Google, Inc. (NDAQ:GOOG) announced a few days ago that they acquired YouTube - a popular online video sharing website - for $1.6 billion. The acquisition is Google's largest by a wide margin, with their total acquisition costs in 2005 at just $130 million for 15 companies. The market became interested in the company after YouTube signed a licensing deal with Warner Music, which directly addressed the copyright issues that kept so many parties away. But why the large purchase price? Some speculate the Google may have made the purchase in anticipation of a bidding war between Yahoo, Microsoft, and other media companies that may be interested in a leading segment of the online video market. Moreover, the two companies are also both funded by Sequoia Capital - one of the world's largest venture capital funds - which may have also contributed to the smooth deal. The transaction is expected to be completed by the end of the year.

Many people have criticized the purchase, reasoning that the company is only 18 months old, founded ago by 29 year old Hurley and 27 year old Chen, with no profitability and a high cash burn rate relative to its valuation. However, others argue that the company is a brilliant acquisition that Google will be able to creatively monetize; but, with such an elastic market, any advertising that would affect video playback in any way might cause a mass migration to competing services. Google itself remains confident in its purchase; during a conference call, Brin even went so far as to say that "this really reminds me of Google just a few short years ago." Investors applauded the move as the stock rose over $8 in trading the day the deal was announced. Whether or not YouTube turns out to be a good purchase largely depends on what methods Google uses to monetize the website. This entails finding an effective advertising technique that won't disrupt the highly elastic traffic that uses the site.

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