Google to Share Revenue with Video Content Providers

In a surprising statement during Thursday afternoon's third quarter conference, Google's president for technology, Sergey Brin, referred to the development of Google Video and YouTube going forward as separate properties. At least in Brin's view, they'll exist together, but they won't be combined.

Brin's comments were prepared in advance, and not made extemporaneously or in response to a question from analysts, ostensibly to explain how the company is researching new search methodologies for video.

"When I perform a search," Brin said, "I often find that the best answer is not necessarily a Web page. I know that sounds like heresy from Google, but in fact, if you're learning a sport, if you want to build a house, if you want to study a science, often videos are the best medium to learn about those things...and this has obviously been a significant initiative for us. I'm speaking about both Google Video, which we've developed over the past few quarters or so, as well as, obviously, YouTube, which we announced our intent to acquire. Both of those together are going to really help to get more video to more users, providing them with better information to large classes of their kinds of search queries."

Google executives declined to share further light into the impetus behind its acquisition of YouTube, though they clearly indicated that it would not set a pattern for any future acquisitions. In fact, Eric Schmidt and others emphasized that the company will resume its typical growth pattern of partnering with other firms rather than buying them outright, adding that the partnership model has proven most effective in driving growth in both market share and revenue.

"We believe at Google that we're more effective when we partner," Schmidt stated in his opening remarks. "Partnerships are a huge benefit, not just for Google, but also for whomever the partner is. We see impressive growth in the area of partnering with existing and new companies from content technology and advertising perspectives, [and] we've laid the groundwork for many more coming. This industry is clearly poised for growth, and this is still the early stages of something that is likely to be a very major transformational industry."

Responding to a question from a Citigroup analyst, Google CFO George Reyes made it quite clear that the YouTube deal -- which involved a stock trade -- would not be the model for Google's future growth. "I think you should think of this as a one-off, one-time that we did [this], and going forward, we're going to use cash."

Can Google afford to do this? If you look at this quarter's numbers, you bet. "I'm sitting here looking at the free cash flow for this quarter alone," Reyes told another analyst, "and it's $512 million. So the cap-ex [capital expenditures] investments that we need to make, we can easily afford, and drive them to build more value for the company."

If the company expects to continue to maintain such a tremendous cash flow, can it afford to continue to stake its entire future on a bet that advertising alone can sustain the momentum?

"It's important that we develop other good sources of revenue going forward," stated CEO Eric Schmidt. "We think that advertising, and in particular search advertising, will be the majority of our advertising revenue for many, many years. We have a number of very interesting successes: The enterprise business continues to churn along. It would be an enormous success on its own merits."

By "enterprise business," Schmidt is referring to products and services Google is positioning toward server administrators, such as Google Apps for Your Domain. "You can see that product, as it becomes more successful, could become...a very significant source of revenue," said Schmidt, before adding that his company's online payment service, Google Checkout, which got off to a rocky start last June, could also provide some supplemental income.

But as Google continues to roll out more and more products, it could become more difficult for it to realize "monetization" with each new item, as Sergey Brin admitted. "If we continue to develop so many new, individual products that are all [in] assorted silos," he said, "you'll have to essentially search for our products before you could even use them. You'll have to search before you can do a search, in many cases.

"Instead...we're trying to create horizontal functionality across a range of products, across media types, and so forth," Brin continued, Google Apps for Your Domain being one example. It's the integration of existing services with new functionality, he explained, that makes that offering work well separately. "There are increasingly many ways that we're integrating together all of our search offerings, so you don't have to pick where you're going to search first."

The message Schmidt wanted to close with today was that Google will go back to focusing on partnerships, despite the "one-off" acquisition of YouTube. "The partnerships are much more than just revenue partnerships," he said. "They really are a way of doing business for us going forward."

In response to questions about legal concerns about video copyright, Schmidt offered this alternative to legal confrontation: "This value of video is to partner, not to focus on the legal aspects, but to focus on the business partnership aspects, because we certainly want to respect everybody's copyrights. They need us; we need them. The combination should produce some very interesting new partnerships, which we are hopefully going to work on, especially after the integration of YouTube is complete."