Google is in discussions to acquire YouTube Inc for about $1.6 billion, although the deal is far from done and the talks could collapse, the Wall Street Journal reported on Friday, citing an unnamed source familiar with the matter.

Google's reported interest in YouTube would reflect a sense of urgency on the part of the search engine giant to improve its position in the red-hot online video market.

Google entered the market in early 2005, at about the same time YouTube was founded. But so far the success has gone to the scrappy start-up, not Google.

YouTube leads the field

In September, YouTube nabbed almost 46 per cent of all US visits to video websites, while the video section of News Corp's came in second with 21.2 per cent, according to Hitwise. Google Video came in third with 11 per cent, followed by MSN Video with 6.8 per cent and Yahoo Video with 5.6 per cent.

YouTube, in typical start-up fashion, approached the market aggressively, opening up their service to anyone wanting to upload their videos, and quickly became a phenomenon. It embraced tagging and sharing features, creating the most popular online video community.

Meanwhile, Google took a much more conservative approach, at first only featuring videos obtained through formal agreements with professional production houses. Consequently, users had to pay to view many of the videos in the catalogue. Months later, it added an upload feature for regular users, but closely policed submissions. It wasn't until recently that it opened wide the service's door and added tagging and sharing capabilities.

Yahoo, Microsoft and AOL are also playing catch-up to YouTube, whose model these large internet companies are adopting.

Advertisers chasing the traffic

Google, Yahoo, Microsoft and AOL need a strong position in this market, due to the increasing popularity of online video. Collectively, traffic to the top ten video websites increased 164 per cent between February and May of this year, according to Hitwise. As traffic to online video sites increases, so does the interest of advertisers, who in turn generate most of the revenue for Google, Yahoo, Microsoft and AOL.

For many years, online video remained an unfulfilled promise, hobbled by high broadband prices, inferior image quality and reluctance by TV networks and film companies to put their shows and movies on the web. However, in the past 18 months, video on the web has gained momentum, helped by a critical mass of users with broadband access, improved quality and a willingness by production companies to distribute their films and programs online.

Copyright challenge

The deal clearly would strengthen Google's position in online video, but it might also saddle Google with potential copyright liability issues, said analyst Greg Sterling of Sterling Market Intelligence, in an interview.

Critics have blasted YouTube for being lax about ridding its catalogue of copyrighted videos uploaded without permission. Some predict entertainment companies will sue YouTube out of business.

Thus, Google needs to walk a fine line between copyright protection and preserving the appeal of YouTube's rich catalogue, Sterling said.

Still, gaining YouTube's audience gives Google an enormous opportunity to boost its fledgling efforts in video advertising, of which it has done very little, Sterling said.

Most of Google's revenue comes from text ads that run along with web search results. Google is trying to diversify its business with other types of ads, such as banners and video.

However, its video ad efforts have been hurt by Google Video's relatively weak position in the market, Sterling said.

For YouTube, getting bought by Google would mean salvation from death by copyright litigation, wrote Josh Bernoff, a Forrester Research analyst.

Google has the technical resources YouTube lacks to implement a system to automatically detect and remove copyrighted material, Bernoff wrote.

If dealing with lawsuits, Google - unlike YouTube - can negotiate with plaintiffs and reach amicable resolutions to ligitation, according to Bernoff. "By itself, I still think YouTube is toast. But with Google - maybe not," Bernoff wrote.

Google and YouTube declined to comment.