According to news reports, Google is going to buy Youtube for $1.65 billion.  The market likes the deal, pushing Google stock up by $4 billion since the Wall Street Journal reported on the rumers on Friday.

Google is getting a bargain by buying YouTube for $1.65 billion.  Google’s price-earnings multiple is over 60 which means that if Google can generate $27.5 million in incremental earnings per year it pays for the deal.  Based on the stock bump up, the market thinks that YouTube will generate an even bigger bump in earnings, something like $67 million in increased earnings.

Generating that kind of earnings bump should not be hard if Google can keep growing the site and drive out the bandwidth costs.  YouTube must be spending $3-5 million per month on bandwidth using a traditional content delivery network, like Limelight Networks.

All Google needs to do is to add some P2P content distribution technology, like RedSwoosh, to its toolbar and most of those bandwidth costs just disappear. This would also be a huge benefit to podcasters as it would allow podcasters to join the P2P content delivery network for much less than they currently pay for bandwidth.

Just cutting the bandwidth costs by $4 million per month would have made YouTube worth $2.4 to $3 billion.

I’m surprised that YouTube had difficulty doing that math.

The market obviously thinks that Google should be able to make up the missing $1 billion in market capitalization through advertising deals.  More than likely, the market is under-estimating the value of this deal as well.