The Wall Street Journal reported this Friday that search leader Google is in active talks to acquire online video site, YouTube, for $1.6 billion; a move some analyst believe is in Google's best interests.

Experts contend that while the Mountain View Calif.-based search firm already offers its own video service, Google only garners 11 percent of the online video market, a figure which pale in comparison to YouTube's sector leading 46 percent.

Ownership of video traffic would help Google capture a bigger portion of advertising revenues from video content distribution deals, Meryll Lynch's Justin Post told clients on Monday, although content owners would still likely keep the majority.

Post explains the merger would give the combined company a strong user position in the rapidly growing video advertising market - expected to reach $640 million in 2007, and grow to $1.5 billion by 2009.

Despite the large future potential YouTube may offer Google, however, the acquisition does not come without challenges. Much of the content on YouTube is free, and many video clips are copyrighted material from traditional media companies who may sue for copyright infringement.

Google could be responsible for filtering out copyrighted material or negotiating revenue sharing partnerships with the owners before aggressively monetizing YouTube, Post said.

Additionally, the acquisition represents a radical departure from [Google's Merger and Acquisition] strategy in the past, Citigroup's Mark Mahaney explains.

Prior deals have almost exclusively been based on tuck-in technology deals, he said, where Google integrates acquired technology into its own, as opposed to managing a new brand. Given no prior track record, it is unclear whether Google could manage the acquired firm to profitability.

However Mahaney believes that the clear positives for Google are synergies between the world's 3rd largest user generated content site and arguably one of the world's largest and most scalable advertising/computer networks could be enormous, he said. We await potential details.

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