Will Google's Big Bet Pay Off?

If you can't beat them, buy 'em. Having launched its own video site with great fanfare last year, Google conceded defeat to its competition Monday, swallowing up video sharing site YouTube.com for $1.65 billion in stock. While Google Video had been able to capture just a tenth of the online video market, YouTube has about 47%, according to Web monitoring agency Hitwise. And visitors, on average, spend twice as long on YouTube (18 minutes) as they do watching Google videos. So Google pounced, betting that online video ads and distribution will be key to the search giant's future revenue growth. "YouTube built a better mousetrap. Not only did they build a better mousetrap, they built it earlier and faster than Google did," says Scott Kessler, Internet analyst at Standard and Poor's. "Google is the far and away leader in online video right now."

Sitting on some $10 billion in cash, Google CEO Eric Schmidt told TIME recently that figuring out what to do with all that money was one of the company's key priorities. This deal, worth more than ten times Google's acquisitions last year combined, takes a big step toward resolving that issue. Schmidt told TIME last month that generating revenue from video was a challenge the company was intensely focused on. Google has recently been experimenting with new types of video ads, and has partnered with MTV to distribute short videos to third-party sites.

But to make the $1.65 billion deal worthwhile, Google will have to prove that the market for video ads and distribution has broad commercial appeal. So far, YouTube has yet to turn its attention to making money from the millions of visitors it attracts every day. But just before inking the deal with Google, the San Bruno, Calif.-based startup signed licensing and distribution deals with CBS, Universal and Sony. That, YouTube hopes, will help keep the upstart from suffering the painful demise that hit Napster, which couldn't successfully parlay its huge Web audience into a profitable, legal social network.

YouTube has long denied plans to sell out. Founder Chad Hurley told TIME in August: "We're not for sale. We're definitely looking to stay independent." Apparently $1.65 billion changed his mind. But today, after announcing the acquisition, Google CEO Eric Schmidt said YouTube would retain independence, maintaining its staff and keeping its name. "It makes perfect sense to continue YouTube as a brand and as a community and as a separate business operation of Google," Schmidt said. Hurley said he saw the deal as a way of remaining independent while taking advantage of Google's resources to accelerate his site's growth. Clearly Schmidt is counting on Hurley's brainchild to do the same for Google.

— with reporting by Laura Locke/San Francisco