Was Google’s $1.65 billion acquisition the result of decision traps?

This is the second part of an article on Google’s acquisition of YouTube.

The Decision Traps
So given the uncertainties and the process issues, it is possible that Google management – like many of us – fell victim to a variety of decision-making traps:

Affinity Bias
On more than one occasion, Google’s leadership has noted the striking similarity between YouTube’s founders and Google’s.

The day the acquisition was announced, Sergey Brin was quoted as saying, “It’s hard to imagine a better fit with another company. This (YouTube) really reminds me of Google just a few years ago.” A few days later, Google CEO Eric Schmidt stated, “Chad and Steve remind me of Larry and Sergey”. From psychological research, we know that human beings will assign positive attributes to those with whom they identify. In other words, we like those who are like us.

Although one could argue that both Brin and Scmidt were merely making perfunctory public relations statements, it is important not to underestimate the power of the affinity bias and its subtle effect on decision-making. If YouTube had been operated by a markedly dissimilar team – for example, a group of Hollywood executives – would the acquisition still have occurred for $1.65B? Regardless of the business opportunity YouTube provides Google, it is not hard to imagine a Google strategy team discussion where the “affinity” factor influenced the conversation, acquisition decision, and ultimate purchase price.

Diving In
As previously mentioned, Google competitors NewsCorp and Yahoo! had already made big splashes with their purchases of Web 2.0 companies. The enthusiasm for Web 2.0 companies was quickly rising in the investment community. Google’s stock, after its meteoric rise in 2004 and 2005 had begun to level off and even decline (at the beginning of 2006, Google was trading at $465 per share – the week before the YouTube announcement, the stock was trading at $404 per share). The intuitive notion that “social networking sites have the added ability of generating user loyalty and increasing the barriers to switching to other Internet portals or platforms” had taken hold in Silicon Valley. The pressure on Google to make an acquisition – despite the conflict such a move would have with Google’s “homegrown” philosophy – would have been enormous. And given that Viacom, Yahoo, and Time Warner were also courting YouTube, Google likely felt they had to move quickly. Ready, fire, aim.

Shooting From The Hip
“Video is a great medium for advertising and from that point of view we are really excited about YouTube,” effused Sergey Brin in a conference call announcing the acquisition.

Google has a growing track record of success in earning advertisers’ dollars. Moreover, Google was appropriately lauded for cleverly monetizing search before any other company figured out how to do so. It’s not surprising then that, Brin feels confident that YouTube presents a golden opportunity to extend this success. After all, shouldn’t the combination of Google’s brainpower and the video medium’s tradition of advertising make for a huge windfall?

The evidence to the contrary is surprising and seemingly absent from Brin’s assessment. First, prior to the acquisition, YouTube had introduced advertising in a number of creative ways. Nonetheless, the company – with only 67 employees – was not profitable and heavily dependent on venture capital. Second, and perhaps more importantly, 16 months after the launch of its own video service, Google had still not created a lucrative video advertising engine.

Perhaps Brin believes that YouTube’s audience gives Google a critical mass previously absent from its own video service efforts (Google had less than 1/4 of YouTube’s traffic) and that is entirely necessary to draw in advertising dollars. Nonetheless, it would appear that such boldness in the face of evidence to the contrary, is an example of relying disproportionately on one’s past successes to predict future outcomes.

Expert Bias
Why does a gum manufacturer advertise that four out of five dentists recommend chewing it after meals? Because when faced with uncertainty, humans practice mental economics and default to “what the experts say.”

In Google’s case, the experts are their investors. One of those investors is Michael Moritz of Sequoia Capital who also has a seat on Google’s Board of Directors. Sequoia Capital is the primary investor in YouTube and had much to gain from the acquisition. It appears there would be a conflict of interest. With an acquisition of this size, it is likely that the Board was consulted and although Mr. Moritz would have abstained from any formal vote (if indeed one took place), it is possible that he used his informal influence to encourage the deal. Although it may seem harsh to suggest this behaviour which, by some standards, would be considered ‘immoral’, the media also chose to speculate that this was the case.

Summary
The YouTube acquisition may be wildly successful for Google and, 5 years from now, Google Leadership may be lauded as business geniuses by the media. There is, however, a difference between good outcomes and good decisions. Any number of exogenous variables can influence outcomes. Good decision-making – making decisions that create the greatest likelihood for successful outcomes – requires an effective process and the vigilance to avoid typical decision traps.

Notes: On March 13th 2007, Viacom announced a $1 billion copyright infringement lawsuit against Google and YouTube. “We will certainly not let this suit become a distraction to the continuing growth and strong performance of YouTube and its ability to attract more users, more traffic and build a stronger community,” Google said.

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