Yahoo! Builds Its Own YouTube

Tech website re/code reported on Friday that Yahoo! Inc. (NASDAQ: YHOO) is working on a plan to build a competitor to the ubiquitous YouTube franchise that Google Inc. (NASDAQ: GOOG) paid $1.65 billion for in late 2006. Just a guess, but Yahoo is likely to spend a lot more than that to get a competitive product out the door.

Still, the company and its CEO Marissa Meyer seem to be attacking in the right way. According to the reports, Yahoo is using the promise of more cash to lure the star talent and the popular YouTube channels away from Google and into the Yahoo fold. The interloper is trying to take advantage of the complaints by content providers that they don’t make enough money on YouTube.

That may be true, but the only way Yahoo can fix that is by paying more — probably a whole lot more. Yahoo is apparently telling video makers that it can offer better deals than YouTube either through better advertising revenue or guaranteed ad rates for the makers’ programming. Yahoo is also offering other inducements, including promotional space on the site’s heavily trafficked home page.

Yahoo has another problem. YouTube is not only the world’s leading streaming video site, but it is also the world’s leading music streaming site. Pandora Media Inc. (NYSE: P), Spotify, Rdio, and the rest pale in comparison. How will Yahoo steal that business? Only at great cost.

At the very least, to dislodge the YouTube giant will require a massive investment in popular talent. Katie Couric’s addition to Yahoo’s stable was a start, but the company is going to need to do a deal with someone like Howard Stern at an enormous contract rate. Stern got $500 million from Sirius XM Holdings Inc. (NASDAQ: SIRI) in his original five-year deal and a similar deal for the next five years through the end of 2015.  Stern will be available relatively soon, but he won’t come cheap. Just sayin’.

When China’s Alibaba finally comes public, Yahoo stands to gain a warchest of $37 billion if it sells its entire stake. It will have the cash to spend on going up against YouTube, but YouTube is not without resources of its own. Google is sitting on cash and short-term investments of around $50 billion.