Google to buy YouTube in $1.65b deal

Online search leader Google Inc. agreed to acquire the popular online video site YouTube for $1.65 billion in stock, a deal that signaled the coming of age of Internet video.

YouTube also reached content-sharing agreements with several of the world's leading video and music companies. The entertainment companies, which have denounced YouTube users by claiming they illegally post their products on the Internet, will now partner with the company to distribute music and videos legally.

``Right now we're in the middle of a shift in digital media entertainment," said YouTube cofounder Chad Hurley during a conference call disclosing the Google acquisition. ``Users decide what they want to watch and when they want to watch it. By joining forces with Google we'll be able to sharpen our focus on this new model."

Founded in February 2005 by three former employees of the Internet payment service PayPal, YouTube lets visitors publish homemade video clips. YouTube also offers ``social networking" features like those found at popular sites like MySpace. A YouTube visitor can organize a group of video fans who share common interests, like videos about news, sports, or travel.

``The YouTube team has built an exciting and powerful media platform that complements Google's mission to organize the world's information and make it universally accessible and useful," said Google chief executive Eric Schmidt.

Within months of its launch, YouTube had become one of the fastest-growing websites. Now Youtube officials say about 100 million videos per day are viewed on the site. According to comScore Networks Inc., a market research firm, YouTube was the third-most-popular US video site in July. That month, 30.5 million Americans viewed videos on the site. That put YouTube behind rivals Yahoo Inc. and News Corp's MySpace service, which each had about 37 million viewers. But YouTube is well ahead of Google, which reached 7.5 million viewers. Google's Schmidt said yesterday that Google Video will continue as a service once the acquisition is complete, but he said he is impressed by YouTube's success at creating a community of loyal viewers.

``There was a clear winner in the social networking side of video," said Schmidt. ``That is really what led us to begin negotiations with YouTube."

Michael Inouye, a research analyst, at In-Stat in Scottsdale, Ariz., questioned whether YouTube is worth such a steep price. Inouye said that social networking leader MySpace offers a much richer set of features than YouTube. But last year, News Corp. paid $580 million for MySpace, about a third of what Google is paying for YouTube.

``I just don't see the same growth potential that MySpace had," Inouye said.

Josh Bernoff, principal analyst for Forrester Research in Cambridge, took a more positive view. ``What Google needs right now, where they're actually weakest right now, is in the social networking space," said Bernoff. With social networking, Google visitors will spend more time at the site, allowing Google to show them more ads and generate more revenue. But Google's own social networking service, Orkut, has failed to attract a large number of users. Buying YouTube gives Google the social networking success it needs, Bernoff said.

Internet analysts had warned that any YouTube acquisition could saddle the new owner with serious legal liability. Major movie and music companies have complained about YouTube users who post copyrighted material on the site without permission.

But before the Google deal was disclosed, YouTube unveiled deals with Universal Music and Sony BMG Music Entertainment to make these companies' music videos available on YouTube. The music companies will get a cut of advertising revenue generated when the videos are shown. Another major music company, Warner Music Group, already has such a deal with YouTube.

Google's own video service struck similar deals yesterday with Warner, Sony BMG, and German music giant Bertelsmann AG.

Yesterday, YouTube did a copyright deal with CBS Corp. that will require YouTube to filter out unauthorized displays of CBS video content, while sharing ad revenues for other CBS materials displayed on the site.

YouTube already has a similar deal with General Electric Co.'s NBC television network. These video and music content deals should greatly reduce the risk of a copyright-infringement suit against Google.

Google's acquisition of YouTube was widely expected since last week, when the Wall Street Journal reported that negotiations were under way.

Investors bid up Google shares by 2 percent yesterday, in anticipation of the deal, which was disclosed after the stock market closed. Google shares closed at $429.

Hiawatha Bray can be reached at bray@globe.com.