Google, YouTube, and the Questions of Value
In his formulation of the resource-based view (RBV) of the firm, Jay Barney lays out four conditions by which a firm can achieve strategy's Holy Grail - sustained competitive advantage. He frames the conditions as questions.
- The first is the question of value: do a firm’s resources and capabilities enable the firm to respond to environmental threats or opportunities?
- The second is the question of rareness: how many competing firms already possess particular valuable resources and capabilities?
- Next is the question of imitation: do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already possess it?
- And finally there is the question of organization: is a firm organized to exploit the full competitive potential of its resources and capabilities?
According to Barney, the answer to all four questions must be "Yes" in order for a firm to have a basis for sustained competitive advantage, i.e. to significantly outperform its competitors over some extended time period.
While Barney's theory can be and often is used to analyze a firm's entire portfolio of resources and capabilities, it can also be used to analyze subsets of them. Point in case is Google's recent acquisition of YouTube.
Though they have not said so in precisely the terminology of the resouce-based view, much analysis and commentary about the deal can be understood in that light. This relates especially to the first of Barney's four questions- the question of value. Put in plainer, less theoretical terms, the compelling questions pertaining to value are these:"What is YouTube worth to Google?", that is to say "What does the YouTube acquisition allow Google to do that it did not or could not previously and what is that worth." Obviously, the answer to that question in purely quantitative terms is "something much more than the $1.65 Billion that was paid." In a qualitative sense, we could ask yet another question "What did Google get for its money?" Here are some potential answers:
- YouTube's vast catalog of amateur videos? Yes, but hardly anyone would argue that that is worth even a 1/10 of the purchase price
- YouTube's 5-10 million daily visitors? Well, yes. And if YouTube pages soon have Google Ads, there stands to be more visitors, market share, and revenue for Google as a result. And while that could be substantial, I somehow think that this is not the most valuable aspect of the purchase.
- YouTube's unprofitable business model? Surely. But that problem can and will be fixed.
- A video distribution network? Yes, but Google aready has a video page of its own.
- 5-10 million visitors plus a social network? Surely. But I think this aspect is greatly over-rated. It's hip to be social these days but it's not at all clear that people are so "emotional" about or attached to home videos and amateur content that significant network externalities have been created. After all, if they had, why wasn't YouTube already capitalizing on them? Google does search, not social networking, so it is hard to see how this angle is going to work out profitably.
- YouTube's brand? Surely. But it's not as big a brand name as Google's.
- Pirated content? Again, surely. But that content can't be sold or monetized unless deals can be reached with its producers, something YouTube was keen to do before the acquisition and something Google is even keener to do after.
- They kept YouTube out of other hands? Apparently so. But that hasn't stopped Yahoo from continuing to make deals with mainstream media. In fact, they announced just today that local news from 16 CBS-owned television stations will be carried on Yahoo.
- Leverage in negotiations with premium content producers? You bet. What YouTube offers Google is millions of visitors plus a social network (of unclear value) plus a brand and a distribution network which can be used to make TV, movies, music videos, sporting events, concerts, and music available, via the web, to an audience already demonstrably interested in it, an audience Google doesn't own but to which it has propreitary access... for now.
Although the answers to all of the above "value" questions are "yes", clearly all of the resources and capabilities are not of equivalent value. Nor are they all equally complementary with each other or with Google's existing resources and capabilities. What remains to be seen is whether or not Google is able to work out copyright agreements with the content producers. Apple has certainly done so, but they've got Ipods. And it still took a few years.
File under: Resources and Capabilities | Question of Value
Tags: youtube| Google | Entertainment
Comments
I forgot to add this: Great post!
:-)
Posted by: K T Cat | October 20, 2006 4:53 PM
Don't underestimate the power of the YouTube brand and the social network. User-created content is killing the video and print media. While Google had Google Video, it was not the blogging community's household name like YouTube is. My bet is that Google isn't sure what the future of the web is, but it knows that user-created content will be king. They wanted to pick up the crown jewel of video content distribution.
Posted by: K T Cat | October 20, 2006 4:52 PM