YouTube’s Origins & Insights
How YouTube took off in the video-sharing market
This is one of a series of posts on the origins of well known startups including Instagram, TikTok, Spotify, and SoundCloud. The series is an extension of a short essay I wrote called The Seed Model.
I can say fairly confidently that I use YouTube more than any other app. It all started in college when I googled a music video I hadn’t seen since it was on MTV’s TRL. YouTube’s music video catalog was still pretty thin back then, but the idea I could watch any music video anytime I wanted blew my mind. Gradually, YouTube’s algorithm realized I had other interests and the videos it showed me were better than anything I saw on TV. One minute I was watching engineers explain what happened when monsoons crashed into bridges; the next, Jeff Bezos breaking down Amazon’s leadership principles to a class of students thousands of miles away. Anytime I’m confused about a new concept, I search YouTube to find someone to explain it to me like I’m 5. When I want some background noise, I turn on the YouTube TV app. YouTube was — and remains — my best outlet for procrastination. Its endless library of videos entertain me, distract me, and expose me to parts of the world I’d never see without it.
YouTube was founded in 2005 by former PayPal employees Chad Hurley, Steve Chen, and Jawed Karim. Their original plan was to create a new type of dating site featuring video profiles instead of static descriptions. They reasoned that video profiles would provide far more context than ordinary profiles and transform the way people found love. The plan fell apart, however, when they launched their private beta. They couldn’t find women willing to upload videos, so they resorted to taking out ads offering $20 to women who joined.
As bad as the young founders were at matchmaking, they were exceptional engineers. Nearly all the websites that let people share videos online in 2005 were either terrible or prohibitively expensive. By creating a simple interface for uploading videos and letting anyone use it for free, YouTube had unwittingly discovered a much better way to publish videos online. The first YouTube video on record — Jawed at the zoo — set the stage for creators of all kinds to use YouTube to share any video they wanted. The concept took off almost immediately and within 18 months they sold the site to Google for $1.65b.
Problem 1 — Putting videos online
At the time of YouTube’s founding, it was very difficult to build a website where people could publish and watch videos. Among other challenges, the team had to figure out:
Recording. In 2005 there weren’t many people who had videos to upload. Back then, mobile phones didn’t have cameras on them and most people didn’t own video cameras. YouTube’s base of creators was limited to people who had bought video cameras, uploaded their videos onto their computers, and wanted people on the internet to watch what they had recorded.
Hosting. Video files were large and cloud hosting platforms like AWS didn’t exist yet, so YouTube had to come up with a way to store videos that users uploaded. The team had no choice but to buy servers and personally maintain them — no small feat during phases of hypergrowth.
Playing. Internet connections were relatively slow and bandwidth constraints made it hard to play videos quickly through web browsers. Users essentially had to download videos they wanted to watch using their internet connection, which made for a disjointed viewing experience.
Sharing. YouTube could only grow quickly if creators and viewers had an easy way to share videos. That meant every video needed its own webpage and viewers had to be able to share links through channels where their contacts could easily access them.
Discovery. Viewers needed a way to find videos that creators uploaded. So on top of all the challenges of getting videos onto webpages, YouTube had to build its own search engine and teach creators how to get their videos featured in search results.
Problem 2 — Moderating video uploads
As soon as people realized they could upload any video and quickly build an audience, they started using YouTube to share videos that threatened its future. Unlicensed clips of film and television scenes invited lawsuits from major studios who were determined to protect their valuable DVD businesses. Graphic clips featuring nudity and violence would tarnish YouTube’s reputation as it courted mainstream viewers around the world. Without a legal department and moderation team to fend off these issues, YouTube would face the same fate as illegal file-sharing sites like Napster.
Problem 3 — Growing too quickly
Most startups don’t have the luxury of growing so quickly that they can’t support their users, but YouTube was one of the lucky few. Just six months after launching its public beta, YouTube had its first video with over a million views. Two months after reaching that milestone, YouTube was getting 8 million views per day. As their viewership scaled up, their costs scaled as well. It was very difficult to create a fast, stable viewing experience when so many people were trying to watch the same videos at the same time. They needed engineers, servers, attorneys, managers, and — above all else — money to pay for their rapidly growing website. While venture capitalists were happy to fund them, the founders could see the writing on the wall. They had stumbled onto what looked like a generational internet business, but growing pains meant that success was far from guaranteed.
Selling to Google
The founders decided they needed the resources of an experienced company to help them navigate YouTube’s growth phase. Instead of going it alone and trying to build out internal infrastructure, they started listening to acquisition offers from companies who had already dealt with the kinds of issues they were facing. In short order, Google and Yahoo emerged as the top bidders. Unlike legacy video companies, Google and Yahoo understood the dynamics of building an internet business. They also had engineers who could quickly get up to speed with YouTube’s technical needs. But Google won out. YouTube already relied heavily on search to help users discover its videos and Google was the world’s leading search engine. Furthermore Eric Schmidt, Google’s then-CEO, promised them autonomy, control, and hundreds of millions in personal wealth. They completed the entire deal in just one week with final closing at a Denny’s in Palo Alto.
Insight 1 — Selling out doesn’t mean giving up
The first insight from YouTube’s success is about the timing of its sale to Google. The founders chose to sell just as they entered the most intense phase of their growth. They had significant content moderation problems, unsettled negotiations with major studios, and a tiny ad business that hadn’t proven itself yet. While viewership was growing exponentially, it was clear the team needed experienced managers to help turn the attention they were generating into a business. The founders could’ve made a lot more money if they had stayed independent, but they also could’ve lost their business in the Great Recession that started just a year later. Selling when they did locked in their generational wealth and gave YouTube the resources it needed to grow into the the largest video-sharing site in the world as well as the second largest search engine.
Insight 2 — Auctions raise sale prices
The second insight from YouTube’s success is about how the founders conducted their sale. They made two brilliant moves that ensured they’d get the best outcome for the company. First they brought multiple bidders to the table. By having several companies submit offers, they enticed them to make big offers that they might not have gotten if they had only pursued a single bidder. Google wanted YouTube to expand its own ad business, but it also wanted to stop Yahoo from stealing it away. If Yahoo had won the bidding war, it could very well be Google’s largest competitor today and costed them many multiples on the $1.65b they ended up paying. The second move the founders made was to put time pressure on the deal. By running a fast process, they didn’t give Google a chance to lowball them and draw out the process.
Insight 3 — Solve hard technical problems
The third insight from YouTube’s success is about the founders’ commitment to solving difficult technical problems. Oftentimes founders pivot when they encounter hard technical problems that aren’t immediately solvable. YouTube’s founders weren’t video engineers, they had worked in payments at PayPal. But despite their inexperience, they committed to solving all the problems with publishing and watching videos online. By solving a technical problem that nearly every amateur video creator had at the time, YouTube created a giant business that changed the entire internet. Their willingness to step outside of their comfort zone gave them generational wealth and a business that remains the leader in its category to this day.
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