Google buys YouTube for $1.65 billion

updated 10:47 a.m. ET Oct. 10, 2006

SAN FRANCISCO - Internet search leader Google is snapping up YouTube for $1.65 billion, brushing aside copyright concerns to seize a starring role in the online video revolution.

The all-stock deal announced Monday unites one of the Internet’s marquee companies with one of its rapidly rising stars. It came just a few hours after YouTube unveiled three separate agreements with media companies to counter the threat of copyright-infringement lawsuits.

The price makes YouTube Inc., a still-unprofitable startup, by far the most expensive purchase made by Google during its eight-year history. Last year, Google spent $130.5 million buying a total of 15 small companies.

Although some cynics have questioned YouTube’s staying power, Google is betting that the popular video-sharing site will provide it an increasingly lucrative marketing hub as more viewers and advertisers migrate from television to the Internet.

“This is the next step in the evolution of the Internet,” Google Chief Executive Officer Eric Schmidt said during a conference call Monday.

YouTube will continue to retain its brand, its new headquarters in San Bruno and all 67 employees, including co-founders Chad Hurley and Steve Chen. Meanwhile, Google will continue to run a less popular video service on its own site.

The deal is expected to close before the end of the year.

“I’m confident that with this partnership we’ll have the flexibility and resources needed to pursue our goal of building the next-generation platform for serving media worldwide,” said Hurley, YouTube’s 29-year-old CEO.

Schmidt thinks so highly of Hurley and Chen, 27, that he compared them to Google’s now 33-year-old co-founders, Sergey Brin and Larry Page.

Brin sees the similarities too. “It’s hard to imagine a better fit with another company,” Brin said during Monday’s conference call. “This really reminds me of Google just a few short years ago.”

The two companies even share a common financial bond: Sequoia Capital, an early Google investor that owns a roughly 30 percent stake in YouTube. Menlo Park-based Sequoia remains a major Google shareholder and retains a seat on the company’s board — factors that might have helped the deal come together after just a week of negotiation.

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YouTube has drawn less flattering comparisons to the original Napster, the once-popular music sharing service that was buried in an avalanche of copyright infringement lawsuits filed by incensed music companies and artists.

While most videos posted on YouTube are homemade, the site also features volumes of copyrighted material — a problem that has caused some critics to predict the startup eventually would be sued into oblivion.

But Hurley and Chen have spent months cozying up with major media executives in an effort to convince them that YouTube could help them make more money by helping them connect with the growing number of people who spend most of their free time on the Internet.

As its negotiations with Google appeared to be near fruition, YouTube on Monday announced new partnerships with Universal Music Group, CBS Corp. and Sony BMG Music Entertainment. Those alliances followed a similar arrangement announced last month with Warner Music Group Inc.

The truce with Universal represented a particularly significant breakthrough because the world’s largest record company had threatened to sue YouTube for copyright infringement less than a month ago.

While Google has been hauling away huge profits from the booming search market, it hasn’t been able to become a major player in online video.

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