Google buys YouTube for $1.65 billion

That should change now, predicted Forrester Research analyst Charlene Li. “This gives Google the video play they have been looking for and gives them a great opportunity to redefine how advertising is done,” she said.

Investors applauded the possible acquisition as Google Inc. shares climbed $8.50 to close at $429 on the Nasdaq Stock Market, then added another $3.11 in extended trading.

Several other suitors, including Microsoft Corp., Yahoo Inc. and News Corp., reportedly have discussed a possible YouTube purchase in recent weeks.

(MSNBC.com is a joint venture of Microsoft and NBC Universal News.)

“This deal looks pretty compelling for Google,” said Standard & Poor’s analyst Scott Kessler. “Google has been doing a lot of things right, but they are not sitting on their laurels.”

Google’s YouTube coup may intensify the pressure on Yahoo to make its own splash by buying Facebook.com, the Internet’s second most popular social-networking site. Yahoo has reportedly offered as much as $1 billion for Palo Alto-based Facebook during months of sporadic talks.

“Yahoo really needs to step up and do something,” said Roger Aguinaldo, an investment banker who also publishes a dealmaking newsletter called the M&A Advisor. “They are becoming less relevant and looking less innovative with each passing day.”

Selling to Mountain View-based Google will give YouTube more technological muscle and advertising know-how, as well as generate a staggering windfall for a company that was running on credit card debt just 20 months ago.

To conserve money as it subsisted on $11.5 million in venture capital, YouTube had been based in an austere office above a San Mateo pizzeria until recently moving to more spacious quarters in a neighboring city.

Since the company started in Hurley’s garage in February 2005, YouTube has blossomed into a cultural touchstone that shows more than 100 million video clips per day. The video library is eclectic, featuring everything from teenagers goofing off in their rooms to William Shatner singing “Rocket Man” during a 1970s TV show. Most clips are submitted by users.

YouTube’s worldwide audience was 72.1 million by August, up from 2.8 million a year earlier, according to comScore Media Metrix.

Li and Kessler expect even more media companies will be lining up to do business with YouTube now that Google owns it.

“It’s going to be like, ’You can either fight us or you can make money with us,”’ Li predicted.

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