Google buys YouTube for $1.65bn! These things take time to sink in......... but $1.65bn for a 20 month old company, which hasn't posted a profit yet, seems a tad expensive, no?

That's what all the old school commentators are saying, indeed, that's what all the old school media companies are saying. Even Viacom, owners of MTV, supposedly the media company for the youth, sniffed around YouTube and decided against it - they were probably priced out in the end.

Ultimately a $1.65bn gamble isn't that big a gamble for a company with a $130bn market cap. The acquisition also plays to three markets, one of which is Google's strength, one is a market that Google lags behind in and the other is one Google would hope to dominate.

Advertising is Google's strength, financially at least. Through their search algorithms they have built an online advertising business with no peers. The search giant recently agreed to pay NewsCorp's MySpace $900m over three and half years in exchange for being it's search provider. You could legitimately argue that Google has in fact only paid in the region of $750m for YouTube, once you factor in any advertising and search deals Google would have had to do with them.

Social-networking is a phonemenon Google have missed. It's just not been a market Google have been good at exploiting; they were certainly fatally slow including networking features into Google Video, handing YouTube the market dominance they now have. The purchase of YouTube gives them a good base to build a networking site to rival the likes of MySpace. Whether or not that's a market they are looking to enter they still have a site with a large and, for the time being at least, loyal user base.

Video is 'the' burgeoning online market. Whether your in to happy slapping or The Planet's Funniest Animals you can find it all on the internet. When Google bought YouTube they weren't just buying access to the millions of registered users, they were buying a huge catalog of content and a proven content delivery model. Should the old media companies want to distribute videos online they now have to deal with two main players, Apple (iTunes) and Google (YouTube, Google Video).

The deal takes on a new twist when you start taking about video delivery not just to the computer but to the television. Last month Apple pre-announced 'iTV', their set-top box for delivering iTunes content to your living room. It's due to be released in Q1 2007 and will allow you to stream your iTunes videos to your telly. Around the same time Eric Schmidt, Google CEO, joined Apple's board of directors. Rumours abound that Apple and Google are in talks to open up the iTV to Google, it'll be a complicated deal as their video sales business' clash but it looks a win-win for both firms. Imagine The World's Wildest Police Videos mixed by yourself and distributed to your friends - Sheriff John Bunnell may soon be out of a job.

The loss for the traditional media firms will be that as television shifts to an IP / internet, video-on-demand model they'll become even more reliant on Apple, Google and any other potential newcomers - unless they get themselves in on the act.

Whether Google has leveraged itself in to a position of power and whether they can see returns from their $1.65bn investment remains to be seen.

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