Tuesday, October 10, 2006

Calls of Note Part 1

Going to highlight couple of additional comments on the Google (NASDAQ:GOOG)/ Youtube deal:

- CIBC believes YouTube is a great deal for Google due to potential synergies and YouTube's leading social networking platform.

Google brings 1) a large network of advertisers; 2) a system for targeting online consumers that result in higher monetization and CPMs; 3) global infrastructure and hardware investments to scale YouTube's bandwidth and storage needs; and 4) new "search over video" technology.

With nearly $10B in cash and marketable securities at the end of 2Q06, Google has the ability to pay $1.5-$2B for such a deal with more than enough cash cushion left over for capex. That said, Google management indicated that the transaction would be slightly dilutive initially. Firm estimates the transaction is roughly dilutive by $0.15 if YouTube is breakeven to net income in 2007. Based on their preliminary estimates and channel checks, YouTube has the potential to generate $150-$300M in ad revenues in '07 or 08, and it could prove highly accretive if Google finds a way to monetize the traffic with solid execution and new technology in 2-3 years.

In CIBC's opinion, the deal is potentially a big blow to Yahoo! (NASDAQ:YHOO), which recently lost in bidding for a Dell distribution deal and for the search monetization rights to MySpace. According to channel checks, the bid for YouTube was competitively bid by Yahoo!, MSN and others, but ultimately, Google s victory may hint that they are better positioned to monetize these emerging platforms, not to mention the advantage of having a $10B warchest.

They believe the deal illustrates the continued friction between old media /content (TWX, NWS, VIAB, NWSA) and new media/Internet distribution (GOOG, YHOO). Firm believes old media companies may be disadvantaged as new media companies consolidate Web 2.0 platforms and social networks.

- Morgan Stanley notes that $1.65B in GOOG shares is A LOT to pay for a startup with negligible revenue, however...as they were / are positive about eBay's Skype acquisition, they are positive about YouTube (which, based on deal terms, should be dilutive by 1-2% for CQ4). YouTube supports an impressive 72MM unique global users (up 23x Y/Y, per comScore), and 4.7B page views (up 103x Y/Y). In addition, the company indicated 100MM+ video views + 65K uploads daily. All in, YouTube has created a very effective way to distribute new forms of media and engage users.

Firm believes traditional media companies, inspired by rapid ramp in quality / usage + community / ranking / feedback of user-generated video, have realized a pressing need to use the Internet as a distribution channel. In their view, the opportunity has the potential to be measured in billions of dollars in annual revenue within 2-4 years. Per IAB (Interactive Advertising Bureau), US search advertising revenue ramped from $285MM in 2001 to $4B in 2004 (estimated at $6B+ in 2006E) owing to effective monetization of Internet content (words) by Google / Yahoo! - similar ramps will occur in Internet video.

Reiterate positives view on Google - the firm likes big bets that are strategically sound, especially when the majority of short-term number crunchers think the bets are crazy. Google has been analyzing its search queries for years and building its base of servers - they buy Google's view that we are entering an 'Internet video revolution' - and with Monday's announcements, Google just improved its hand and also helped push 'the revolution' forward. In addition, Google improved its weak position in the social networking area. No change in firm's Google estimates for now, but probability for upside in C2008 / C2009 has increased.

Maintains Overweight.

Notablecalls: Not actionable but good to know category. Check out my comments from yesterday.

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