This past holiday weekend my colleague Doug McIntyre gave support to a blog I wrote in May 2007 when he posted Google (GOOG): The Failure Of YouTube. In my rant I gave a detailed analysis outlining how Google had overpaid for YouTube by a fantastic amount.

In the story Doug quotes projections that 2008 revenue generated by Google might gross $200 million from YouTube. That's revenue, not profit. A 20% profit would be $40 million if that was possible. In the article I wrote: How can I say Google overpaid for YouTube? I stated the case in plain English why the YouTube investment would have to earn $300 million (net, not gross) minimum, in its first year not to be dillutive.

They missed the target by a mile. They will continue to miss the target and I do not expect it to ever justify the cost. Just because Google has lots of cash slushing around does not mean they have money to waste.

One of the reasons that AOL (a division of Time Warner (NYSE: TWX), Yahoo!, (NASDAQ: YHOO) and MSN (a division of Microsoft Corp. (NASDAQ: MSFT) are floundering is that the Internet in general is a very dilutive mechanism by its very nature.

It takes almost no investment to start a new site or a new company to compete with the larger sites. Even though most individual sites are not directly a threat, the fact that there are tens of thousands of sites added daily means that cumulatively they take viewers away from the main large sites.

The fact that Google itself came out of nowhere to overtake every other web site in a relatively short period of time, or that Facebook has overtaken MySpace (a division of News Corp (NYSE: NWS) in many respects is further evidence of this fact. I think Microsoft was smarter to partner with Facebook rather than buy it, although I do not know that they wouldn't have if possible.

We can only speculate what someone might pay for Craigslist or Wikipedia, but most assuredly it would be a great fortune and the bidding likely would drive the price up beyond reason in most cases.

Look for Time Warner to figure out how to dispose of AOL or separate itself from the portal. The same is true of Rupert Murdoch. I expect him to parlay MySpace into some other venture that might be more profitable. Both companies will make more money as sellers then owners of these sites.

One of the dilemmas making it hard to sell advertising on the YouTube site is the poor quality of many of the videos and their short duration. I could not help but think the site has an alter ego somewhere called RubeTube, and it turns out there are many, but none seem to be affiliated with the early twentieth century cartoonist Rube Goldberg, who would be amused by many of YouTubes participants.

Google's closing stock price Friday July 3, 2008 was $537.00.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of TWX.