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Google to buy YouTube for $1.65 billion

Search engine leader looks to bulk up in the burgeoning online video market.

By Paul R. La Monica, CNNMoney.com editor at large

Google, the Internet's leading search engine, announced Monday that it is buying popular online video site YouTube for $1.65 billion in stock.

YouTube, which was founded in February 2005, has quickly become the most well-known of several online video sites. More than 100 million videos, many of which are short videos created by the site's users, are downloaded a day on the site.

According to Internet research firm Hitwise, YouTube has about a 46 percent share of the online video market.

For Google (Charts), the purchase of YouTube gives the company the ability to tap into the potentially lucrative online video and social networking markets. Some analysts have criticized Google for relying too much on advertising tied to keyword searches.

The combination of Google and YouTube could further strengthen Google's dominance in online advertising, giving it an edge over rivals such as Yahoo! (Charts), Microsoft's (Charts) MSN and News Corp (Charts)., which owns the social networking site MySpace. Some analysts said Monday that Yahoo, Microsoft and News Corp. also had probably expressed interest in buying YouTube.

Bill Tancer, general manger of global research of Hitwise, said after the deal was announced that MySpace would now probably need to promote its own video service more aggressively on its site in order to compete with a combined Google-YouTube.

And Martin Pyykkonen, an analyst with Global Crown Capital, said that Google's purchase of YouTube could be viewed as a preemptive strike against Yahoo, which has been rumored to be in talks to purchase social networking site Facebook.

In a statement, Google said YouTube will operate as an independent unit of Google once the deal closes and will retain the YouTube brand name. The companies added that no YouTube workers will lose their jobs as a result of the acquisition and that Google will maintain its own online video business.

Clayton Moran, an analyst with Stanford Group, said after the deal was announced that Google was paying a rich price for YouTube since it has yet to generate a sizable amount of sales. But he said Google needed to do something to become more competitive with MySpace, which currently ranks in second place in online video market share.

"My sense is that Google is paying a full price considering that YouTube is still unproven in regards to its revenue potential. But considering the success of MySpace it was clearly worthwhile for Google to take this step," Moran said.

In addition to giving Google a stronger foothold in the burgeoning social networking market, YouTube could also help Google extend its highly successful text-based search platform into video, which could wind up being even more profitable.

Pyykkonen said that for this reason, Google may be able to justify paying such a high price for YouTube.

"Google has talked a lot about video and video search without really having anything particularly going on there. I would think that a lot of advertisers would be willing to pay a premium for a video search ad opposed to paid search text," he said.

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