The modern world works in video:
from news reports to education, reaction gifs and just laughing at people injuring
themselves. And, all of that is really thanks to
just one company. Like the founders of several other
big tech companies, the creators of YouTube met while working at Paypal, back when Elon
Musk was still calling the shots.
In October 2002, when eBay acquired
PayPal for $1.5 billion, Chad Hurley, Steve Chen, and Jawed Karim became instant
millionaires. This was especially important for
the latter two, because they had both dropped out of college just before graduating. Chad Hurley was a designer, so he
quit PayPal to work on a few projects like designing bags and working on a feature film. Jawed Karim actually finished his
degree online, while Steve Chen stuck around at PayPal for a few more years. The three remained friends,
however, and met up frequently to discuss ideas for their own company.
The actual spark that inspired
YouTube is a different story, depending on which founder you talk too.
It was either because they couldn’t
send large videos, or because they couldn’t find footage of Janet Jackson’s famous
wardrobe malfunction. Their first ideas for the platform
though, were actually a bit different. Like Mark Zuckerberg, they were big
fans of a website called HotOrNot.com, where you could rate people’s appearance. They imagined a site where members
would put up a kind of dating profile video, talking about who they were and the kind of
person they were looking for. But, pretty soon they dropped the
idea, in favor of a more universal platform. The domain youtube.com was
activated on 14th February, 2005 and just two months later Jawed Karim uploaded the first ever
YouTube video: him in the zoo.
By May 2005, the YouTube website
was up and running, and appropriately featured videos of Chen’s cat. Suffice to say, YouTube was a success
from the very beginning. Much like PayPal, its beauty was
in its simplicity. In contrast with competing
services, one of which was Google’s, uploading a Youtube video was free and you could upload
as many as you wanted, as long as they weren’t too big. But, with no way to profit from
their service, YouTube was burning money fast. Luckily, the PayPal mafia was here
to help, with former CFO Roelof Botha investing $3.5 million in seed funding, around
September 2005. This investment was vital as the
site needed time to grow and to establish itself before monetizing.
By November 2005, YouTube was
hands-down the biggest video platform, serving 2 million videos per day. Server costs were becoming so
massive that YouTube ran out of money less than six months
later, causing Sequoia Capital to
inject another $8 million. At the time, YouTube’s biggest
problem was licensing, but movie studios and record labels, quickly saw the benefit from short
clips being shared among users, as the first viral videos began to appear. By October 2006, it was clear that
YouTube was the winner in the video platform race, but Google wasn’t ready to give up
just yet.
Instead, they put down 3% of the
entire company’s value on the table, which persuaded Hurley, Chen and Karim to sell YouTube. Outsiders thought that Google had
paid way too much, spending over $1.5 billion for a website that hadn’t made a single
dime. But, Google was confident it had
made the right decision, and the synergies between the two companies were truly exceptional. Google’s army of lawyers quickly
settled the majority of YouTube’s legal troubles and even resulted in profitable
deals being signed with the likes of Sony, Lionsgate, and MGM. With Google capital, YouTube also
developed an automated copyright system, Content ID, which could reliably detect
copyrighted content as soon as a new video was uploaded. By utilizing Google’s vast server
farms, YouTube could also reduce their hosting costs, which were already approaching $2
million per day. But the ultimate benefit, was the
integration between YouTube’s video platform and Google’s advertising arm, AdSense.
One of the reasons behind Google’s
success as an advertising platform, was its access to immense amounts of information,
which YouTube could provide in spades. YouTube’s main problem, on the
other hand, was a lack of monetization, which AdSense easily solved. By showing ads next to videos,
YouTube finally started generating revenue. Despite that, it has never made a profit. By 2009, YouTube was showing 5
billion videos every month, earning way less from ads than they spent on hosting. As a consequence, that year YouTube
lost $470 million dollars. But, that didn’t really matter,
because YouTube’s true value for Google is the information it has about its users: what you
watch, what you like, what you comment. In a way, YouTube is profitable,
it’s just that a big chunk of its value isn’t easy to determine. Of course, the ultimate goal for
YouTube is to replace television, and to do that YouTube needed to be more than just an
archive of TV clips and cat videos.
It was in their interest to promote
original content and to that end in 2011, they partnered with numerous celebrities and
production companies to create unique, high-quality content. After a $300 million investment, in
March 2013, YouTube was ready for the next step in its master plan: moving towards a
subscription model. The first iteration was called
Music Key, which allowed you to stream music without ads for a monthly fee. In October 2015, it was incorporated
into YouTube Red, which removed ads across the whole platform and gave access to exclusive
content. The adoption rate for YouTube Red
isn’t particularly spectacular. By the end of 2016, it had only 1.5
million subscribers.
And it does make sense: in the age
of Adblock, it’s hard to get people to pay for something they’ve been getting free for
years.
The recent trouble YouTube has had with its advertisers, better
known as the Adpocalypse. In short, the Wall Street Journal
ran an article about how ads were being shown. Next, extremist content, particularly attacking the
biggest YouTuber out there, PewDiePie. Big advertisers got worried this
could become a public relations crisis, so they stopped spending money on YouTube. Of course, YouTube need those
advertisers to keep the platform running, so they introduced options for what kind of videos
brands don’t want their ads to be shown on. These categories include “tragedy
and conflict” and “sensitive social issues”, both of which are pretty open to
interpretation. This resulted in many videos which
should’ve been alright getting demonetized, so no ads running on them.
YouTube was, of course, fine with
that, since it meant bringing back advertisers at the expense of a few channels losing
their revenues. Unsurprisingly, that’s exactly what
happened. Many YouTubers got their livelihoods
destroyed, while the YouTube advertising platform returned to record profitability. In fact, YouTube’s exclusive ad
platform for high-spending advertisers is already sitting at a record number of participants,
way more than even before the Adpocalypse. What this fiasco really showed,
however, is that YouTube is beholden advertisers.Ultimately, it is the big brands
that are the customers, while both content creators and viewers are merely users of the
platform whose priorities are of lesser importance.
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