Ballmer: They Paid How Much For That?

Even the people running the richest tech companies are awestruck by Web 2.0 valuations. Microsoft Corp. (MSFT ) boss Steven A. Ballmer, who sat down with BusinessWeek editors and writers hours before Google (GOOG ) finalized its $1.65 billion purchase of YouTube, questioned how the online video service could fetch so much. Here's an edited transcript of the conversation.

What do you make of the possible deal between Google (GOOG ) and YouTube?

[You've got to ask,] could Google do whatever it is they're hoping to do without paying $1.6 billion? Is YouTube really some permanent, long-term thing, or is it a fashion? I'm not saying it is a fashion. But every time we do valuations, I wonder if we can afford to keep this hot for 10 years. I'm sure somebody at Google has to do the same analysis, because $1.6 billion is more than 1% of their market cap.

Is there a business model? Right now, there's no business model for YouTube that would justify $1.6 billion. And at the end of the day, a lot of the content that's up there is owned by somebody else. The truth is, what Google is doing now is transferring the wealth out of the hands of copyright holders into Google's. So media companies around the world are all threatened by Google. Why? Because basically Google is telling you how much of your ad revenue you get to keep. They better get some competition. Us, Yahoo -- somebody better break through or you can short all media stocks right now.

Getting back to the core question, I am surprised that Google would pay $1.6 billion for it.

You're clear as a bell on the YouTube valuation...

I'm not saying it is overvalued. I'm not saying I wouldn't write a check for that amount of money. I might. If you're asking me if I would offer $1.7 billion if no one else was offering $1.6 billion, no, I wouldn't do that.

Look, there are only [a few] buyers who can buy anything over a billion dollars in this space. There's us. There's eBay. There's Yahoo. And there's Google. I don't think there's anybody else. Even Amazon has a market cap of only $13 billion. I don't think they're going to do too many $1 billion deals.

In general, what do you think about Web 2.0 valuations?

There's hot companies, and there's everything else. The question is what's the value of an eyeball. Take Facebook. If you knew for sure that you were going to have the kind of minutes of eyeball time by the percentage of college students that Facebook has today for the next 15 years, it's an easy billion-dollar check to write, even though it doesn't have a business model that establishes that. If [Facebook founder Mark] Zuckerberg is going to grow older, he's going to lose his "hip," the site is going to be replaced by Facebook Prime -- you know, the guy will be old; pretty soon he'll be 25. It's not like it's so sticky -- college students churn every four years. If it's that, it's not worth anywhere close to a billion.

We're excited about Facebook. We're selling all the advertising for it. We're more excited now that we're selling ads for it than we were before.

These are hits-based phenomena. Don't you and others have to monetize very rapidly before people shift into something else?

If they are hits-based, which is the implication I've made, and you pay a lot of money, you're going to have to move in, milk, and get out. Or, it may turn out that the money is in the infrastructure. What is Google to MySpace (NWS )? It's the advertising infrastructure. In some of these things, you'll have to decide, if you're the big guys, do I want to play at the application level? Or do I merely want to play at the commerce and other platform level in a way that strengthens the rest of my assets and allows me to make money?

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