Pop quiz: How many times have you visited YouTube today? Once? Twice? Five times? Twenty times? YouTube is so useful and fun that if you told me you visited the site 100 times today, I would probably understand. As we all know, YouTube is useful in a million different ways. The streaming video service is great for proving a point in an argument, learning how to cook a particular meal, perfecting a new soccer move, listening to music, laughing at a prank, re-watching the best parts of our favorite shows… The list is endless. Everyone who is reading this now has probably been sucked down many a YouTube rabbit hole. That's when you search the site for one very specific video, and find yourself emerging from the rabbit hole two hours later after consuming a thousand "suggested videos".
For something that is so central to our daily lives and culture today, it's hard to believe that YouTube didn't even exist just 10 short years ago. It's even harder to believe that YouTube wasn't necessarily a slam dunk success right out of the gate. As a matter of fact, just a few years into its existence, many people thought YouTube was going to be a flash in the pan web business. One that would inevitably be destroyed by copyright lawsuits or the ever-expanding expense of its own bandwidth costs. I know it seems hard to believe in retrospect, but when Google decided to buy YouTube in 2006 for an unprecedented $1.65 billion, many industry analysts thought that acquisition was a completely insane waste of money. Fast forward a few years, and it's proven to be Google's best purchase ever. Scratch that. I'm gonna go on record and say that YouTube is the greatest business acquisition of all time. Here's why…
How Janet Jackson's Wardrobe Malfunction Changed The Internet Forever:
There are lots of stories about how the idea for YouTube came about. Was it the result of a simple brainstorming conversation between engineers at a party? Was it someone's brilliant realization that it was hard to find clips of popular programs like The Daily Show, South Park and Saturday Night Live, after they had aired? Or was Janet Jackson's exposed right breast? Believe it or not, it was Janet Jackson's exposed right breast.
On February 1st, 2004, Janet Jackson and Justin Timberlake performed at the Super Bowl halftime show. At one point during their performance, Justin reached over and pulled off a piece of Janet's costume. You can imagine the collective shock that hundreds of millions of viewers felt when they realized that removing that little piece of costume left Janet's right nipple exposed to the world.
After this now-notorious nipple-slippage incident, a budding Stanford graduate student named Jawed Karim noted that it was damn near impossible to see the clip anywhere on the internet. Keep in mind that back in 2004, only a tiny percentage of the population had a DVR. And of those people who were lucky enough to own a DVR (and could rewind over and over and over and over), basically no one had the knowledge or equipment needed to download the footage off their TIVO onto a disk or flash drive that could then be transferred to a computer and ultimately a website.
One of the only people in the world who possessed both a DVR and the ability to transfer content to his computer was a suburban-Chicago entrepreneur named Rob Nolte. Nolte had recently launched a website called big-boys.com that he was using as a resource for web developers. On a whim, Nolte decided to transfer the Janet Jackson clip from his DVR to his computer. He then proceeded to post the clip on his website. He figured a few random friends who did not have a DVR might want to check it out. 24 hours after the Super Bowl, if you googled "Janet Jackson Super Bowl video", Rob's big-boys.com link was the top result. Instead of a few random friends visiting, the site was inundated with hundreds of thousands of visits per day for the next several weeks. Rob immediately had the brilliant idea to scrap his web developer website and replace it with a website that posted funny viral videos submitted by users. Instantly, one of the earliest streaming videos sites in history was born. Another site, eBaumsworld, which had been around since 2001, quickly followed suit and also began posting videos. Big-Boys changed it's name to Break.com in November 2005.
Disclosure: My first (and only) job out of college was at Big-Boys.com, hence my intimate knowledge of the history of internet video. I worked at Big-Boys/Break from July 2005 until February 2012, at which point I left to run CelebrityNetWorth full time (it was just a side project that I worked on at nights and on weekends before that).
YouTube was the brainchild of Chad Hurley, Steve Chen, and Jawed Karim. The trio met while they worked for PayPal. Chad Hurley was a designer, and had graduated from Indiana University of Pennsylvania with a degree in Design. Steve Chen and Jawed Karim had both majored in computer science at the University of Illinois at Urbana-Champaign. Clearly one of them noticed a burgeoning new industry of streaming video on the web. Pretty soon, their combined talents led to the creation of the online juggernaut that is now known as YouTube.
They bought the YouTube domain name on February 14, 2005, and quickly began building the site. YouTube began small. Their offices were above a pizzeria and a Japanese restaurant. They opened the beta site to the public in May 2005. The very first video uploaded to YouTube was an 18 second clip of Jawed Karim at the San Diego zoo standing in front of some elephants. This video was titled "Me at the Zoo" and was shot by Jawed's friend Yakov Lapitsky.
After a few successful months of operation, the trio put together a proposal for Venture Capital firms. Using connections from their days at Paypal, the team eventually landed $11.5 million in funding from Sequoia Capital to get the business off the ground. The money was paid out between November 2005 and April 2006. Their official site launched worldwide in November of 2005. Here is "Me at the Zoo", from the user account "jawed's channel", in all its ground breaking glory:
How YouTube Took Over The World:
As hard as this is to believe today, there was a time when MySpace was one of the largest websites in the world. Back in 2005, Facebook was a blip on the Social Media radar. I realize this sounds totally bonkers, but back in February 2005, Mark Zuckerberg actually offered to sell Facebook to Myspace for $75 million. Myspace CEO Chris DeWolfe rejected the offer. He chose… poorly.
Side trivia: Myspace was acquired by Newscorp in 2005 for $580 million. In 2011, Newscorp sold all of its Myspace-related assets to a company called Specific Media for $35 million. As of this writing, Facebook has a market cap of $218 billion. Game, set, match… Zuck 🙂
Ok so how is Myspace related to YouTube's success? Well, at some point in mid-2005, Myspace gave its users the ability to customize their profile pages with externally embedded content and html markup codes. This innovation inspired millions of Myspace users to build customized profile pages decorated with all their favorite colors, animated gifs, photos and…most importantly: videos. If you wanted to embed a video on your Myspace page back in 2006, there was only one site on the internet that allowed that functionality: YouTube.
Want to force all your Myspace page visitors to listen to "Look At This Photograph" by Nickleback? Simply find the video on YouTube, and grab the embed code. Want all your friends to see that viral video of the fat kid singing the "Numa Numa" song in his bedroom? YouTube had you covered.
YouTube's early rise to dominance is directly correlated to the rise of Myspace. Don't believe me? Take a look at this (photo) graph. (Every time I do it makes me laugh). This graph plots the traffic growth of Myspace (green line), YouTube (red line) and MTV.com (blue line), between 2005 and 2007. Notice how starting a little bit before 2006, Myspace and YouTube grew almost step for step? Then right at the beginning of 2006, YouTube explodes in growth, eventually surpassing Myspace right around June 2006. So what caused YouTube to explode into the mainstream at the very beginning of 2006?
Throughout most of 2005, YouTube was still a relatively small service used mainly to enhance Myspace profiles. Then, something magical happened right at the end of 2005. Believe it or not, YouTube actually owes a major part of its success to Saturday Night Live stars Andy Samberg and Chris Parnell. On December 17, 2005 SNL aired a little video called "Lazy Sunday". It was the very first SNL digital short and it aired at the very end of the episode, which also happened to be the season finale. In other words, no one at SNL thought much would come of this silly little rap video. They were wrong.
The very next day, the entire world was asking "did you see that SNL rap video???". By now, it had been almost two years since Janet Jackson's nipple gate and many more people had DVRs, but not many people were actually DVRing SNL. So, the day after the episode aired, everyone and their mother scrambled to find somewhere to watch it online (probably so they could post it to their Myspace pages). In case you're wondering why people weren't posting the video to Facebook, keep in mind that at the time, Facebook was still exclusively closed-off to people who had .edu email addresses. Also keep in mind that the Facebook Newsfeed was 9 months away from being launched and the Facebook "Like" button was still three years away from existing.
Lazy Sunday wasn't being replayed on NBC or anywhere on TV, so the only way to watch the clip was to Google things like "Lazy Sunday", "SNL rap video", "Chronicles of Narnia SNL". The first result on Google for all of these queries was a link from: YouTube. All of a sudden, the entire world was being introduced to, and very quickly falling in love with, the concept of internet video sharing. In the coming weeks, every mainstream newspaper and media outlet did a report on the wonders of this new-fangled "Youtube" website and how internet videos were breathing life back into a dreary Saturday Night Live.
Side Trivia: Ironically, "Lazy Sunday" is nowhere to be found on YouTube today.
As Malcolm Gladwell would say, "Lazy Sunday" was YouTube's tipping point. Within six months, YouTube was not only much bigger than Myspace, it quickly became one of the largest websites in the world.
There was just one problem. Actually two big problems. Problem #1) With all that growth in video views, every month YouTube was bleeding away a small fortune thanks to their exponentially growing bandwidth expenses. To make matters worse, the company had no revenues at all at that point, and no plan for earning revenues anytime soon. Throughout the first six months of 2006, YouTube was reportedly burning through $1 million a month to cover bandwidth costs. And it was money they did not have. Their $11 million in VC money was long gone. At that point they were limping along, possibly towards certain disaster.
Problem #2) The vast majority of videos being uploaded to YouTube back then were copyrighted material. You could watch entire episodes of South Park, The Daily Show, Colbert, SNL, Family Guy, Conan and thousands more. Even full length pirated movies were uploaded! Many industry analysts (most vocally, Mark Cuban) were convinced that YouTube would inevitably be sued into oblivion by Turner, Viacom, NBC/Universal, Disney or all of the above. And YouTube didn't exactly have the money for lawyers.
Viacom did eventually sue YouTube for $1 billion. The lawsuit revealed a ton of interesting factoids about the early days of the site. For one thing, the three YouTube founders traded a bunch of emails where they themselves questioned whether or not it was OK that most of their user uploads were copyrighted material. They also traded emails where they compared their early success to big-boys.com. Slightly more embarrassing was the revelation that many of the copyrighted uploads were actually being uploaded BY THE FOUNDERS! Woops. In one email exchange, Youtube founder Chad Hurley was concerned that too many homemade stunt and prank videos were being uploaded to the site. He emailed the following to his fellow founders:
"We're becoming another big-boys or StupidVideos!"
Steve Chen responded:
What's the difference between big-boys/stupidvideos vs youtube? If you look at the top videos on the site, it's all this type of content."
Google Saves The Day
At a point when a lot of people thought YouTube was either one lawsuit or one bandwidth bill away from going under, Google stepped in and saved the day. On October 9, 2006, Google Inc purchased YouTube for $1.65 billion in stock. Sequoia Capital earned $500 million for its 30% stake (off an investment of $11.5 million). Chad Hurley was given around 730,000 shares of Google which at the time had a value of $395 million. Steve Chen was given 635,000 shares of Google which were worth $326 million. Jawed Karim (who actually left the startup a year earlier to finish his degree at Stanford) walked away with 137,000 shares which were worth $65 million.
And remember, they sold YouTube 100% for Google stock. No cash. At the time the deal closed, Google shares were trading at a pre-split equivalent of $230 a share. As of this writing, Google is trading at $577 a share. That's a more than 2X increase even when you take into account the stock split. Today Hurley, Chen and Karim have personal net worths (after taxes have been removed) of $400 million, $350 million and $140 million, respectively.
Why YouTube Was The Greatest Business Acquisition Ever:
Incredibly, after nearly seven years of legal wrangling, in April 2013 a district court ruled in favor of YouTube over Viacom. Today, more than 1 billion people visit YouTube each month. These visitors watch 6 billion hours of video per month. 100 hours of video are uploaded every single minute. Within two days of buying YouTube, Google's stock price increased by $2 billion, essentially paying for the entire cost of the deal. Within a matter of months, YouTube would become the second largest search engine in the world, behind Google. In 2013, just seven years after the company had no revenue and no plans for revenue, YouTube earned $3.5 billion.
If YouTube was a standalone company today, it's not hard to imagine that it would be worth somewhere between $150 billion and $200 billion. Google picked it up for $1.6 billion. And that is why YouTube was the greatest business acquisition of all time.