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Fri 13 Oct 2006 08:00 PM

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Google YouTube buy sign of online times

Since the dot.com bubble burst so spectacularly a few years ago, the IT industry has been looking for that next “killer app”: the all-important piece of functionality that is going to encourage customers to spend money in such lavish fashion again. Last year, Rupert Murdoch’s News Corp seemed to think it had found that “killer app”: the Arctic Monkeys.

Well, we could have said Lily Allen and would probably have got as many blank stares, and both would have been misleading, because what News Corp obviously bought was MySpace, the popular online community site famous — amongst other things — for helping to launch the careers of both these musical acts. The fact that old media outfit News Corp was willing to splash out US$580million on a site mainly watched by teenagers was seen then as a sign that those dot.com days could well be coming back.

So what to make of last week’s news that Google is buying video phenomenon YouTube for US$1.65 billion? According to Google CEO Eric Schmidt, the firm’s decision to make its biggest purchase to date was based on the potential it saw in online video, especially on the social networking side. With more and more people globally signing up for broadband internet connections and video sharing technology improving, then there is clearly a potential demand. And YouTube is already in a strong position — it claims to receive 20 million unique visitors a month, with around 100 million videos available on its site.

What it doesn’t yet have is big revenue streams: something which has been perceived by analysts as yet another sign that the dot.com days are indeed back. Worse, YouTube is also seen by many as a potential danger because many of those 100 million videos available on its site could already belong to somebody else. While it was an under-funded startup that didn’t really matter; people don’t tend to launch expensive legal actions against firms that can’t afford to settle them. Google however is one of the richest firms in the world, and potential plaintiffs will be far more likely to launch lawsuits against it if they perceive they have something to gain, a point internet entrepeneur Mark Cuban made last month when he claimed that “anybody who buys [YouTube] is a moron.”

Leaving copyright issues aside (which is a fairly hefty leave) however, and Google is confident that it can make its YouTube buy pay off. The key will be the same model that has worked for Google: advertising. By persuading advertisers to run targeted advertising alongside YouTube’s content, and by improving the search facilities on the site, Google believes it is on to a winner. The firm has certainly proven it can crack the online market, but YouTube is another play altogether.

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