How on Earth can YouTube command a $1.6bnprice tag?

It's less than two years old, but YouTube is already fetching a price tag of $1.6 billion, to be paid by the darling of the internet age, Google.

Although it's tempting to scoff at the sum, it's probably not wise. Many of those who scoffed at News Corp forking out a comparatively meagre $500 million-odd for MySpace last year are now eating their words.

To some, the MySpace acquisition has gone on to make Rupert Murdoch look like a genius dealmaker with the vision to see beyond the fug currently surrounding the future of old media. Not because the service is delivering a fantastic cash return, mind you, but because its popularity among the teens of today and the adults of tomorrow is surging.

Ditto YouTube. An estimated 100 million video clips are watched on its site every day by a total audience of almost 35 million users. It's got the kind of customer database that can make a grown marketer cry. But it's also got some alarming grey areas. Like how does it make any money. Incredibly, YouTube has yet to announce exactly how it will carry advertising. It's very clear about which advertising models it's rejecting, but not so forthcoming about which advertising model it's actually going to adopt.

So why the big sums? For YouTube's soon-to-be-parent Google there are some synergies, the most important of which is that YouTube is much more popular than Google Video. But the simple answer is there's a land grab going on not seen since, er, well, the last dotcom boom. Media operators are trying to get their mitts on popular sites before anyone else beats them to it. It's clear tomorrow's consumers are using the internet for leisure, and devoting less time to newspapers, magazines and television.

And this trend appears to be unstoppable. Take The Guardian's stellar relaunch just over a year ago. The paper is modern and easy to read (its design netted an elusive black Pencil from D&AD's 2006 jury) and it cost in the region of £80 million. Reader numbers have risen, but only slightly. Even when the traditional media owners produce excellent creative products, take-up is not guaranteed.

So although it looks like the figures being paid for the likes of MySpace and YouTube are absolutely crazy, there is method in the madness. With the financial models still so unproven, we can be sure that some of the ventures will collapse, accompanied by many miles of high-profile "told-you-so" comment. However, some will succeed. And, given the bleakness surrounding so much of traditional media these days, few of its operators can afford not to take a multibillion-dollar risk.

Ian Darby is away

francesca.newland@haynet.com.

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