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Trends in Web 2.0

What Google's acquisition of YouTube means for Web 2.0

It's hard to put a seriously negative spin on Google's $1.65 billion acquisition of online video startup YouTube. But opinions differ on the exact import of the biggest internet deal to date. Some say the lofty sum paid by the deep-pocketed Google suggests the deal represents the high-water mark--or even the beginning of the end--of the Web 2.0 renaissance.

"I certainly don't think there will be another YouTube in [terms of] price," says Jay MacDonald, partner in New York City media banking firm DeSilva + Phillips. MacDonald's rationale: As first mover in the online video space, YouTube naturally commands the biggest price tag, and anybody who follows will get less.

At the same time, MacDonald notes, Web 2.0 differs from Web 1.0 in significant ways. Most notably, ventures in this second wave of internet startups tend to be real businesses with customers, revenue and profits, as opposed to the early-stage ideas that marked the first round of online startups. "Web 1.0 was a flawed model," MacDonald says.

As a startup commanding lots of eyeballs but only a handful of employees, as well as an unproven monetization scheme and no profits, YouTube at the time of the acquisition agreement was more like the Web 1.0 model. So Web 2.0 businesses, even latecomers, may still go for big prices, because they can deliver as actual businesses rather than ventures that essentially offer only potential. And because acquisitive companies look at prices paid by other buyers when structuring their own bids, YouTube at the very least provides a comparable valuation that benefits entrepreneurial sellers.

But MacDonald recommends that Web 2.0 entrepreneurs not count on a YouTube-size deal for their own companies. For one thing, not many companies have Google's financial clout. And most of those that do, such as AOL and MySpace buyer News Corp., have already made large investments in various Web 2.0 niches. The leading buyer candidate who hasn't made a purchase in online video, for instance, is Microsoft, which announced shortly after the Google-YouTube deal that it was unveiling a beta version of its own user-uploaded service, called SoapBox.

Web entrepreneurs themselves see things a little differently. Online video search pioneer Thomas McInerney, 34, co-founded in 1998. His business survived the boom and bust, and he is still CEO and 50 percent owner of the San Francisco online video company. McInerney says his 30-person firm, which had signed deals to distribute feature film and TV content for Warner Bros. and Sony, isn't looking for a buyer. "A lot of companies that say that are posturing," he acknowledges. "They think by saying they're not interested in selling, they're more likely to [be] bought."

McInerney also acknowledges that almost all companies are for sale at the right price. And he believes that whether you're talking about Web 2.0 consolidation or you genuinely don't want to sell your company, the YouTube deal is a positive for entrepreneurs. "Google is doing a lot for the industry," he says. "They re-energized the sector and showed you can make money if you execute well."

This story appears in the January 2007 issue of Entrepreneur. Subscribe »

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