On heels of music deals, Netco pays $1.6 bil for vid site

HOLLYWOOD — Marking the transformation of Internet video from curiosity to serious business in barely a year, Google on Monday agreed to acquire YouTube for $1.65 billion in stock.

Deal immediately makes Google the biggest player in this burgeoning market, and turns the Netco into the most powerful partner for media companies looking to distribute their content online.

That was demonstrated Monday, as four major content companies signed deals with the two Netcos:

  • CBS pacted with YouTube to provide daily short-form content from its entertainment, news and sports networks. Net will sell advertising around its videos and split the revenue with YouTube. In addition, CBS will use new technology, expected to launch later this year, from the Netco to identify user-uploaded content that violates its copyrights and will then decide whether to ask YouTube to take it down, or to keep it up and split revenue from related ads.

  • Sony BMG Music Entertainment and Universal Music Group signed content licensing, revenue-sharing deals to put portions of their musicvideo catalogs on YouTube, along with other special video content. Both will also, like CBS, take advantage of YouTube’s new technology to strike or make money from copyright-violating content uploaded by users. Warner Music already has a similar deal with YouTube.

  • Sony BMG and Warner Music signed content distribution, revenue-sharing agreements for their musicvideos on Google Video. In addition to making money from ads on the search giant’s video section, they will take advantage of its new syndication technology to put their videos on other Web sites, along with ads. They also will use Google technology to let users access some of their content to create their own musicvideos and will get a cut of related ad revenue.

EMI, the only major label that didn’t sign a deal Monday, is in talks with both Netcos.

Pacts underscore how quickly big media has changed its attitude toward online video sites. Just last month, Universal Music topper Doug Morris threatened to sue YouTube and MySpace, calling them “copyright infringers.”

Earlier this year, CBS tried to force YouTube to take down a hugely popular video about an autistic high school basketball player so that it could host the clip exclusively on its own news Web site.

Now it has become the first net to agree to share revenue with YouTube. NBC has a deal to run promotional content only.

“Just this morning, we saw five content-distribution announcements, which in my view highlight the growing value content owners place on the Internet as a new channel to distribute and promote their work,” Google CEO Eric Schmidt said in a conference call. “This acquisition is the next step in our thinking about the evolution of the Internet and video and one of many investments Google will be making to make sure we have the proper place in people’s online lifestyle worldwide.”

YouTube is still full of copyrighted TV shows, movie clips, and other content, however, and it remains to be seen how aggressively Google will act to remove them and whether that will alienate users, as happened with many peer-to-peer music networks that tried to go legit.

YouTube is far and away the most popular Internet video site, while Google Video is No. 3. Once it controls both, the search giant will have about 56% of the Web video traffic, according to August data from HitWise.

The No. 2 video site is part of MySpace, owned by News Corp.

Other big online media companies, including Yahoo! and Microsoft, are believed to have been in the hunt for YouTube as well. They, along with the major media congloms, are taking a look at all the remaining players in Internet video in search of a potential acquisition target.

In August, Sony Pictures bought online video company Grouper for $65 million.

YouTube will continue to operate independently following the deal. Google will integrate its search functionality and, perhaps most important, utilize its ad technology and sales force to help YouTube monetize its massive video library.

With the explosive growth it has undergone since launching just last year, YouTube has struggled to develop a profitable business plan.

That presents a huge opportunity for Google to extend its advertising network to include the 34 million visitors YouTube was getting per month as of August, according to Nielsen/NetRatings.

Search giant recently has started including video advertisements on its own video site and likely will integrate them onto YouTube, which has previously only had banner and text ads, along with content sponsorships.

“For advertisers, video is a great medium,” noted Google co-founder and prexy Sergey Brin. “From that point of view, we’re very excited about YouTube and expect it will be a great channel for advertising.”

For the time being, Google Video will also be a separate entity, competing in many ways with its new sibling division. Eventually, though, a merger of the two seems likely.

Netco launched its video service in early 2005. Initially, it indexed and transcribed TV shows without the permission of many networks. Since then, however, it has switched models and now hosts user-created videos while streaming or selling professional content only with owners’ permission.

With the YouTube acquisition, though, Google will have significant market power in online video, likely leading to mixed feelings on the part of studios, networks and labels.

“Media companies have always been extremely sensitive about Google and should be even more now that it owns the hottest media property around,” noted Dmitri Shapiro, CEO of Veoh Networks, one of many small video sites that now face an even more powerful 800-pound gorilla in their space.

Acquisition is expected to close during the fourth quarter.

Follow @Variety on Twitter for breaking news, reviews and more