Intuitive Decision-Making: How Google Bought YouTube

How does an analytic company like Google make its
most important
decisions?

 If we are to believe the Google myth, we learn,
first and foremost,
that they test everything:

We test everything at Google. While
any company would prefer real-life data to hunches and guesses, Google
is more
focused than most (or any) on getting conclusive proof that a new
feature or
function improves the user experience. We release many of our products
in beta
on Google Labs to get this kind of feedback early in the process so that
we can
influence the design and iterate quickly.

The ability to test lots of products
and features on hundreds of millions of users is enormously valuable.
This
test-bed of users (otherwise known as google.com) provides Google with an
incredible advantage over enterprise-only search vendors. Bad ideas can
be
discarded quickly and great ideas can be implemented rapidly, because we
have
confidence and data to show that they’ll improve the user experience.

Of course, when all decision-making is data-driven,
it can
lead to “madness.”

 Here’s how Douglas Bowman explains why he quit
Google
:

When a company is
filled with engineers, it turns to engineering to solve problems. Reduce
each
decision to a simple logic problem. Remove all subjectivity and just
look at
the data. Data in your favor? Ok, launch it. Data shows negative
effects? Back
to the drawing board. And that data eventually becomes a crutch for
every
decision, paralyzing the company and preventing it from making any
daring
design decisions.

In the end, said Bowman, he “won’t miss a design
philosophy
that lives or dies strictly by the sword of data.”

The testing culture doesn’t end there.  On
the Google Testing blog, James Whittaker describes the
testing frameworks
he’s observed
among the job applicants he’s looking to hire:

  • Input
    Domain
    Framework
  • Divide
    and
    Conquer Framework
  • Fishbowl
    Framework
  • Storybook
    Framework
  • Pessimists
    Framework

Which one of these frameworks
will be best for Google, asks Whittaker.

 Which leads us to the topic of
this blog post:Just how do the executives at Google
make
decisions?

Do they base their decisions on the data?  Let’s
look at one well publicized executive
decision and the executive decision-maker: Eric
Schmidt
and his decision to buy YouTube.

On October 9, 2006, in a deal valued at $1.65
billion, Google
outbid a number of other competitors to snag YouTube, the online video
site
which was growing at a rate far outpacing Google’s own Video site.

The official Google line was as follows:

The YouTube team has
built an exciting and powerful media platform that complements Google’s
mission
to organize the world’s information and make it universally accessible
and
useful,” said Eric Schmidt, Chief Executive Officer of Google.
“Our companies share similar values; we both always put our users first
and are committed to innovating to improve their experience. Together,
we are
natural partners to offer a compelling media entertainment service to
users,
content owners and advertisers.”

 So how didEric
Schmidt value Google?  Was he analytical,
precise, objective?

By his own admission, Schmidt says, in a deposition by lawyers in the Viacom copyright
lawsuit
, that there was very little revenue coming into YouTube to
justify
the price his company paid.

Schmidt says that he told his company’s board of
that
YouTube was worth $600 million to $700 million.

Via CNET, we get Schmidt’s own words:

Viacom attorney Stuart Jay Baskin: And what was management’s valuation?

Eric Schmidt: Much lower than we paid for it.

Baskin: And how was that communicated to the board?

Schmidt: I told them.

Baskin: So why don’t you tell us what you remember telling the board in connection with the valuation?

Schmidt: I believe YouTube was worth somewhere around $600 million to $700 million.


Baskin: What methodology did you use to come up with that number?

John P. Mancini, an attorney working for Google, objects.

Schmidt: My judgment.

Baskin: Was it based on cash flow analysis? Comparable companies? What were you using as the basis for your judgment?

Mancini objects.

Schmidt: It’s just my judgment. I’ve been doing this a long time.


Baskin: I’m not very good at math, but I think that would be $1 billion or so more than you thought the company was, in fact, worth.

Mancini objects.

Schmidt: That is correct.

Later…

Baskin: Can you tell us what reasoning you explained?

Schmidt: Sure, this is a company with very little revenue, growing quickly with user adoption, growing much faster than Google Video, which was the product that Google had. And they had indicated to us that they would be sold, and we believed that there would be a competing offer–because of who Google was–paying much more than they were worth. In the deal dynamics, the price, remember, is not set by my judgment or by financial model or discounted cash flow. It’s set by what people are willing to pay. And we ultimately concluded that $1.65 billion included a premium for moving quickly and making sure that we could participate in the user success in YouTube.

What this tells us is that even in the most
analytic company
in the world
, the big decisions are still made on intuition.

Here’s why.Analytics
can only tell us about the past. We have no data on the future.  So
Eric Schmidt was making an intuitive
decision about Google’s own future through examining the intangibles.

For example:

1. YouTube’s popularity was sky-rocketing, making
it the
runaway market leader among video-sharing sites.
2. It was crushing his company’s own site, Google Video.
3. YouTube was up for auction and would be sold to a competitor unless
Google
jumped first.
4. Google overbid to ensure YouTube didn’t fall into rival hands.

And that doesn’t take into account two other points
which
made the deal a winner.  From the very
beginning, the Google philosophy has been – get attention first, then
monetize
it.
  And that is what this bet was all
about.

Schmidt saw the attention trajectory in YouTube’s
growth,
and he knew that if anyone could monetize that attention it would be
Google.  To leave YouTube for Murdoch,
Microsoft, or Yahoo was not an option.

In hindsight, it may have been a brilliant move.  Although
the monetization has proved
difficult, Google is breaking even today, which is far better than what
has
happened at MySpace, for example.

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