The problem with Yahoo's potential Dailymotion dealMarch 28, 2013: 1:08 PM ET
The site Yahoo may be buying is no dog. Users love Dailymotion. What about advertisers? It's complicated.
FORTUNE -- Even if you've heard of Yahoo's video portal, Screen, you probably rarely, if ever, have knowingly used it. That is one major reason Yahoo is reportedly in talks to purchase Dailymotion, the European video platform.
Eventually, Dailymotion could end up being a major profit center for Yahoo (YHOO). But in the short-term, Yahoo will get two things it sorely needs: global market share and top-line growth. An acquisition would more than double the amount of video inventory Yahoo has for sale, and it would help the company begin to capture business overseas.
There's no way Yahoo could mount a serious challenge to the overwhelming dominance of Google's YouTube (GOOG) as the go-to platform for user-generated video, at least in the short-term. But an acquisition would do two things right away: expand Yahoo's presence in Europe and boost revenues while not adding much to costs. It would put a Yahoo product into the hands of millions of consumers who aren't using any Yahoo products now. The Wall Street Journal reported last week that talks were under way for Yahoo to acquire 75% of Dailymotion from France Telecom, and that Dailymotion had a total valuation of about $300 million. If a deal does happen, it would be former Google executive Marissa Mayer's first major acquisition of her 8-month reign as Yahoo's CEO.
And Dailymotion is no dog. France Telecom says the site's revenue grew by 55% last year.
Mayer has outlined four major areas of focus as she sets out to turn the beleaguered Internet giant around: search, display ads, mobile (meaning: apps), and video. In her public utterances, she hasn't said all that much about video so far. During a conference call with analysts in January, Mayer called video "one of our hottest advertising products" and said "our advertisers are seeing great value on this platform ... We see video as a big opportunity for future monetization, and we're really just getting started here."
Indeed, even with Dailymotion, Yahoo would still be just getting started. Advertisers might see "great value" in video ads, but they're highly discerning about where they spend. The higher up the food chain you go, the more you find advertisers who are skittish about attaching their brands to user-generated video, which is often offensive or just plain stupid. That's why YouTube has invested heavily in its premium channels and original programming -- user-generated videos just don't make money. They do, however, draw users and help generate growth, which is Mayer's main focus right now.
Such hard-to-sell videos are what Dailymotion is mainly all about (though, like YouTube, it has begun financing some premium video content). It's been referred to as the "poor man's YouTube," and not just because it's considerably smaller. Dailymotion has thrived in a YouTube-dominated world in part "by hosting content YouTube won't touch" as BuzzFeed put it. YouTube -- which has about 1.6 billion unique monthly visitors compared to Dailymotion's 116 million -- doesn't have anything like Dailymotion's Red Band channel, which features "sexy" content. Dailymotion has also been much less stringent than YouTube about policing copyright violations. Big brands tend to avoid both of those things.
Of course, Yahoo could change all that after an acquisition. It seems unlikely that it would keep Red Band as it is, and likely that it would clamp down more heavily on copyright violations. But given Mayer's stated desire to avoid having Yahoo produce more of its own content, user-generated videos will likely be the main driver of Dailymotion for some time to come, despite the fact that advertisers don't like it much. Users do like it, though, and there are a lot of users in Europe, where Yahoo isn't popular at all. About 70% of Yahoo's revenues come from the Americas, and most of that from the United States. Hooking consumers in other global regions to a Yahoo product would be a big step toward making the company a truly global enterprise.