Oct. 11 (Bloomberg) -- Google Inc.'s purchase of YouTube Inc. will catapult the most-used search engine into the top spot in Internet video and position the company to dominate the fastest-growing part of the online advertising market.

Internet video advertising will generate $1.1 billion in U.S. revenue in 2008, up from $385 million this year, according to market researcher EMarketer Inc. Google, which has trailed in video, will have a site that is increasing its library of available video clips by 65,000 a day.

``This is a very, very important wake-up call to the other traditional Internet players,'' said Mark Kingdon, chief executive officer of Organic, a San Francisco-based Internet ad agency owned by Omnicom Group Inc. ``YouTube is a huge prize because of the traffic it brings and the engaged audience.''

The $1.65 billion purchase gives Mountain View, California- based Google tools to take a bigger share of advertising budgets by selling video spots, where Yahoo! Inc. and Microsoft Corp.'s MSN already compete. Video will be the fastest-growing form of Internet advertising over the next three years, reaching 4.7 percent of the total by 2008, New York-based EMarketer said.

``The way that we've been approaching the ad model is to look for new, creative ways to engage users with brands,'' YouTube Chief Executive Officer Chad Hurley said yesterday in an interview. ``By us working with Google, it's going to give us a lot of options.''

Shares of Google fell 15 cents to $426.50 at 4 p.m. New York time in Nasdaq Stock Market composite trading and have risen 2.8 percent this year. Yahoo fell 23 cents to $24.24, its lowest closing price since April 7, 2004. Microsoft fell 15 cents to $27.54 and has risen 5.3 percent this year.

Branded Sites

Google and YouTube will look to build on initiatives like YouTube Underground, a music contest sponsored by Cingular Wireless LLC. YouTube is asking unsigned bands to upload clips and users will vote on the best acts. In August, YouTube added ``brand channels'' that companies can customize. Hotel heiress Paris Hilton was first to use the feature to promote her album.

Yahoo, the most-visited U.S. Web site, sells video ads on sites including Yahoo Music. The Sunnyvale, California-based company started accepting clips from its users in May.

Analysts including Jeetil Patel of Deutsche Bank in San Francisco said Yahoo missed an opportunity by not buying YouTube and that Google may eat into Yahoo's sales of graphical banner ads by attracting advertisers to video. Yahoo declined to comment. The company gets about a third of its sales from banner ads, Citigroup analyst Mark Mahaney wrote in an Oct. 8 note.

Stronger Competitor

``Yahoo now faces a much better competitor in video and likely branded advertising as well,'' Anthony Noto, an analyst at Goldman, Sachs & Co. said yesterday in a note. He rates both Google and Yahoo shares ``buy.''

The acquisition, Google's largest, is a break from the company's past practice of buying smaller startups including the photo-management software maker Picasa Inc. and mobile friend- finder service Dodgeball.com.

Some investors may be concerned Google paid too much for YouTube, said Noto. JPMorgan analyst Imran Khan estimates YouTube will generate 2007 sales of $145 million.

Compared with past acquisitions of Internet companies, YouTube's price may not be as high as it seems. Google is paying about $23 for each YouTube user, based on 72.1 million worldwide visitors in August, according to ComScore Networks Inc. That's less than the $28 News Corp. paid for each of MySpace.com's 20.5 million users in July 2005.

New Offices

The company was founded by Hurley, Steve Chen and Jawed Karim in February 2005. Hurley, 29, is chief executive officer, while Chen, 28, is chief technology officer.

YouTube will keep its own offices and all 67 employees will stay with the company, Google said. YouTube last week moved to new offices in San Bruno, California. The old site was infested by rats, as YouTube employees proved by posting video clips of the pests on the site.

YouTube has angered some entertainment companies for showing copyrighted material without permission. The company says it is developing software that will scour clips for copyright infringement.

Redmond, Washington-based Microsoft, the world's largest software company, began testing its own video-sharing service last month. The site, called MSN Soapbox, is limited to users with invitations and will be available to all users within six months, said Rob Bennett, a Microsoft general manager.

Web sites that establish an early lead are difficult to catch. MySpace.com, a social networking site, had almost 80 million visitors in August, up from 23.2 million a year earlier, according to ComScore Networks.

``It's almost impossible to create an attractive alternative place to go,'' said James H. Friedland, an analyst at Cowen & Co. in New York. ``Once a Web site gains critical mass, it's nearly impossible for a competitor to come in and take share.''

To contact the reporter on this story: Jonathan Thaw in San Francisco at jthaw@bloomberg.net.

Last Updated: October 11, 2006 16:22 EDT