By now I'm sure you've gotten your fill of the news that Google is purchasing YouTube. The most interesting reactions I've seen are the the video of the YouTube founders talking about their newfound wealth on YouTube and the BusinessWeek interview with Steve Ballmer. After thinking about it for a few days, I've come to suspect that this may be an example of the Winner's Curse especially when you consider that the $1.6 billion Google is paying isn't all they have to pay. They'll also have to make deals with the major media content producers (i.e. movie & television studios, record labels, etc) which they've already started doing. I wouldn't be surprised if this deal eventually ended up costing north of $2 billion when all is said and done

Unfamiliar with the Winner's Curse? See the article Nasty Auctions which contains the following excerpt

Imagine a professor who holds up a $20 bill in a class and auctions if off to the high bidder. What do we expect to happen? It would make no sense for anyone to anyone to bid higher than $20, and if the high bid is below $20, someone in the class will have an incentive to bid a bit higher. The end result is that the $20 bill should fetch a high bid of something very close to $20, if not $20 itself. This image of people bidding up the value of an item to its true value is used repeatedly when economists discuss markets. However, auctions are not always so nice.

Imagine instead that the professor presents his class with a bottle of coins. He lets them inspect the bottle, but they cannot open it and it is impossible to count the money in the bottle. He then asks everyone to write down a bid, and accepts the high bid. When this experiment is run in actual classrooms, the end result is that the average bid is less than the value of the bottle, because people are risk-adverse and will bid less than they what the expect the value to be. Some people err in underestimating the value of the coins in the bottle, but others err in overestimating their value. Usually one of the people who overestimate the value ends up winning the bid, and it is very common for the bid to be higher than the true value. Economists have dubbed this phenomenon "the winner's curse," and find it a featue of bidding for oil-exploration rights and for free-agent baseball players.

Only time will tell whether this deal turns out to be a bargain like Rupert Murdoch purchasing MySpace or a bad move like the AOL<->Time Warner merger. One thing's for sure, it probably won't be considered as wacky as the eBay<->Skype purchase which will probably never make sense.