The Rise of YouTube: From Cat Videos to Global Advertising
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. That’s why today, we’ll be going a little meta by looking at our mysterious overlord: YouTube.
From PayPal to YouTube
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 dollars, 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 other 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 to. 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 idea for the platform though was 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 the 14th of February, 2005. And just two months later, Jawed Karim uploaded the first-ever YouTube video: him at the zoo. By May 2005, the YouTube website was up and running and appropriately featured videos of Chen’s cat.
Google Acquisition
Sufficed 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 dollars in seed funding around September, 2005. This investment was vital as the site needed time to grow and establish itself before monetizing.
By November 2005, YouTube was hands down to 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 of 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, as they had spent over 1.5 billion dollars 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.
Perfecting the Monetization
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 successes 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 but despite that, it had still 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. But that didn’t really matter because YouTube’s true value for Google is the information it has about its users, what do you watch, what you like and 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.
Don’t Forget to Subscribe!
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, however, 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. Speaking of AdBlock, it would only be fair to discuss the recent trouble YouTube has had with its advertisers, better known as the apocalypse.
In short, The Wall Street Journal ran an article about how ads were being shown next to extremist content, particularly attacking the biggest YouTuber out there, PewDiePie. Big advertisers got worried that this could cause a public relations crisis so they stopped spending money on YouTube. Of course, YouTube needed 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. 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 returns 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 apocalypse. What this fiasco really showed, however, is that YouTube is beholden to advertisers. Ultimately, it’s 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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