Web search leader Google said on Monday it agreed to acquire top video entertainment site YouTube Inc. for $1.65 billion in stock, the highest price yet paid for a consumer-generated media site.
The first deal to value one of the new generation of user-participation Web sites at more than $1 billion combines two of the most popular Internet brands: Google, synonymous with Web search and rapid innovation, and YouTube, a Silicon Valley upstart that has spearheaded the video-sharing craze.
YouTube, which grew in 19 months from a start-up in a garage to now serve up 100 million videos daily, has drawn scrutiny from major media companies for copyrighted television and music videos that users post without owner consent.
While YouTube said on Monday it had signed a spate of distribution agreements with major record labels, some analysts caution Google could still be inviting lawsuits with this acquisition.
"YouTube is phenomenally valuable in terms of traffic and in the Internet sector this is important just like location is important in real estate," Oppenheimer analyst Sasa Zorovic said of combining YouTube with Google's advertising machinery.
Analysts said the deal would thrust Google quickly into the emerging market for video advertising, where it has only a tiny foothold compared with Yahoo Inc. and start-ups.
The all-stock deal, expected to close this quarter, was structured to make it tax-free for YouTube shareholders and cheaper for Google than paying cash, company officials said.
YouTube was founded in February 2005 as one of dozens of Internet video start-ups. It has exploded in popularity since last November by letting users share short clips of home videos and programming copied from television.
YouTube ranks behind only a handful of other so-called Web 2.0 sites -- the new generation of Web sites that rely on user-generated publishing for much of their content.
Social networking sites MySpace and Facebook rank first and second, followed by online encyclopedia Wikipedia, then YouTube, according to U.S. Web audience data from Hitwise Inc.
YouTube, with a little over 60 employees -- twice the staff it had in May -- moved this weekend into "bigger, less rat-infested offices" in San Bruno, south of San Francisco, according to the company's blog.
Google, with nearly 8,000 employees in June, is based in Mountain View, California in the heart of Silicon Valley. Officials said YouTube would remain an independent company.
Earlier on Monday, Universal Music Group and Sony BMG said they signed distribution deals with YouTube, building on a similar agreement with Warner Music Group last month. Google also signed similar deals Monday with Warner and Sony BMG.