Call it dot-com madness 2.0. Google announced last night it would pay $1.65 billion (£880 million) in shares to buy the 19-month-old YouTube, an indebted video search engine accused daily of copyright infringement.

The paper outlay landed Google the hottest web property of the moment, with 72 million monthly visitors and 100 million videos served each day. It also acquired a potential advertising goldmine, and a legal landmine.

Legal troubles are a certainty. YouTube has its hands full responding to take-down notices from copyright holders who want their music videos and TV programmes removed from the site. It has struck a series of deals to keep the lawyers at Universal, CBS and Sony BMG at bay, but many more would prefer their licensed material to remain off the site – or else.

"It will be interesting to see what happens next and what happens in the copyright world," Mark Cuban, the founder of Broadcast.com, who sold the firm in 2000 to Yahoo! for $5.7 billion (£3 million), wrote on his blog. "I still think Google lawyers will be a busy, busy bunch,"

The surge in workload for Google’s legal staff could, however, lay down the framework for more copyright-protected content – not less – making its way online. "I think the record labels, for one, would be more interested in negotiating with Google than trying to do so with the independent YouTube," John Delaney, an analyst with Ovum, said.

The deal’s advertising potential is less clear. Shortly after announcing the acquisition, Google said it does not intend to sell video ads on the site between viewings, leaving tens of millions in ad revenues off the table.

"They are turning down what we believe to be the largest area of online video advertising, in-stream advertising," Nate Elliott, a senior analyst for European marketing and advertising at Jupiter Research, said.

Jupiter predicts that the US market alone for online video advertising will exceed $1.25 billion (£670 million) in the next five years. "Right now, YouTube serves up half of all online video streams. They are waiving access to potentially half that market."

Instead, Google is looking to monetise YouTube eyeballs in a much less proven manner, possibly by selling downloads to some premium content, as iTunes does. Indeed, Google will sell its trademark text-based ads alongside the video feeds. "It’s not a very compelling place to sell text ads," Elliott remarks - picture visitors taking in wacky skateboard tricks on the centre of the page, ignoring the online merchants scrolled to the right.

Interestingly, in staying out of the online video ad market, Google leaves the door open for Yahoo! and Microsoft to make money from the rapidly swelling online video advertising market, a factor that shareholders no doubt won’t appreciate.

But, as Elliott points out, even if Google fails to make a dime on the YouTube acquisition, it will have little bearing on the firm’s bottom line. Google makes enough money in search to buy several YouTubes. If the most positive result of the deal is to shut out Yahoo! and Microsoft in the YouTube sweepstakes, then the investment will go down as a smart one.

Bernhard Warner, formerly Reuters' internet correspondent in Europe and senior editor for The Industry Standard Europe, writes about technology, the internet and media industries. He can be reached at techscribe@gmail.com

Previous articles by Bernhard Warner can be found here

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