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Google Buys YouTube: The Top Is In (October 11, 2006) 
Google buys YouTube, which makes it Official: the top of this market is in. Pardon me while I have a heavy-duty flashback to 1997, when "push technology" was the hot trend and hundreds of millions were offered for its leading proponent, PointCast Network. So fervent was the belief/hype that Pointcast rejected a $450 million buyout. Here's the Wikipedia entry on "the rest of the story": The PointCast Network used push technology, which was a hot concept at the time, and received enormous press coverage. The product did not perform as well as expected, in part because its traffic burdened corporate networks with excessive bandwidth use, and was banned in many places... and people objected to the large number of advertisements that were pushed over the service as well. The client was eventually bundled with Microsoft Windows. At its height in 1997, the directors of PointCast reportedly spurned an offer of $450 million from News Corp for the company. They hoped to go public for a larger amount, but never did.Fast-forward to the present: Here we have YouTube, a 20-month old company with no patentable technology, no revenues except ads (i.e. no different than other websites with millions of users), and virtually no barriers to entry. Their sole enterprise value is name recognition and the "buzz" around downloading free videos. While the business press goes ga-ga over YouTube's 50 million users, does anyone note some rather obvious downsides, such as: 1. YouTube is fundamentally a huge time-sink with no productive value. Recall that truly revolutionary technologies enabled huge leaps in productivity and user value. For instance, the Apple Macintosh enabled small businesses everywhere to create professional graphics with easy-to-use software and a laserprinter. 2. There is nothing in YouTube that Microsoft or Yahoo! can't copy once the "buzz" wears off. Recall that Friendster launched the social network phenomenon but was soon overtaken by others. 3. Google is paying $32 per user for a site which sells ads. And exactly how well do Internet ads work? As a recent lead article in BusinessWeek describes, Click Fraud: The dark side of online advertising, the entire edifice of internet advertising rests on a compromised foundation. 4. "But look at all the potential revenue streams!" Yeah, right. Studios will pay gazillions to YouTube as users download TV shows and movies, blah-blah-blah. Did anyone notice that Apple has the model, brand, technology and CEO who can do this better than YouTube? What people like about YouTube is that it's free. End of story. 5. Exactly what will keep YouTube from being worth $7 million in a few years, when the recession has taken firm hold of consumers' shrinking pocketbooks, and internet ads have been revealed as ineffective, overhyped and overly expensive? Is there a truly compelling response? Subtract the hype and the hope, and you've got a classic flash-in-the-pan fad. And when one-year old fads command $1.65 billion, then it's official: the top is in. But take a look at this chart of Google for confirmation. There is a very dangerous wedge formation, which typically leads to a stock breaking up or down--usually down. Google's P-E ratio (price to earnings) is a very rich 62; a typical PE is 20, and a fast-growing tech company might trade at a PE of 30. Which means Google could drop in half to around $200 and still be fairly priced as a fast-growing tech conglomerate. The chart suggests such a drop is possible--and possibly even probable. For more on this subject and a wide array of other topics, please visit my weblog. 
copyright © 2006 Charles Hugh Smith. All rights reserved in all media. I would be honored if you linked this wEssay to your site, or printed a copy for your own use.
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