Google's YouTube Purchase Gives It A Big Lead Over Microsoft

While Google is about to own the online video leader, Microsoft is just getting its own Soapbox video service started. But the online video market is still new and uncertain, and Microsoft has come from behind before.

The bulldog spirit that drove Microsoft's come-from-behind successes in the past will have to be called upon again in the online video market, where archrival Google took a big step forward with the $1.65 billion acquisition of YouTube.

In buying a market leader, Google immediately took a giant step ahead of Microsoft, which only launched a test version of its YouTube competitor Soapbox last month. While not without risks, Google's buy-to-build strategy certainly removed the difficult job of gathering an online video audience. YouTube in August had 34 million unique visitors, according to Nielsen NetRatings.

"It's so easy to make jokes about knocking them off their Soapbox," Joe Wilcox, analyst for JupiterResearch, said of Microsoft.

But what could help Microsoft get back up is the uncertainty of the online video market, which remains at the experimental stages in advertising and in the handling of content. Among Google's first chores will be to accelerate YouTube's efforts to rein the rampant copyright violations found on user-uploaded video.

While the clips have driven the startup's success since it was officially launched in December 2005, they also could have eventually landed the site in court, where the entertainment industry has been very successful in shutting down Web sites found to abuse the rights of copyright holders.

Before the acquisition was announced, YouTube had been signing deals with a handful of record companies and TV networks to share ad revenue from the use of their music and programming. In addition, the site plans to launch by the end of the year an automated system that would enable companies to search for their property and either remove it, or seek a revenue-sharing deal with YouTube.

Besides dealing with copyright landmines, Google also will have to build an advertising model for video that's as successful as the multi-billion-dollar business it has built around online search. The company, however, has lots to work with. The revenue opportunities on YouTube include not just display advertising, but also encompass video search, product placement and social networking, since part of YouTube's attraction is the ability for users to share clips and form groups around similar interests.

In buying YouTube, Google got lots of money-making potential in a pre-built machine, which Microsoft, so far, seems intent on building itself.

"Microsoft has a lot of pieces to put in place," Wilcox said. "Google has it preassembled. It has a lead."

Josh Bernoff, analyst for Forrester Research agrees. Microsoft currently lags not just in online video, but also in social networking, when you compare its efforts to the success of, the leading site purchased last year by News Corp.

"I have to say that it's going to be pretty much uphill for them," Bernoff said.

Eventually, Microsoft will have to launch its own set of unique services that capture market share in video and social networking, or "it's game over," Bernoff said.

Nevertheless, Microsoft has gone from underdog to a market leader before. Examples include its toppling of Netscape in the late 1990s to take over the Web browser market, and its rise from zero to No. 2 in the videogame market behind Sony.

In an Oct. 9 meeting with BusinessWeek editors, Microsoft Chief Executive Steve Ballmer said the company has a long-term strategy against Google, and mentioned the company's come-from-behind history.

"We're very long-term. We've got a stick-to-it-iveness, a tenaciousness that I would argue is unmatched," Ballmer said.

Matt Rosoff, analyst for Directions on Microsoft, agreed that the company's bulldog spirit would keep them in the game.

"I think they'll be a player (in online video)," Rosoff said. "They'll stick with it for a long time."

Google's acquisition didn't change the market dramatically, since YouTube was already way ahead in gathering an audience around its service, Rosoff said. Google, however, does bring the money to grow YouTube's business faster, and the search engine's backing means YouTube will be around for a long time.

"YouTube is one of those things that's hard to duplicate and replicate," Rosoff said. "Microsoft will take a more measured approach."

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