A Decade Ago, Google Bought YouTube — and It Was the Best Tech Deal Ever

Ten years ago this week, Google bought YouTube for $1.65 billion. That figure seems quaint now (it equates to WhatsApp being worth about 13 YouTubes) but at the time it was an eye-popping figure to pay for a startup only a year and a half old. Some analysts and competitors said Google overpaid. Mark Cuban said the search giant was “crazy” to take on YouTube’s many legal liabilities. Google itself later acknowledged that YouTube wasn’t worth anywhere near the price tag at the time of the acquisition.

A decade later, though, the YouTube buy is widely considered to be one of the best consumer tech acquisitions ever. But is it the best acquisition of all time? There’s certainly an argument for a couple of tiny investments that paid off incredibly, like Yahoo scooping up Flickr and Google’s $50 million acquisition of Android in 2005. The difference is that at that time, no one outside Silicon Valley knew what Android was. YouTube was already world famous when Google snapped it up, and its price tag was ridiculous by conventional standards. It was one of the first wild bets a tech giant made following the dot-com crash, and for the following reasons, I’m willing to defend it as the best one.

Did the acquisition eliminate a direct competitor?

It did. In 2005 the web was in desperate need of a video hub, and Google tried to create one with the poorly named Google Videos (a naming concept the company refuses to reinvent). But the site failed to catch on as quickly as YouTube, which had more social features and extremely popular pirated TV clips (try to find a 2006 feature about YouTube that doesn’t mention “Lazy Sunday”). At the time of its acquisition, YouTube was one of the world’s fastest-growing websites, and its executives had a clear understanding of what users wanted out of a video site. As the adage goes: If you can’t beat them, buy them.

Did it improve the company’s core business?

Yes. Google cares about selling ads, and it especially cares about selling ads against search results. YouTube has evolved into the world’s biggest video search engine, with a sprawling database of clips made navigable by Google’s smart algorithms. Google can sell display and video ads against all these clips, to the tune of more than $5.2 billion in estimated revenue this year, according to eMarketer. It helps that search results from the main Google search engine are often filled with YouTube clips. Google loves when search queries drive people to other Google services, and YouTube is a big part of that strategy.

Was it a smart investment for the future?

Definitely. In 2006, YouTube was basically America’s Funniest Online Videos + illegal SNL clips. Since then Google has made smart decisions to expand the site’s ambitions. Splitting ad revenue with video creators spurred the creation of higher-quality content. That content has been extremely popular among kids and young adults, whose clicks are the precious manna keeping thousands of media/tech/advertising professionals employed. And YouTube has aggressively reinvested its money into the formats of the future, such as livestreaming and virtual reality.

But while YouTube is the reigning king of online video, it hasn’t yet lived up to the cable-killer hype pundits have been ascribing to it for years. YouTube has tried investing in television-like original content, charging for channel subscriptions á la carte, and launching a Netflix-esque monthly subscription service with exclusives shows and movies. But it’s still viewed as television’s kid brother among its advertisers, and as a launching pad toward bigger and better things by its creators. To shake the stigma, the site will probably have to buy up a name-brand media property that screams “TELEVISION. BEER. AMERICA.” Think Twitter scooping up streaming rights for NFL games. YouTube has the infrastructure and the eyeballs — it just needs the kind of content the TV industry respects and understands. A live-TV service rumored to be launching in 2017 could do the trick.

Did it prove profitable?

No … which works heavily against my argument, but hear me out. Google doesn’t break out YouTube financials, but according to a Wall Street Journal source, the video site was “roughly break-even” in 2014. Due to handing creators a majority of ad revenue, constantly upgrading its product, and managing nearly 20 percent of North America’s internet traffic, YouTube’s costs are sky-high. Online video is a complex, expensive business, and thanks to Facebook, it’s now a competitive one, too.

But the heightened competition only makes YouTube a more important strategic asset for Google. In a world without YouTube (or with an independent but less powerful YouTube), Facebook might have been able to waltz into the video sector and take over, usurping Google as the leader in digital advertising. YouTube acts as a bulwark against younger tech companies that know Google could be toppled as internet use shifts from desktop to mobile and, soon, to living room devices. Every dollar YouTube makes is a dollar Facebook or Snapchat doesn’t.

Did it boost the company’s stock?

Yes. Google’s stock climbed to an all-time high shortly after the YouTube acquisition in 2006, and it’s been part of the company’s growth narrative ever since. Wall Street continues to see big upside in the video platform. On Google parent company Alphabet’s last earnings call, five of the 12 stock analysts who asked questions inquired about YouTube’s business. As with many of Google’s more nascent projects, the company’s exact plans for the future of YouTube aren’t clear. But the simple fact that the company is investing in YouTube shows it cares about the future, which investors like. Couple that with a still-thriving search business and you have one of the best-performing stocks of the last decade.

Did it benefit users?

Obviously. YouTube rid us of the scourge of buffering. It created a financial ecosystem that encouraged creatives to launch independent businesses, or at least get their 15 minutes. It let us stream almost any song we wanted for free. The site has at various times courted controversy with copyright holders, record labels, and even the video creators that give it value, but the end result for the lowly YouTube viewer has been a decade’s worth of free, fast online video. Here’s to a decade more.

Are there any crazy tech acquisitions that were smarter?

There’s an argument to be made for Facebook’s $1 billion purchase of Instagram, which also eliminated a nascent competitor and is growing into a significant revenue source. But Instagram is a smaller platform than YouTube with a narrower focus. If Google never bought YouTube, the entire online video ecosystem would be fundamentally different in unpredictable ways. If Facebook never bought Instagram … Facebook’s stock would be lower, and Instagram would have fewer annoying updates begging users to follow their Facebook friends.