Incorporated: 2005
NAIC: 517910 Other Telecommunications
SIC: 4899 Communications Services Nec
San Bruno, California-based YouTube, Inc., is the Internet's premier video-sharing service and since 2006 a subsidiary of Google Inc. The YouTube site was created to allow people to easily upload videos in order to share them privately with friends or family, or with the world at large. It has since developed into a vast repository of videos of all sorts, both amateur and professional, including music videos, rare concert footage, old television shows, promotional spots, political commercials, and other newsworthy videos.
As a result of its free-ranging content supplied by users, YouTube has often faced problems with copyright infringement. Because it relies on flash technology that does not permit downloads, YouTube has been able to skirt any major legal problems by simply removing videos at the request of the copyright holder. The company has also reached partnership deals with numerous content providers, including many record labels, CBS, BBC, The Sundance Channel, and the National Basketball Association. After devoting most of its attention to building a community, which in turn built the brand, YouTube is searching for a way to turn a profit, to "monetize" the service by pursuing an advertising-based business model that could include traditional banner advertising as well as sponsorships, contextual-based advertising, and participatory video ads (PVAs). With Google's backing, YouTube is also expanding the brand internationally, setting up locally oriented video-sharing sites in individual countries.
2005 Origins
The genesis of YouTube dates to late 2005, although the circumstances are not altogether clear. What is certain is that the company was founded by three former PayPal employees, Chad Hurley, Steve Chen, and Jawed Karim.
The oldest of the three, Hurley grew up in the suburbs of Philadelphia, Pennsylvania, the son of a financial consultant and a schoolteacher. His interests included business, technology, and art. Hurley enrolled at Indiana University of Pennsylvania where he first majored in computer science, but soon switched to graphic design and printmaking. Along the way he toyed with web design and animation. As he began looking for a job around the time of graduation he read in Wired magazine about PayPal, a new company that was working on a way to allow people to transfer money using wireless devices like cell phones. He e-mailed his resume, was flown in for an interview, and proved his abilities by designing a company logo which remains in use by PayPal. In 1999 he became one of the first 20 people to be hired by the start-up.
Also among that small group of new hires at PayPal was Steve Chen. Born in Taipei in 1978, he came to the United States with his family when he was eight years old. They moved to the Chicago area, where he attended high school as well as a state-funded boarding school, the Illinois Mathematics & Science Academy. To study computer science, he enrolled at the University of Illinois at Urbana-Champaign, which is considered the birthplace of the World Wide Web because it is where Mosaic, the first popular web browser using a graphic interface, was developed. Here he met Max Levchin, a PayPal cofounder, who convinced Chen to leave school early, less than two semesters shy of graduation, to work for PayPal as an engineer.
The third YouTube cofounder, Jawed Karim, was born in East Germany in 1979. His family relocated to West Germany and immigrated to the United States in 1992, settling in St. Paul, Minnesota. His father worked as a chemist at 3M while his mother took a position at the University of Minnesota, becoming a research assistant professor of biochemistry. Karim also enrolled at the University of Illinois at Urbana-Champaign to study computer science, and like Chen in his junior year dropped out to join PayPal in 2000 as an engineer.
Hurley, Chen, and Karim helped in the development of PayPal, and when the company was bought by eBay in October 2002 for $1.5 billion, they became millionaires. Still in their 20s, they were not interested in retirement, however. Hurley left PayPal in 2003 and dabbled with some projects as a design consultant, including designing messenger bags and working on the film Thank You for Smoking, which was partially funded by Levchin. Chen, in the meantime, remained at PayPal in order to help the company launch a site in China, and Karim finished up his undergraduate degree through online classes and credits earned at Santa Clara University.
PayPal employees were a close-knit group. Hurley, Chen, and Karim remained friends and in 2005 began to get together at their homes or at Max's Opera Café near Stanford to brainstorm about new companies they could launch. Where the idea for YouTube came from is somewhat murky. In the most often repeated and polished version of the story, Chen hosted a dinner party in January 2005 at his San Francisco home, one that Karim did not attend. Hurley and Chen took still pictures as well as videos at the gathering. The next day they tried to e-mail the material to their friends, but the large size of the files proved cumbersome. Believing that there must be a better way to share videos over the Internet, they decided to create a better way that could perhaps become a new business. They then brought in Karim to help develop the idea. Karim, on the other hand, claims credit for the idea, maintaining that the seed was planted in 2004 when he had difficulty finding online video of Janet Jackson's "wardrobe malfunction" during the Super Bowl halftime show in February of that year as well as amateur videos taken of the Asian tsunami late in 2004.
Regardless of deserved credit for the idea of an online video-sharing site, there is general agreement among the cofounders that all three played important roles in fleshing out the raw idea, initially working out of Hurley's garage in Menlo Park, California. In its earliest incarnation, YouTube was intended to be a dating service, heavily influenced by the web site HOTorNOT.com, a site that allowed users to rate the attractiveness of potential dates. What was cutting edge about HOTorNOT was that users provided the content through uploads. The three partners envisioned a dating site called Tune In Hook Up, which allowed users to upload videos of themselves. After a few weeks the idea was deemed too limiting and was dropped. Another concept that failed to pan out was the hosting of videos for people to use on online auctions, akin to the way PayPal piggybacked on the success of eBay. However, it was also considered too narrow a format and was replaced by the more open-ended concept that became YouTube, allowing users with minimal computer skills to post videos of whatever struck their fancy.
While Hurley designed the site's interface, Chen and Karim handled the engineering responsibilities. As the company's organization took shape, Hurley assumed the chief executive officer role, Chen became technology officer (and continued to work for PayPal for a time), and for a short time, Karim served as president. Early on, however, Karim indicated that he planned to continue his education. Soon after YouTube became operational he left to enroll in a graduate program at Stanford University, in turn accepting a smaller ownership stake in YouTube.
November 2005: Sequoia Capital Invests
YouTube graduated from Hurley's garage and set up shop above a San Mateo pizzeria, funded by Chen's credit cards. In May 2005 YouTube released a beta version with about 30 videos, a large number featuring Chen's cat, P.J. Because of its simplicity, YouTube quickly caught on with users and outpaced similar sites launched by established companies, including Google and Yahoo!. An important catalyst to the site growth was the popularity of MySpace, which had many young users who relied on YouTube as a place to keep their linked videos. It was at this stage that another PayPal veteran, former chief financial officer Roelof Botha became involved in the company. After leaving PayPal he had become a partner at Sequoia Capital, the venture capital firm that gained acclaim for its early investments in Apple Computer, Cisco, Google, and Yahoo!. In the summer of 2005 Chen ran into an ex-PayPal executive, Keith Rabois, at a barbecue and showed him the YouTube site. Rabois then told Botha about it, and Botha placed some of his honeymoon videos on the site. He was impressed with the idea for the company, and in August brought in Hurley and Chen to his offices at Sequoia. They began working with Sequoia in refining the company. By September the site was showing more than a million videos a day. The following month, YouTube was plotting strategy at Sequoia's Menlo Park incubator, and in November Sequoia invested $3.5 million in the start-up, to essentially cover the cost of rent, salaries, bandwidth, and servers to host YouTube's activity.
YouTube reached a significant turning point in December 2005 when it eclipsed iFilm, a rival video site, and soon expanded its lead exponentially. Late in the month, a skit called "Lazy Sunday" from NBC's Saturday Night Live was posted to YouTube. The gangsta rap spoof, spread by word of mouth, was viewed about 1.2 million times before the end of the month. During this period Nike also uploaded a promotional video introducing a new pair of shoes featuring Brazilian soccer star Ronaldinho. It too exploded across the Internet in a viral manner. To Hurley the popularity of the Nike spot was even more important than "Lazy Sunday." "That was the transition point," he told Brandweek, "when we saw that both professional and user-generated content could be popular with the community as long as it is entertaining." Another factor spurring growth was a blizzard in the Northeast that kept many people home from work and school for almost a week, providing them with plenty of free time to spend on the Internet. Many of them visited YouTube.
Because of increased traffic, YouTube became the obvious place for people to post videos, which drove further usage. A virtuous circle developed, creating ever increasing traffic, but it resulted in something of a "winner's curse" as well. With more videos to store and deliver, it became more expensive to operate YouTube, which at this stage was focused on building a community rather finding a way to make money out of the venture. In January 2006, YouTube displayed some banner advertising as a way to supplement the cost of new equipment and telecom lines, but still refrained from resorting to more aggressive, and potentially lucrative, forms of advertising, in particular the use of "pre-rolls"--short spots that appeared before the running of a requested video.
Another downside to YouTube's sudden popularity was conflict with content providers and Internet rivals. MySpace, for example, blocked YouTube videos on their pages, but quickly backed down when MySpace users vehemently protested. In what was likely a face-saving gesture, MySpace maintained that it blocked YouTube because of concerns about videos containing pornography and that it reactivated YouTube once it received assurances that adequate pornography filters were in place. In truth, YouTube had always banned inappropriate material and quickly removed any that was posted. In addition, many content providers began requesting that copyrighted material be pulled from the site. In February 2006, for example, NBC asked that clips from the Winter Olympics and Jay Leno monologues be removed, along with the popular "Lazy Sunday" video, after it had been viewed on the site about six million times.
To help continue YouTube's growth, Sequoia made a second infusion of cash in April 2006, investing another $8 million. Traffic continued to grow and YouTube took steps to reach agreements with content providers, who began to recognize that YouTube could serve as a showcase for their products. Because the site was tailored for short formats, videos less than 10 minutes in duration, YouTube could help, in theory at least, to promote the sale of DVDs, CDs, and other full-length works. Deals were struck with the likes of MTV Networks, E! Networks, and Dimension Films. Even NBC came around, agreeing to make available video clips promoting their shows.
Google Acquires YouTube: 2006
One of YouTube's chief rivals was Google, which offered its own video-sharing service. According to the Economist, Hurley and Chen in private "had unflattering things to say about Google and its rival, clip-sharing site, Google Video." They were also making public pronouncements that they had no plans to sell YouTube, intent on maintaining the company's independence. For its part, Google had focused on internal growth, indulging only on small acquisitions. Thus, it came as a surprise to many when it was announced in October 2006 that Google was going to buy YouTube for $1.65 billion in stock. To some observers it seemed like an incredibly high price for the business, but because Google was flush with cash, possessed an enviable balance sheet, and was using only its highly valuated stock to make the deal, the acquisition made sense in a different way. Because $1.65 billion represented 3 percent of Google's market value, the real question was whether instant market dominance in online video was worth 3 percent of Google.
Clearly, Google executives believed the answer was yes. The benefits to YouTube, which was allowed to operate as an independent unit, were manifold. According to the Economist, "Google's vast and growing computer farms can store information more cheaply than any other firm's. Its main business of search-related advertising is so profitable that it can afford to carry YouTube until meaningful revenues appear. Google has the largest online network of advertisers, whom it can refer to YouTube. It has armies of lawyers that can be deployed to handle copyright suits." Moreover, the sale to Google made its founders multimillionaires and provided windfall profits to Sequoia and its investors.
Google quickly set aside $200 million to cover potential losses or damages stemming from any copyright problems. YouTube also had the funding needed to move out of the space above the pizzeria and into an office building. Moreover, YouTube began taking steps to make more money from the business. In November 2006, it forged its first agreement with a mobile telephone company, Verizon Wireless, to provide YouTube videos to V Cast Music service subscribers, the first in what was expected to be many deals with wireless carriers. In June 2007, YouTube, which was already visited by users from around the world, also made use of Google's deep pockets to begin an international push, setting up YouTube sites in Brazil, France, Ireland, Italy, Japan, the Netherlands, Poland, Spain, and the United Kingdom. Already the company had in place licensing agreements with more than 150 European content providers. "This is just the beginning," Chen told Business Week Online. He continued, "If we had the resources, we would be launching in 140 countries." Given that Google was its corporate parent, there was every reason to believe that if YouTube were successful in establishing its brand in these nine countries the necessary resources would become available for a wider push.
Principal Competitors
IFILM Corporation; Movielink LLC; Yahoo! Video.
Further Reading
Cloud, John, "The YouTube Gurus," Time, December 25, 2006/January 1, 2007, p. 66.
Delaney, Kevin J., "Garage Brand," Wall Street Journal, June 27, 2006, p. A1.
Green, Heather, "Way Beyond Home Videos," Business Week, April 10, 2006, p. 64.
------, "YouTube: Waiting for the Payoff," Business Week, September 18, 2006, p. 56.
Grossman, Lev, "The People's Network," Time, November 13, 2006, p. 62.
Helft, Miguel, "With YouTube, Student Hits Jackpot Again," New York Times, October 12, 2006.
Hopkins, Jim, "Surprise! There's a Third YouTube Co-Founder," USA Today, October 11, 2006.
Lashinsky, Adam, "Turning Viral Videos into a Net Brand," Fortune, May 15, 2006, p. 40.
Lowry, Tom, et al., "Smart Move or Silly Money 2.0?" Business Week, October 23, 2006, p. 34.
Schenker, Jennifer L., "Google Takes YouTube Global," Business Week Online, June 20, 2007.
"Two Kings Get Together; Google and YouTube," Economist, October 14, 2006, p. 82.
Woolley, Scott, "Raw and Random," Forbes, March 13, 2006, p. 46.
— Ed Dinger
