Google's Purchase of YouTube: The Challenges Ahead

So by now, you may have heard that Google has bought YouTube for $1.6 billion.

I don't think the purchase was a mistake, but it will be extremely hard for Google to turn this into a successful acquisition. The worst case scenario is that in five years, people say, `Remember YouTube? What ever happened to them?' (Earlier examples: GeoCities, Broadcast.com, Infoseek.)

Here are the four biggest challenges facing Google and YouTube in the aftermath of the deal:

1. Justifying the $1.6 billion valuation. Google and YouTube both have a light touch when it comes to advertising -- they don't like to slather ads all over the page, and to date, YouTube has resisted playing ads either before or after its videos. But I have a feeling that to justify paying such a high price for YouTube, pre-roll or post-roll ads will be introduced -- something YouTube should have done long ago. Now, managing the inevitable user backlash will be tricky.

2. Continuing to invest in innovation and product improvement at YouTube. I'm blogging this morning using software called Blogger, which Google bought in 2003. Almost nothing has been improved or added since then -- to the point where Blogger is now lagging almost every other blogging tool. Google has a tendency to buy companies and then forget that Net businesses are like sharks -- they need to keep swimming forward.

3. Integrating YouTube and Google Video. Google says this isn't part of the plan, but it just doesn't make sense for some videos (paid downloads of TV shows or movies) to be found at Google Video, and other videos (free uploads of user-generated content) to be found at YouTube.

4. Managing copyright. YouTube has begun to set a precedent that it will share revenues with record labels whose music is used in videos posted to YouTube. Developing systems to identify when a record company's music pops up on the site -- or even harder, a snippet of video owned by someone else -- and then compensating the owner will be phenomenally complex. (I don't think it can be done with human employees.) Furthermore, since YouTube will be sharing revenues, its incentive will be to pump up its advertising revenues (see item #1).

Your thoughts?

For kicks, you might enjoy this message from YouTube founders Steve Chen and Chad Hurley. (They seem to be standing out in front of the TGI Friday's in San Mateo.) Clearly, their PR people were not present when this was made... which makes it kinda cool.