In economics, bargaining is a negotiation to share a surplus. The simplest bargaining procedure is a two-stage affair: one person proposes a split of the surplus, and the second person decides whether to accept or reject it afterwards. If the second person accepts, the surplus is shared according to the split, otherwise both parties get nothing. An example of a real two stage bargaining between two parties is when Google acquired YouTube. In October 2006, Google Inc. announced that it had reached a deal to acquire YouTube for US$1.65 billion in Google Stock. The deal closed in November 2006.
Google is a multinational, publicly-traded organization built around the company’s hugely popular search engine. Google’s other enterprises include Internet analytics, cloud computing, advertising technologies, and Web app, browser and operating system development. It was co-founded by Larry Page and Sergey Brin while they were students at Stanford University. In February 2005, YouTube was created by three previous PayPal employees. It is generally a is a video sharing website where users can upload, view and share video clips.
On Friday October 9th 2006, Google announced that it would buy YouTube for stock that it valued at $1.65 billion stock which means that the owners could have a lot more than the $1.65bn in a few years’ time if Google continues to grow. YouTube’s willingness to pay is unknown but YouTube accepted the deal from google in just a week. Google managed to beat out a number of other YouTube suitors at the time, including Microsoft, Viacom, Yahoo and the News Corporation. Under the terms of the deal, YouTube will retain much of its identity and will keep its name and its office in San Bruno, California, more than 25 miles from Google’s headquarters in Mountain View. YouTube will operate independently to preserve its successful brand and passionate community.
The acquisition of the privately held YouTube will enable Google to increase its online video traffic. According to Hitwise, which monitors Web traffic, YouTube had a 46 percent share, MySpace had 23 percent and Google Video only had 10 percent. Therefore, it would further strengthen Google’s stranglehold on online advertising and would give it an advantage over rivals such as Yahoo, Microsoft, MSN and NewsCorp which were all interested in buying YouTube at the time. Google also managed to eliminate a competitor by buying Youtube. In 2005, Google tried to create one with the poorly named Google Videos. The company refuses to reinvent this concept as the site failed to catch on quickly as YouTube which had more social feature. Thus, the YouTube purchase gave the company the capabilities to tap into the potentially lucrative online video and social networking markets as some market analysts at the time criticised Google for being too connected and reliant on advertising linked to keyword searches.
The deal will also greatly benefit YouTube. Google’s vast resources will help it navigate some sticky legal issues. Copyrighted videos often find their way onto YouTube’s pages despite efforts by the site to prevent it. YouTube could also benefit from a Google alliance as it tries to develop new software to prevent copyright infringement.
However, there were some criticism towards Google’s bid. Some analysts and competitors said Google overpaid. Even Google’s CEO Eric Schmidt later acknowledged this and says that YouTube was valued at only US$600 million to US$700 million at the time of the acquisition. It wasn’t worth anywhere near the price tag at the time of the acquisition which was US$1.65 billion. On the other hand, Mark Cuban said the search giant was crazy to take on YouTube’s many legal liabilities.
Furthermore, the acquisition of YouTube was a really good investment in the long run. Splitting ad revenue with video creators encouraged the improvement the content quality. Higher quality content increased the views significantly especially among young viewers. YouTube has also done some major reinvestments for its money for example, livestreaming and virtual reality. Shortly after the deal, Google’s stock sky rocketed as well.
Conversely, the deal was not very profitable as of now because YouTube’s costs are very high. This is mainly due to sharing the ad revenue to creators, continuous renovation of its product and handling a massive internet traffic.