Search engine giant Google announced last week that it is buying the popular video sharing site YouTube for $1.65 billion in Google stock. Although Google has its own video sharing service, Google Video, traffic statistics from Hitwise show YouTube with two and a half times more hits than Google Video back in August 2006, and more than four times the visits in September 2006. YouTube will keep its name and will continue to operate independently from Google, and Google claims that YouTube will complement Google Video rather than replace it.

Does the acquisition make sense? From Google's perspective, it gives Google the lion's share of the fast-growing video sharing world, and another vast source of pages on which to display contextual advertising. Google has said it won't run ads before videos, but I have to assume that people at Google are thinking hard about new ways to turn user-contributed video into a serious revenue stream.

It's even easier to see why YouTube would want this deal. The company has been losing money and hasn't come up with any reasonable way to reverse that trend. Bandwidth and server costs and maintenance must be insane for YouTube, but those are problems that Google has already solved. Plus, YouTube was facing threats of lawsuits from the major movie studios, and Google announced deals to display music videos from Sony BMG Music Entertainment and Warner Music Group. Those deals indicate Google may have the negotiating clout to make licensing happen more broadly, and Google certainly has the money and legal firepower to fight any lawsuits that do ensue.

These music videos will be made available for online viewing for free (select music videos from Warner Music Group will also be available for purchase as downloads for $2), and the studios will gain revenue via Google's normal ad model. That may hurt Apple's ability to sell $2 music videos via the iTunes Store (see "iTunes 6 Gets Video," 17-Oct-05), although it remains to be seen if the audio and video quality of free music videos on Google Video/YouTube will be comparable to downloads from the iTunes Store.

Google's press releases also note that the company is working with content companies to allow people access to music and video for use in their "creative user-generated productions," which presumably is meant to cover user-created videos, but makes me wonder about sample and mixing of music as well. But the most interesting statement in the Warner Music Group press release is: "Once Google's technology is implemented, content companies such as Warner Music Group will have the opportunity to monetize the use of music in user-generated content, or if they choose, have the content removed from the platform."

There's clearly a dance going on here, but it's unclear who's leading or where it's headed, and it bears future scrutiny. Google may or may not always live up to its motto, "Don't be evil," but companies like Sony BMG Entertainment and Warner Music Group have definitely thrown their lot in with the devil in the past, as with the scandal surrounding Sony BMG's surreptitious distribution of spyware on audio CDs as a copy prevention mechanism.