GeeksToolBox, could nudge Sirius XM away from Apple’s line of fire.

(Photo: Orbitcast.com)

(Updates earlier post to clarify deal terms)

After four years of recriminations and in-fighting between executives from Sony Music and executives from BMG Music Entertainment, Tokyo-based Sony Corp has decided to end the mutual pain of a controversial merger and take full control of Sony BMG.

Artists like Beyonce, Bruce Springsteen and Justin Timberlake will now record under a new banner: Sony Music Entertainment Inc.

The FT had reported in June that Bertelsmann was looking for $1.2 billion-$1.5 billion for its 50 percent stake in Sony BMG, but it looks like the German media company settled for $600 million-$900 million — the exact sum depends on how you do the math.

Basically, Sony said it is paying $600 million cash to Bertelsmann, which will also get half of another $600 million in cash on Sony BMG’s balance sheet for a grand total of $900 million. The deal values Sony BMG at $1.2 billion. (UPDATE: You can argue that half of Sony BMG’s cash belonged to Sony, so its total cost was $900 million but Sony says it hadn’t consolidated Sony BMG’s cash. Bertelsmann adds that the value to it was higher than $1.2 billion, after taking into account tax breaks)

Will full ownership by Sony give the record label a new lease on life? According to Music & Copyright research, Sony BMG ranks second in the music industry with a 20.1 percent market share, behind Universal Music’s 28.8 percent. Here’s what some analysts told our correspondents in Tokyo and London:

Daiwa Institute of Research analyst Kazuharu Miura

Sony BMG is a company whose sales have been on a declining trend. But it has managed to post profits so far thanks in part to its restructuring efforts. There is no reason to see this as particularly negative. But I don’t think this is something that prompts investors to chase Sony shares, either.
Sony’s cash out is $600 million, while Sony BMG has been posting after-tax profit of about $100 million to $200 million. Of that profits, Bertelsmann’s portion will come to Sony after the deal. So, Sony can expect a return of about $50 million to $100 million for a $600 million investment. That is not a bad
investment.

Informa music analyst Simon Dyson

It would appear that Bertelsmann was getting out of the music industry altogether but actually they’ll still deal with some management and rights, which signals that they think there’s money to be made, just not in retail.
I’m probably a little more pessimistic than most people. I’m very sceptical as to whether music sales are going to return to growth for a good five or six years.
Sony is big in music and games, for example with Guitar Hero, for which artists seem keen to sign up. I wouldn’t think that actually owning the music company would need to be a part of it.
BMG on the surface seems to have got the most out of it. But they’re very clever people at Sony, perhaps they’ve got some kind of plan.

Jupiter music analyst Mark Mulligan

This is absolutely related to the fact that the music industry is in a really difficult time. But it has much if not more to do with Bertelsmann refocusing itself. What Bertelsmann really created was a cross-media megalith, trying to do too many things across too many areas. Owning everything isn’t necessarily the best way of getting the most out of a media company.
The timing and the importance of getting this done has been intensified by the state of the music industry. The music industry’s declining but some time in the next couple of years the decline will slow. Digital music sales will ultimately catch up with the rate at which CD sales are declining.

(Photo: Reuters)

The following is a timeline of key events leading up to Yahoo’s Aug. 1 annual meeting.

2006 January - Yahoo Inc begins to report a string of weak quarterly results, reflecting competitive missteps by the company, market share gains by rival Google Inc, changes in the online advertising landscape and weakening spending in some ad segments.

2006 - Microsoft Corp and Yahoo begin preliminary talks on various partnerships, including a merger.

2007 February - Yahoo, under the leadership of previous Chief Executive Terry Semel, tells Microsoft it is not the right time to discuss a takeover, as the Yahoo board sees great potential in its new advertising technology and by making internal organizational changes.

2007 June 12 - A strong minority of Yahoo shareholders challenges the company’s direction, as CEO Semel comes under fire. Nearly a third of votes cast at the company’s annual shareholders’ meeting oppose some of Yahoo’s directors.

2007 June 18 - Yahoo co-founder Jerry Yang takes over as chief executive as Semel steps aside. Semel remains Yahoo chairman.

2008
Jan. 31 - Microsoft CEO Steve Ballmer makes a $44.6 billion, $31-per-share, cash-and-stock takeover offer to Yahoo’s board. Semel resigns as chairman and is replaced by Roy Bostock.

Feb. 1 - Microsoft makes the offer public. Its shares fall 6.6 percent to $30.45; Yahoo shares rise 48 percent to $28.38.

Feb. 11 - Yahoo rejects the Microsoft offer as too low.

Mid-February - Yahoo begins talks with Time Warner Inc on a deal to combine the media conglomerate’s AOL unit with Yahoo in exchange for Time Warner taking a stake in the merged company. MySpace owner News Corp and Yahoo also discuss a tie-up.

March 18 - Yahoo releases financial forecasts until 2010, in an effort to prove it is worth more than Microsoft bid.

March 28 - One of seven face-to-face meetings takes place between the “senior-most” executives of Microsoft and Yahoo to discuss the bid. Yahoo asks how Microsoft would handle regulatory issues, including antitrust concerns, in a merger.

April 4-7 - Microsoft reevaluates its bid for Yahoo because the Internet company may have lost value since the offer was first made. Microsoft sets a three-week deadline for Yahoo to reach a deal or possibly face a proxy fight. Yahoo again rejects Microsoft’s bid.

April 9 - Yahoo says it will test Google search ads on its site, which could be more lucrative than selling its own search ads. Talks between Yahoo and Time Warner/AOL heat up.

April 15 - At another meeting between between Yahoo and Microsoft executives and their financial advisers, Yahoo asks about Microsoft’s integration plans and Yahoo raises a list of “key non-price deal terms” it believes are critical.

May 3 - After several earlier meetings, Yang meets Ballmer in Seattle. Microsoft verbally raises its offer to $33/share, or $47.5 billion, from its original $31/share bid. Yahoo wants $37/share, or about $5 billion more. Late in the day, Ballmer calls off the talks.

May 15 - Carl Icahn proposes a full dissident board slate for election at Yahoo’s annual shareholder meeting in July. Icahn says he now holds a 4.3 percent stake in Yahoo, including 9.9 million shares and 49 million call options. Yahoo Chairman Bostock replies to Icahn that “none of the alternatives we are considering would preclude us from entering into a transaction with Microsoft or any other party.”

May 18 - Microsoft says it has raised with Yahoo an “alternative” deal that would not involve the software maker buying all of the web company but says it could reconsider pursuing a full acquisition. Microsoft proposed buying Yahoo’s search business and as part of the deal Microsoft would buy a stake in what remains of the company.

June 6 - Icahn says Yahoo should offer to sell itself to Microsoft of $34.375 a share. Throughout June, the two sides exchange a series of letters in an acrimonious war of words.

June 12 - Yahoo announces search advertising deal with Google for up to 10 years, and says talks with Microsoft have ended. U.S. lawmakers promise to scrutinize the deal on antitrust concerns. The companies say they will wait up to three-and-a-half months to put the deal into effect.

June 13 - Microsoft says it had offered to pay $8 billion, or $35 a share, for a 16 percent equity stake in Yahoo, and $1 billion in up-front payments to acquire Yahoo’s search advertising assets.

June 26 - Icahn says in a proxy filing that if his slate is elected, it will seek to hire a “talented and experienced CEO” to replace Yang, eliminate a severance plan, and sell Yahoo to Microsoft for at least $33 a share.

July 7 - Microsoft says it is interested in discussing a major transaction with Yahoo, such as the purchase of all or part of the company, only if Yahoo elects a new board. Microsoft says it has concluded that it cannot reach an agreement with Yahoo’s current management.

July 21 - Yahoo reaches settlement with Icahn that will put the billionaire activist investor and two other nominees on an expanded 11-member board in August, defusing a proxy battle showdown and making an immediate deal with Microsoft less likely.

July 22 - Yahoo’s second-quarter net profit fell 19 percent but investors took heart that it did not change its outlook despite a weakening U.S. economy and the distraction of Microsoft’s failed takeover bid.

Aug. 1 - Yahoo’s annual shareholder meeting.

Sources: Statements from Microsoft, Yahoo, Google and Icahn; Reuters stories and data.

Photos: Reuters, Yahoo and Microsoft company materials, Google Maps.

Compiled by Eric Auchard, Peter Henderson and Tiffany Wu.

The marathon satellite merger for Sirius and XM is finally complete. (Check out the new “Sirius XM Radio” logo, above, provided by Sirius.)

That means new channel options, new pricing options, new radios — eventually.

We want to know if you care. Does the prospect of having Oprah and Howard Stern on your radio make you want to sign up for satellite radio? Will you start paying for the service once the free subscription in your new car runs out? Does the thought of the upcoming professional football season mean it’s time to pick up a satellite radio?

We’d like to know.

Federal regulators have cleared the last remaining hurdle for Sirius Satellite Radio’s proposed acquisition of XM Satellite Radio Holdings, a deal that will combine rivals in the nascent U.S. pay-radio market.

The U.S. Federal Communications Commission reached an agreement to conditionally approve the deal on Thursday, four months after the Department of Justice gave its blessing, and 18 months after XM and Sirius agreed to combine. Experts say that new services from a combined company could come in a few months, but suggest their holiday subscription growth may be hurt by the delayed deal closing.

Here are are some important dates in the history of the satellite radio industry.

* 1994 - CD Radio goes public at about $3.15.

* Oct. 1999 - XM goes public at $12 a share.

* Nov. 1999 - CD Radio changes its name to Sirius Satellite.

* Nov. 2001 - XM starts national radio service, after launching its first two satellites — “Rock” and “Roll” — earlier in the year.

* 2002 - Sirius launches national satellite radio service.

* Oct 2003 - XM reaches 1 million subscribers.

* Dec 2003 - Sirius signs 7-year, $220 million pact with the National Football League.

* Oct 2004 - Shock Jocks Opie and Anthony begin broadcasting on XM, on a premium channel.

* Oct 2004 - XM signs 11-year, $650 million pact with Major League Baseball; deal starts with the 2005 season.

* Oct 2004 - XM unveils Delphi MyFi, its first portable radio receiver.

* Dec 2004 - Sirius reached 1 million subscribers

* Oct 2004 - Sirius signs shock jock Howard Stern to 5-year, $500 million deal.

* April 2005 - XM raises subscription price to $12.95 a month from $9.99, matching Sirius.

*Sept 2005 - XM surpasses 5 million subscribers.

* Feb 2006 - XM signs 3-year, $55 million deal with Oprah Winfrey.

* Sept 2006 - Sirius tops 5 million subscribers.

* Jan 2006 - Sirius starts broadcasts of Howard Stern.

* Feb 2007 - Sirius and XM propose merger; Deal requires approval of their respective shareholders, the U.S. Federal Communications Commission and the U.S. Justice Department. Sirius CEO Mel Karmazin to be CEO of new company, XM Chairman Gary Parson to become Chairman.

* July 2007 - CEO Hugh Panero says he is stepping down in August; COO Nate Davis to become Interim CEO.

* Nov 2007 - XM and Sirius shareholders approve the deal.

* Mar 2008 - The Justice Department approves the deal.

* June 16, 2008 - FCC Chairman Kevin Martin announced his recommendation to approve the merger with conditions.

* June 30, 2008 - Sirius ends the second quarter with 8.9 million subscribers, up 25 percent from a year earlier. XM had 9.65 million subscribers at the end of June, up 17 percent from a year earlier.

* July 25, 2008 - FCC Commissioners approve the deal with conditions, clearing the way for a deal that will leave just one U.S. satellite radio service. Analysts expect the deal to close within days or weeks of the regulatory approval.

(Sources: XM, Sirius, Hoover’s, Reuters)

(Top picture: A Russian Proton with a satellite for Sirius Satellite Radio is lifted into place at its launching pad at the Baikonur Cosmodrome, Kazakhstan, on September 1, 2000, while (L to R) Bob Prevaux, Program Director for Space Systems Loral talks with Rob Briskman, Executive Vice President for Sirius Satellite Radio and Ted Sitek, Mission Manager for International Launch Services. (Reuters/Karl Ronstrom))

Google’s second quarter earnings disappointed Wall Street yesterday and sent its shares tumbling. The search giant blamed lower returns from managing its huge cash piles but analysts are also concerned the market leader in search advertising might augur a wider slowdown in online advertising.

Google itself said revenue growth from search ads was “positive” in every sector except for real estate, which was down by a small amount.

But the Street wasn’t convinced, perhaps because Microsoft also disappointed with its quarterly earnings citing “tough” economic conditions which impacted its software business and online ad sales.

As is well known Microsoft has been involved in on-off on-again buyout talks with Yahoo while Yahoo is separately flirting with the idea of a merger with Time Warner’s AOL unit. But just in case the AOL talks don’t work out for Yahoo, Reuters has learned that Yahoo is prepared to renew talks over News Corp’s Web properties, which include leading social networking site MySpace.

Keep an eye on:

• Rambler Media, owner of Russia’s Ramble Web portal has agreed to sell the Begun advertising agency to Google for $140 million (Reuters).
• Warner Bros is set to unleash an online series on Batman that it hopes will usher in a new kind of Web entertainment blending comic books and animation called “motion comics” (WSJ)
• EMI is hunting for a smaller New York headquarters for its North American recorded-music operation after completing a global cost-cutting initiative last month that eliminated some 2000 jobs world wide. (New York Post)

(Photo: Reuters)