Newly minted multi-millionaire Steve Chen cracked first. Just a minute into his video message to YouTube’s millions of users, the 27-year-old founder of the phenomenally popular website couldn’t hold it together any longer.
He walks out of shot as his business partner Chad Hurley, 29, explains that their $1.65 billion (£890m) deal with Google means “two kings” of the internet have got together.
The phrase soon proved too much for Hurley, too. As someone off-camera asked what the deal means for YouTube’s users, Hurley repeats the “two kings” phrase to a giggling Chen.
“Two kings have got together. The king of search and the king of video have gotten together. We have it our way. Salt and pepper.” They both collapse in giggles.
Like many of the videos on YouTube, this one contains an in-joke. “Have it Your Way” is the catch phrase of another business giant: Burger King. A love of fast food is obviously something the pair share — they finalised the Google sale in Denny’s, another fast-food outlet.
Amateur, not very funny, yet oddly compelling — in short, a typical YouTube video. By Friday, Steve and Chad’s video had been viewed more than 1.7m times.
Just 18 months ago, nobody had heard of YouTube; many over 30 still haven’t. But in its short and meteoric rise, YouTube has become the first port of call for people wanting to watch video on the internet.
People across the world post their own homemade videos on the site. Goofy footage of teenagers miming to TV theme tunes, the funny antics of pets, video diaries of American soldiers in Iraq — YouTube spans the ridiculous to the historic. The quality varies as much as the content, ranging from grainy clips filmed with mobile phones to highly skilled animation.
The top video of “all time” (that is, since YouTube went live in May last year) is of an otherwise obscure comedian, Judson Laipply, performing a jokey history of dance from Elvis to Outkast via Devo, MC Hammer and Vanilla Ice. It has been watched more than 33m times.
Much of the content may seem, frankly, worthless. But that is to miss the point.
More than a website, YouTube is a cultural phenomenon: one of a new wave of websites that rely on their community of users to create their content.
So-called “Web 2.0” sites like Craigslist, Facebook, MySpace and Wikipedia have created global communities that redefine the mass media, attracting record prices and sparking another internet gold rush in Silicon Valley.
But for all its post-millennial credentials, YouTube owes a lot to “old media”. On a weekly basis, half of the most popular videos are culled from the established stars of music and television, with numerous clips from South Park and other hit comedy shows, along with news items, sport and music videos. Reams of copyright-protected material is being made available illicitly and for free.
Like its Web 1.0 predecessors, YouTube makes next to no money. Only in August did it start to accept video advertising and other sponsorship, including a Paris Hilton channel, courtesy of Warner Bros.
Google — the king of web-advertising as well as search — is looking to old-fashioned advertising to help its new-fangled business justify its fancy price.
In the meantime, the established media companies are weighing up whether to play ball or sue. And YouTube’s community is watching to see if there is a price to pay for joining Google’s kingdom.
DENNY’S is not the most auspicious venue for an industry-defining deal.Most famous for its “Grand Slam” breakfast, the chain is like Little Chef’s big brother.
Earlier this month, over plates of eggs and chicken strips, Hurley and Chen met Eric Schmidt and Larry Page, respectively Google’s chief executive and co-founder, to finalise the all-share deal that was announced last Monday.
In YouTube’s early months, Hurley and Chen rejected talk of a sale. But as the site grew, so did the cost of running it. The cost of storing all the videos is thought to be more than $1m a month.
Google and YouTube had been talking for a while, but these discussions became serious only in August, according to David Drummond, the search giant’s senior vice-president for corporate development.
YouTube was also courted by Yahoo and media companies including News Corporation, the ultimate owner of The Sunday Times.
Google launched its own video service last January, but Google Video was no match for YouTube. In August, 23.7m people in America visited YouTube, three times the 7.8m that Google Video attracted.
Until recently, the world’s most powerful web company has concentrated on organic growth; its acquisitions have been small. The purchase of YouTube marks a significant change.
“It became clear to us that [YouTube] shared our user vision and our vision of comprehensiveness, of being able to have all the videos on the web,” said Drummond. “They’ve got traction, they’re culturally very similar to us. In this important area, we could accelerate our approaches to realising that vision.
“Video is one of the more important types of information on the web. With greater bandwidth, with better devices, video is going to be even more important for people looking for information. Helping people find information, that’s what our mission is all about.”
This is Google’s third billion-dollar deal in a year. Last December, it paid $1 billion for 5% of AOL, Time Warner’s internet arm. The search giant paid another $900m to sell ads on MySpace, the community site owned by News Corporation. Such commitments barely dented its cashpile, which now stands at about $11 billion.
It is Google’s cash that is largely responsible for this second boom for internet companies, according to Jeff Jarvis, a media commentator who is the author of the influential Buzzmachine blog.
Google’s spending spree has left Yahoo, its closest rival, looking flat-footed, but has also potentially exposed the company to a flood of lawsuits from traditional media.
It has also fuelled speculation that Google’s phenomenal rate of growth may be finally slowing. Some critics believe YouTube may be the high-water mark.
LAST WEEK, the top 20 videos on YouTube included Theo Walcott’s sensational second goal against Germany for the England Under-21s. They also included Paul Robinson’s goalkeeping blunder against Croatia.
While this is a testament to the international popularity of English football, YouTube does not own the rights to this footage. It is one of many millions of similar instances that could present YouTube with serious problems.
Mark Cuban, the entrepreneur who made billions selling his web-radio firm to Yahoo in the first internet boom, said YouTube would be “sued into oblivion” now it is owned by deep-pocketed Google.
All the video of teens lip-synching to music is potentially an infringement of copyright law, as are the clips from television. When news of the deal broke last week, Stephen Colbert, the American satirist and YouTube favourite, joked that he should receive $700m of the deal money for all the clips he has supplied. The joke will have rung true for many media executives.
This year the NBC television network forced YouTube to pull clips from its Saturday Night Live show, and Doug Morris, chairman of Universal Music Group, said the site owed hundreds of millions in unpaid copyright fees.
Some media executives talked privately of suing YouTube until they owned it. Last week Dick Parsons, chairman and chief executive of Time Warner, said he remained concerned about the illegal use of the media group’s content on YouTube. Parsons said he would be pursuing Google for a fair agreement.
Established media have often greeted technology with lawsuits only to recant when they realise there is money to be made.
“The industry doesn’t have the best history of figuring out what is in its best interests,” said Laurin Mills, digital-rights expert and partner at Washington-based law firm Nixon Peabody.
“The change in technology is going to drive the change in business model over time, and until the next business model becomes obvious you will get this kind of tension.”
Jarvis said YouTube, or something like it, was the future for media.
“Your audience is now your distributor,” he said. “People tell each other what they are watching; their views are effectively votes that push certain clips to the top of the charts.”
He pointed to a now infamous appearance by the comedian Jon Stewart on CNN’s political show, Crossfire. Stewart was incensed by what he saw as the show’s failure to discuss seriously the issues of the day and he publicly berated the panellists. “Say the show got 150,000 viewers on TV,” said Jarvis.
“The last time I looked on iFilm (another video website) the Stewart clip had been watched 3.7m times. Add in Google Video, YouTube and the rest and you can at least double that.” Stewart’s funny and biting critique effectively killed the show.
The platform of the internet had turned a comedian into one of the most powerful political commentators of his generation. Privately — for fear of being seen as luddite — some executives compare YouTube to MTV. The music channel became a huge commercial success on the back of promotional videos that record companies gave it for free. Its enormous success was bitterly resented by many, especially when record music sales started to slide and piracy rose.
Now any agreement struck with YouTube will be seen as an industry benchmark. Any infringements it is allowed to get away with will be aped by competitors. Cuban argued last week that media firms will now pursue YouTube’s rivals in the hope of achieving legal victories they can then wield over Google. “The wise reaction is not to call in the lawyers, it’s to say ‘How do I make this work’,” said Jarvis.
GOOGLE’S DRUMMOND insisted the threat of legal action is overblown; and there certainly seems to have been a change of heart in some quarters recently. Universal Music (UMG) and Sony BMG both struck content deals with YouTube last week, allowing its users to incorporate copyrighted music in their videos.
Universal said it “broadly embraces” the power and creativity of user-generated content, allowing users to incorporate music from its recorded music catalogue into the videos they create. “UMG and its artists will be compensated not just for UMG-produced videos but also for the unique, user-created content that incorporates UMG music,” it announced. This willingness to share revenues is the key to YouTube avoiding litigation. “We are set up to respect the rights of copyright owners,” Drummond said.
“There’s a lot of value here to be shared with content owners. With a Google/ YouTube combination, and our proven monetisation capabilities, it becomes an even more compelling proposition.” He said the deal with Universal “will mean there won’t be any more threat of litigation from that company”. Drummond added that Google and YouTube have a number of mechanisms to discourage the posting of copyrighted content, and “we take it down very promptly” when alerted to its presence. “We both have developed tools that content owners can use to flag their content on the site (ie, to highlight copyright-infringement problems). The way we are working with content providers is to forge deals where, going forward, they can derive some value.”
Warner Music was the first major record label to reach an agreement on revenue sharing with YouTube. The company will receive a percentage of any ad revenue every time one of its songs is used on the site. CBS, the television network, has also entered an advertising partnership with YouTube, though CBS retains “the sole discretion” to allow clips from its programmes to remain on the site.
Some senior media executives argue that these are signs that lessons have been learnt since the Napster debacle. The free song-swapping website was crushed by legal action by the music industry, but this failed to stop enormous web piracy.
“If we had licensed Napster we could have saved ourselves billions and got a real head start in digital music,” one music executive said. “But as usual the lawyers had the loudest voices.”
If there is money to be made, media companies are happy to share content as long as they get their slice.
“It is innovation over litigation,” said Michael Nash, senior vice-president for digital strategy at Warner.
“You do have to take a very strong position to protect your rights. We can’t ignore uncompensated exploitation of our content. But it’s a dead-end to ignore the needs of our consumers.”
Drummond said: “We think this platform we have been building, and which YouTube has been building, is a really amazing opportunity for content owners to make more money by offering more of their content to be on the site. And then allowing us to figure out interesting ways to monetise it.
“Just as we do on the web, we are happy to share the revenue with the partner.”
FINDING a fair share will be the challenge.
Dividing up the advertising revenues from YouTube will be a much more complex business than charging royalties on CD sales.
The risk that Google will take too big a share of the economic pie will remain a key concern for media executives. For all that Big Media seems to be playing nice, there is no doubt that the Google deal changes life for YouTube.
It’s not a start-up owned by two relatively poor twentysomethings. YouTube is the video arm of the world’s most powerful internet company. Google has attracted the ire of the book-publishing world and the newspaper industry over the past year, and is often accused of bulldozing opposition. As YouTube grows it is bound to attract similar opposition.
Then there are YouTube’s rivals waiting in the wings. Microsoft is busy on its own video plans as is Yahoo, and there is a Time Warner-backed venture called Veoh.
But YouTube, or Google’s, greatest rival is as likely to arrive just as they did — out of nowhere. Few doubt there will be a new generation of entrepreneurs trying to do to YouTube what YouTube has done to Google Video — make it redundant.
But this weekend, future problems won’t worry Hurley and Chen. With hundreds of millions of dollars of Google shares coming their way, for the giggling duo it’s Whoppers all round at Burger King.
California dreaming of web giants
ONE of the many surprising facts about YouTube is that its two young founders, Chad Hurley and Steve Chen, already have experience of a billion-dollar technology buyout.
Hurley, 29, and Chen, 27, met at PayPal, the online payments company that eBay bought for $1.5 billion (£808m) in July 2002. Although the future YouTube duo were relatively junior employees, they learnt a familiar Silicon Valley lesson: technology start-ups can make you very, very rich.
It is this kind of hands-on experience that helps explain why the area south of San Francisco in California continues to produce a disproportionate number of the world’s most exciting technology companies.
Doug Richard, the Californian software entrepreneur who came to prominence on the BBC Dragons’ Den programme, said: “They go through PayPal and it changes them for ever because they see it’s real. It’s a derisking event because they’ve got immediate experience that success is possible.
“This is the key differentiator between Silicon Valley and everywhere else. Walking out the door and starting a business without any experience is a totally rational alternative.”
In the age of the world wide web, it ought to be the case that great innovations can arise anywhere. Theoretically, all you need is a computer, a broadband connection and a good idea.
In practice, nearly all the big consumer web businesses seem to sprout in and around the Santa Clara valley: YouTube’s neighbours include PayPal, Google and Facebook, a social-networking site whose chief executive Mark Zuckerberg, 22, is being courted with a $1 billion deal by Yahoo.
Richard, who has studied the technology “cluster” based around the UK’s Cambridge University, said this makes setting up a business less risky. “Entrepreneurs are surrounded by people they can get money from, people they can learn from, people they can take advice from — others who are in a position to do something about the risk.”
Perhaps it’s the Californian sunshine, but entrepreneurs dream bigger dreams in Silicon Valley: what Google set out to do was to, simply, “organise the world’s information and make it universally accessible”.
Silicon Valley superinvestor
SEQUOIA CAPITAL is one of Silicon Valley’s most successful investment companies. It is also one of its most secretive.
When, three years ago, the University of California was required to publish details of the performance of its investments, Sequoia reacted with alarm.
The venture-capital firm asked the university, one of its longest-standing backers, to withdraw from its funds.
“It is not in the interests of Sequoia Capital’s other clients that we be hounded, badgered and stalked by entities wishing to either profit from or publicise our private and confidential information,” said a letter from Mike Moritz, the Welshman who is Sequoia’s best-known partner.
Sequoia may be shy but it has little to be embarrassed about. Its $11.5m (£6.2m) investment in YouTube — now thought to be worth $500m or more — is the latest in a long run of stellar successes.
Moritz put the first money into Yahoo, the internet company, which is still worth $33 billion even after a bad year. He also backed Google, and continues to sit on the search giant’s board. That $12.5m investment made billions more.
The list of technology firms backed by Sequoia reads like a roll call of the industry’s best-of-breed: Apple Computer, Cisco Systems, Entertainment Arts, Flextronics and Oracle. Extraordinarily, companies backed by Sequoia represent 10% of the value of the Nasdaq technology market. No wonder it can afford to be picky about who invests in its funds.
The investment in YouTube was the responsibility of Sequoia’s Roelof Botha, who knew Chad Hurley and Steve Chen from PayPal, where he was chief financial officer.
Moritz declined a request to talk about YouTube last week, but Sequoia’s website makes clear the firm’s priorities.
“We cater to two constituencies: the founders and management of private companies who have selected us as partners and the limited partners who have trusted us with their money.
“We want to do well by both, but founders and management come first. We have learned the only way to develop a fabulous company is one step at a time. This happens if the company makes wonderful products or delivers a service that thrills large numbers of customers.
“If that occurs the founders, management and employees of these companies prosper. It is only then that the investor deserves to be rewarded. It has to happen in that order. There are no short cuts.”
