If Google does buy YouTube, I hope it doesn’t turn out to be BOOB Tube. I cannot help looking at this transaction like a cross between Ebay buying Skype and the Napster disaster. At first I thought about Time Warner “having to do” a deal with AOL at the peak of its hype. But then, AOL actually had significant cash flow to justify some kind of valuation. In this case and at least for the moment, YouTube has minimal revenues since starting to sell ads in March. I have seen some interesting guesses on their revenue generating potential, but who knows what the real numbers are. YouTube’s recent announcement that it now serves 100 million videos daily at its site is a big deal. No doubt. But they didn’t say they reported $100 million in revenues or $100 million in profits. We do know that they have about $1 million a month in estimated bandwidth costs, but that’s chump change for someone like Google. It does make me wonder that if video content is such a great space, that maybe we should be talking about buyouts of companies like AKAM that are actually making money delivering the content.

Frankly, I think this whole thing is a fad that will fade. I remember MP3.com, their IPO, their being sued into oblivion, their sale to Vivendi, and finally, the dismantled scraps being picked over by CNET. How about Napster? The greatest similarity to YouTube was an amazing growth story used by the same peer-to-peer crowd that loves YouTube. It was free, it was fun and it was a huge community. But it didn’t make money and it had huge copyright issues. Again, the similarities are eery. Napster was fantastic and at the end of the day, a failure by big music to recognize a shift in the media’s distribution. It took Apple to get it right with iTunes and the iPod.

Some times, free stuff works because it is free. But investors have a tough time with cool things that don’t make money. Take Skype for example. I love Skype and so do millions of its users. However, Ebay paid $2.6 Billion for something that generated about $80 Million in revenues for the first half of 2006. Just look at what has happened to EBAY stock since last September when it agreed to buy Skype (down about 25%). There are other reasons, but this is certainly one of them. Was it worth it? Ebay management is not providing much clarity on Skype revenues and expenses, but the CFO did suggest that they hoped to do $200 Million in annual 2006 revenues. You need some amazing growth rates to justify the price they paid. Assuming they reach their 2006 sales goals, is Skpe worth 13 times sales? Verizon is trading at 1.25 times sales, AT&T is at 2.25 times, and Quest is at 1.17 times. Skype revenues will have to grow 25% each year until 2014, before it comes close to 2 times revenues.

In YouTube’s case, I think the business model has some huge limitations that might cause it to crumble once someone tries to make serious money with it. I wonder how many ads users are willing to watch for a 2-minute vid clip, if any. How many users will switch to alternative sites that will inevitably become popular if they stay like the free version of YouTube? We saw that with all the knock offs that showed up to replace Napster. Some of those sites were domiciled in foreign countries that have minimal respect for intellectual property or the consequences of breaking copyright law. I expect that to happen with video as much as it did with music and don’t see barriers to entry as it relates to the technology.

Google is visionary and I have a tough time criticizing them because of their contribution to making my research life so much easier. But I am going to make an exception. I agree with Mark Cuban and don’t like the idea of a purchase, but would rather see a business relationship. I just don’t have a clue what they would be buying other than a ton of lawsuits. Google is great at making money off search. Their attempts to make money in other areas is not good. If they find a way to have YouTube leverage the search mechanism, then there is a chance it can work. But I doubt it, not at this price.