In outmaneuvering Yahoo Inc. to buy YouTube Inc., search giant Google Inc. is declaring its intention to become Hollywood's online partner of choice.
Led by former movie mogul Terry Semel, Yahoo has spent the last two years hiring show business executives and opening a big Santa Monica campus to build on its early lead in connecting Web surfers with music, movie trailers and TV clips.
Yahoo had placed its own bid for YouTube, hoping to guard its turf in online entertainment. But Google snapped up the popular site for watching and sharing online videos. In addition to filling Google's void in online entertainment, the proposed $1.65-billion acquisition would give the search giant inventory for display and video ads, an area in which it has trailed Yahoo.
"It certainly looks as if Yahoo is the real loser in this," Needham & Co. analyst Mark May said. "They can now be considered a major laggard in the online video category."
Analysts said Yahoo's failure to acquire YouTube was the latest in a string of missteps that had widened the competitive gap with Google. In the last few months, Mountain View, Calif.-based Google has also made content distribution deals with Viacom Inc. and record labels and signed on as the advertising broker for News Corp.'s Fox Interactive Media, owner of social-networking site MySpace.
Meanwhile, Sunnyvale, Calif.-based Yahoo delayed the launch of a search-advertising system designed to compete with Google, then warned of a third-quarter revenue shortfall. It acquired a small video-editing firm, Jumpcut, but failed to consummate its courtship of the two biggest Internet communities available: YouTube and Facebook.
The stock valuations of the two companies reflect their divergent momentum: Google is worth $130 billion, compared with Yahoo's $34 billion. Yahoo shares fell 56 cents, or 2.2%, to $24.47 on Tuesday, down nearly 40% this year, while Google shares fell $2.35 to $426.65. Its shares are up about 3% this year.
"While Google seems to be firing on all cylinders, not only has Yahoo had its fair share of execution problems, but they also seem to have had an impact on the company's ability to move quickly on big actions like a potential acquisition of Facebook," said Scott Kessler, an analyst with Standard & Poor's.
The hefty price Google paid for YouTube evoked memories of the Internet bubble of the late 1990s, analysts said. But many said Google could afford to make that bet to keep YouTube away from other suitors, which included News Corp. and Viacom.
Deutsche Bank analyst Jeetil Patel criticized Yahoo for letting YouTube slip away, saying it would have been a much better home for the video-sharing service. He attributed the failure to cultural differences between the companies and Yahoo's unwillingness to fork over big bucks for a potentially useful property.
A Yahoo spokeswoman would not comment on the YouTube deal but said Yahoo was not ceding any ground to Google in show business relationships.
"We believe that Yahoo continues to be a partner of choice for media companies," spokeswoman Joanna Stevens said.
For example, she said, Yahoo TV is the most-visited site for television-related information, with promotional clips and full shows. Yahoo also runs the Web's most popular music site.
Laura Martin, an analyst with Soleil Media Metrics, said Yahoo still held the edge in entertainment. "People think of Yahoo as much more of an online content provider," she said, adding that Google's YouTube purchase was the first sign it planned to pursue a strategy similar to Yahoo's.
Gaither reported from San Francisco, Chmielewski from Los Angeles.