Google grabs YouTube for $1.65bn

Google has agreed to purchase online video phenomenon YouTube for $1.65bn in stock, the companies announced on Monday.

The deal, which had been rumoured for days, will dramatically improve Google's video-sharing service with one of the internet's hottest properties in YouTube.

YouTube will operate independently, and the companies will work together on building new features for independent users as well as for aspiring directors, they said in a press release. The deal is expected to close in the fourth quarter of 2006.

Google CEO Eric Schmidt said on a conference call after the deal was announced: "This is one of many investments that Google will be making to put video at the heart of a user's online experience. When we looked at the marketplace and saw what was going on, we saw a clear winner in the social networking side of video, and that's what drove us to start the conversations with YouTube."

From the YouTube side, co-founders Steve Chen and Chad Hurley - who polled ninth in this year's silicon.com Agenda Setter list - described their excitement at taking advantage of Google's deep pockets and advertising contacts as they continue to expand their site. Chen, who serves as YouTube's chief technology officer, said: "We now have the resources to take our service to the next level."

Google's acquisition of YouTube comes as online video is really starting to hit its stride. As more and more people have signed up for broadband internet connections and the technology behind video-sharing services has improved, traffic to YouTube's site has skyrocketed. The site has about 45 per cent of the online video market, according to recent figures from web traffic monitor Hitwise.

Google's clout gives YouTube more credibility in this emerging market for online video, said Josh Bernoff, an analyst with Forrester Research. "I think the combination of the greater potential to make deals and also the greater technical ability to solve copyright problems puts them in a much better position than YouTube is by itself," he said.

Around 100 million videos are available on YouTube on a given day, with 65,000 new videos added every day, according to the company's website. It cited numbers from Nielsen/NetRatings, claiming 20 million unique visitors per month.

Improving YouTube's search capabilities with Google's technology will be one of the first priorities of the merged organisation. But Google also sees advertising possibilities in those numbers, said Sergey Brin, Google's co-founder and president of technology. "Video is a great medium for advertising," he said.

The companies struck an all-stock deal in order to make the transaction tax-free for the YouTube shareholders, according to David Drummond, senior vice president of corporate development for Google.

CNET News.com's Anne Broache contributed to this article

Tom Krazit writes for CNET News.com