A Billion Bucks for YouTube?

by on October 10, 2006

Jim DeLong likes to talk about how strong intellectual property rights are necessary to allow small companies to do business with larger companies. As he put it in IT&T News this summer:

Without IPR, innovators have no way to deal with platform companies, who could simply take any ideas revealed and implement them. And even if the platforms wanted to compensate the innovators, they would be unable to, because any competitor could copy the innovation without payment.

The platform companies know it is in their interest to have innovators protected by strong IPR, because without these, people would not be willing to invest in innovative companies.

It seems to me that Google’s YouTube acquisition is a counterexample to DeLong’s theory. YouTube is an innovative company that secured several millions of dollars in venture capital and used it to create a billion-dollar company in less than a year. Yet as far as I know, strong IP rights have not been an important part of YouTube’s strategy. They don’t appear to have received any patents, and their software interface has been widely copied. Indeed, Google has been in the video-download business longer than YouTube, and their engineers could easily have replicated any YouTube functionality they felt was superior to Google’s own product.

It would of course be silly to claim that copyrights and patents are never important assets for a startup company seeking a corporate buyer. But I think DeLong seriously overstates his case when he says that entrepreneurship would be impossible without these assets. Like all businesses, most of the value in technology startups lies in strong relationships among people, not from technology, as such. Technological change renders new technologies obsolete very quickly. But a brilliant team of engineers, visionary management, and a loyal base of users are assets that will pay dividends for years to come. That’s why Google was willing to pay a billion bucks for YouTube.

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