Why I'm not a Net pundit

I don't get why Google is paying 1.6 billion dollars to buy YouTube. (Actually, they're not really "paying" anything -- they're issuing stock worth $1.6 billion, which is easy to do provided your existing stockholders don't mind. Intuitively, you'd think that by buying something by printing new shares of stock, the company would be diluting the value of its existing shares, but it isn't -- assuming the asset they're buying is, in fact, worth what they're paying for it. Assuming YouTube is actually worth $1.6 billion, Google's balance sheet will now show an additional $1.6 billion in the assets section and the same amount under stockholders' equity. Think of it this way: if Google had issued $1.6 billion worth of new stock and sold it on the open market for cash, then taken the cash and bought YouTube, Google's balance sheet would look exactly the same as it does. But again, the "if YouTube is really worth that kind of money" is a big if. I was recently looking over the financial statements of a company I used to work for, and noted that in 2002, they had restated their 2001 earnings, taking a loss of approximately $1 billion for "Goodwill/Asset Impairment." That's a geeky way of saying "We figured out that this company we bought really wasn't worth what we paid for it, so we took a hit." If at some point, YouTube proves to be a turkey -- if the millions of videos watched every day don't translate into profit, as they haven't so far -- you might see Google taking a similar charge against earnings in a future year. But I digress.)

What, exactly, is YouTube? Basically, it's just a server farm, with an extremely fat Internet connection that allows it to stream huge amounts of video at people like you and me every day. I hasten to add that I think YouTube is one of the greatest things out there -- I use it a lot, most recently when I ran across some videos of symphony orchestra performances. But as we saw during the Internet bubble of the '90s, cool and great don't necessarily mean profitable.

In any case, I don't get why Google couldn't just promote its own video site -- which is horribly under-promoted at the present time, with just a plain link that says "Video" on the Google home page. Why shell out a billion and a half for something they could do just as easily in-house for a lot less money?

I haven't seen YouTube's financial statements, but it'll be interesting to see how much Google records as "Goodwill" on its balance sheet next year. Goodwill is what my first accounting prof used to call "blue sky" -- it's what you pay for a company over and above what it's really "worth," on paper, in terms of its net assets. When you buy a company because it has a good reputation, a lot of happy customers, and a lot of brand loyalty, you pay extra money -- that's goodwill. I sure hope, for Google's sake, all that goodwill doesn't get ill.

Urb's Blog