Yahoo Responds to Google’s YouTube Acquisition

Case Type: mergers & acquisitions; business competition/competitive response.
Consulting Firm: Katzenbach Partners (now Booz & Company) final round job interview.
Industry Coverage: E-commerce, Online Business; Software, Information Technology.

Case Interview Question #00125: It was October 2006. Search engine giant Google (NASDAQ: GOOG) just announced that it has agreed to acquire YouTube, the consumer media company for people to watch and share videos online, for $1.65 billion in a stock-for-stock transaction. Following the acquisition, YouTube will operate independently to preserve its successful brand.

You have been retained by the internal strategy group at Yahoo (NASDAQ:YHOO), an Internet services company best known for its web portal, email service and search engine Yahoo Search. You are asked to analyze Google’s announced acquisition of YouTube. Is this move a competitive threat for Yahoo? And why?

Possible Answers:

Part 1: Core Competencies and Overall Situation Analysis – The interviewee should think about the acquisition against the backdrop of the core competencies that each firm brings to the table. There are no absolute right/wrong answers; one approach is outlined below.

Suggested Answer: Yahoo has positioned itself as a destination site. It wants consumers to go to Yahoo! and explore all of its wonderful services, spending time and money there. Time means that advertisers’ ads are more likely to be clicked. Money means that Yahoo! is making e-commerce transactions, or selling subscriptions to premium online services. It tries to promote a sense of community among its users.

Google has spent its early years as a search engine. To ‘google’ has become synonymous with search. To take advantage of this brand-name recognition, Google pioneered advances in ad-based software that allowed businesses to better target consumers segments based on the particulars of the search (Google Adwords and Adsense). Google has the “eyeballs” of the consumers, but it doesn’t have the consumers’ wallet. It wants to monetize all its traffic.

The acquisition of YouTube by Google is a competitive threat. Google’s acquisition is a move toward creating an online community. The company spent $1.65 billion because it believes it will be able to monetize this traffic somehow.

Part 2: Competitive Response — Inform the candidate that Yahoo wishes to counter this threat and assume that feasibility and cost are not a concern at this point. Ask the candidate to develop a competitive response and give candidate creative license. There are no absolute right/wrong answers; some ideas are outlined below.

Commentary/Notes: The candidate should ask for a moment to collect his/her thoughts, and ideate creative solutions.

Suggested Answers:

• Create an offering to counter YouTube for the Yahoo community.
• Buy Google.
• Find a way to share real-time videos among friends from cell phones, mobile devices or wristwatches. This would involve a cross-selling strategy with a partner. (Apple, Microsoft, Amazon, Facebook, MySpace?)
• Create backdrops (or allow open source coders to create them) from historical events or sporting arenas or famous movies, and enable people to be able to re-enact scenes or create new ones (An example of this might be a rock stadium backdrop and you and your friends can jam on instruments and make a rock video).

Part 3: Customer acquisition — Provide interviewee the hypothetical situation in which Google proceeds with the YouTube acquisition and believes that it can charge $150 per user annually and make 67% margins. Ask the candidate to compute the time taken to recover the acquisition costs.

This part of the case is a simple math exercise. Information to be given if asked: Assume YouTube user base 40 million; Discount rates should be ignored; Assume no user base growth or attrition.

Answer:

• User base: 40 million
• Acquisition Cost = $1.65bn
• Therefore, Margin/user needed to recover acquisition cost = $1650/40 = $41
• Actual Margin/user = $150 x 67% = $100 per year
• Therefore, Google will recover acquisition cost in less than 6 months.

Interviewer’s Note: This case involves assessing the potential threat of competition’s merger to the business. The case is primarily qualitative in nature and tests the candidate’s conceptual understanding of M&A activity and overall business knowledge/judgement. The case offers the candidate several opportunities to be creative in problem-solving. A quality candidate will imbue the discussion with structure, creative solutions, and demonstrate knowledge of current business landscape.