Episode 7 YouTube

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, along with guest speakers, delve into the acquisition of YouTube by Google. They discuss YouTube's journey from a startup to a billion-dollar entity, highlighting its explosive growth, the pivotal role of viral content like SNL's Lazy Sunday, and its acquisition for $1.65 billion just 18 months post-founding. Despite its significant cultural impact and status as a video streaming pioneer, they critique YouTube's business model, noting its lack of profitability due to high operational costs and content creator payouts. The conversation also touches on Google's strategic defense in owning the video platform and YouTube's influence on internet infrastructure, albeit with a subpar direct user experience. Additionally, the episode examines the broader implications of video consumption trends and the shift towards ad-supported models.

• Pilot is a sponsor for the episode and provides accounting, tax, and bookkeeping services for startups and growth companies.
• Pilot is the largest startup-focused accounting firm in the U.S.
• The company is backed by notable investors including Sequoia, Index, Stripe, and Jeff Bezos.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs and in fact now is the largest startup focused accounting firm in the US."

The quote explains Pilot's services and its position as a leading accounting firm for startups in the U.S.

• Pilot's growth from a startup to a billion-dollar company is highlighted.
• The company's philosophy aligns with Jeff Bezos' axiom that startups should focus on their core product and outsource non-core activities like accounting.

"When we started working with them way back when they were just a startup themselves, and now they're a billion dollar plus company backed by Sequoia, index, Stripe, and even Jeff Bezos himself."

This quote highlights Pilot's impressive growth trajectory and the high-profile backing it has received.

• Pilot offers a comprehensive suite of financial services including finance, accounting, tax, and CFO services.
• The firm works with thousands of startups, including well-known companies like OpenAI, airtable, and Scale.

"Pilot both sets up and operates your company's entire financial stack. So finance, accounting, tax, even CFO services like investor reporting from your general ledger all the way up to budgeting and financial sections of board decks."

The quote details the extensive range of financial services provided by Pilot and emphasizes their capability to manage a company's entire financial operations.

• Google is speculated to become the most valuable company in the world, potentially surpassing Apple.
• The discussion is based on Google's earnings announcement and subsequent market speculation.

"We sit here on the eve of the announcement that Google is the most valuable company in the world to tell you about Google's."

The quote sets the stage for the discussion about Google's market valuation and introduces the topic of the episode.

• The conversation acknowledges that the claim about Google's valuation is conjecture and not typical of the show's usual content, which avoids speculation.

"In steep contrast to what we normally do on this show, that is just conjecture and hypothesis we never conjecture."

This quote indicates that the hosts are deviating from their usual approach by discussing market speculation, which they generally avoid.

• YouTube's acquisition by Google is considered a significant event, given YouTube's rapid growth and the relatively short time between its founding and acquisition.
• YouTube was founded by former PayPal employees and was one of the first investments by Sequoia Capital's Roloff Botha, a PayPal alum.

"YouTube was founded early 2005 by two former engineers and one former designer from PayPal, part of the much ballyhooed PayPal mafia."

The quote provides background on YouTube's founding team and their connection to PayPal, as well as the involvement of Sequoia Capital and Roloff Botha.

• The "Lazy Sunday" SNL sketch played a pivotal role in YouTube's early viral growth, with millions of views contributing to its popularity.

"Lazy Sunday comes out and a whole bunch of people video their tvs and post it to YouTube. And I don't know if this was in aggregate or just one of the versions of the clips of. This clip of Lazy Sunday generates 7 million views on YouTube, which was huge."

This quote highlights the significance of the "Lazy Sunday" video in catalyzing YouTube's growth through viral viewership.

• YouTube's funding history is discussed, including a Series A led by Sequoia and a Series B involving Artis Ventures.

"So it was founded in early 2005, and then in November of 2005, Sequoia and Roloff come in and they lead a $3.5 million series A."

The quote outlines the early investment rounds that YouTube secured, emphasizing Sequoia's role in the Series A funding.

• Google's purchase of YouTube for $1.65 billion is characterized as an incredible achievement given the short time span and the venture capital raised.

"Incredible. I mean, this is just over a year and a half after the founding of the company, literally in a garage. They'd only raised eleven and a half million in venture capital."

This quote expresses amazement at the rapid success and high valuation of YouTube at the time of its acquisition by Google.

• The acquisition occurred in a time when such large deals were uncommon, contrasting with the later acquisition of Instagram by Facebook.

"This kind of stuff, and this was 2006. This stuff didn't happen in 2006."

The quote places the acquisition in historical context, noting how extraordinary such a transaction was for that time period.

• Viacom's lawsuit against YouTube for copyright infringement is discussed, highlighting the legal challenges and the protracted battle over content rights.

"In March of 2007, Viacom files a $1 billion lawsuit against YouTube, accusing the company, the directors, and I can't remember if Google was named in the suit or not, of knowingly and blatantly violating copyright laws."

The quote details the serious legal accusations Viacom made against YouTube, setting the stage for a long legal battle over copyright issues.

• The lawsuit led to the public disclosure of investment memos and testimony, providing insights into YouTube's early risks and the strategic thinking behind the acquisition.

"There's this amazing byproduct of the lawsuit, which is the disclosure process, and we get to see it's just public in the public domain, all of this incredible material and testimony about YouTube, about Sequoia's investment in YouTube, about the acquisition."

This quote explains how the lawsuit inadvertently resulted in the release of valuable information about YouTube's early days and its acquisition by Google.

• The disclosed investment memo candidly addressed the risks of competition and defensibility, with a focus on user experience rather than network effects.

"The key risks that they identify in here could not be more candid and could not be more real of concerns."

The quote emphasizes the forthrightness of the investment memo in identifying potential risks and challenges for YouTube.

• YouTube's reliance on traffic from other channels, such as Facebook, is seen as a potential weakness, with the platform described as a "super fancy CDN."

"I'm a little bit bearish on YouTube primarily because it's not a destination site."

The quote expresses skepticism about YouTube's long-term position due to its dependence on external traffic sources for content discovery.

• Testimony from Google's then-CEO Eric Schmidt revealed that Google paid a premium to acquire YouTube to prevent competitors from buying it.

"He testified that he told Google's board in the days leading up to the acquisition and as they were working on it, that he thought YouTube was worth about 600 to 700 million."

The quote provides insight into the strategic considerations behind Google's acquisition price for YouTube, highlighting competitive concerns.

• Viacom claimed YouTube needed financing for lawsuits to avoid going out of business.
• Despite YouTube's product-market fit and rapid growth, legal issues prompted a sale.
• Facebook, another rapidly growing platform at the time, is mentioned for comparison.

"We have no, that's what Viacom argued. Yeah, and ultimately lost, we should say. But, yeah, super interesting. You've got this property, this product that is clearly incredible product market fit growing like, I don't know, anything, I think nothing that the Internet had ever seen until that point. I mean, maybe, I guess Facebook existed then, so was probably growing at a similar rate and yet had these massive existential questions that even though it was a huge price, leads them to actively try and sell the company. Only 18 months in."

This quote highlights the juxtaposition of YouTube's significant growth and product appeal against the backdrop of legal challenges that threatened its existence, prompting the decision to sell.

• Google's purchase of YouTube was primarily in stock, with minimal cash involved.
• The reasons behind Google's stock-heavy transaction are speculated upon.
• The value of the stock since the acquisition is considered to have increased significantly.
• Sequoia, a major shareholder in Google, also had significant investments in YouTube.

"Yeah, and the interesting thing about the sale too, it's almost entirely stock. It was only 15 million in cash and the rest in stock."

This quote points out the structure of Google's acquisition of YouTube, which was notably heavy in stock rather than cash, indicating strategic financial planning or constraints at the time.

• Time magazine named "You" as Person of the Year in 2006, symbolizing user-generated content's impact.
• YouTube's video views and unique visitor numbers showed exponential growth from 2006 to 2013.
• YouTube's growth trajectory is noted alongside the rise of other digital streaming services like Netflix.

"By May of 2010. So four years later, YouTube is up to 14 billion video views a month from 100,000,004 years earlier. By 2013, YouTube has 1 billion monthly unique viewers visitors, and the growth has just continued since then."

The quote underscores YouTube's rapid expansion in terms of video views and unique visitors, marking it as a dominant player in the digital content space.

• YouTube's ad-supported model is contrasted with subscription-based services like Twitch and Netflix.
• Despite high revenues, YouTube's profitability was break-even due to content creator payments and other costs.
• The average revenue per user (ARPU) for YouTube is discussed in comparison to other social platforms.
• YouTube Red, a subscription service, was introduced as a strategy to increase profitability.

"Yeah, 4 billion in revenue growing fast. But after payments to content creators and hosting costs and ad sales costs and all associated stuff about a break even business, zero profit."

This quote highlights the challenges YouTube faced in achieving profitability despite high revenue, due to significant operating costs associated with an ad-supported model.

• YouTube's cost structure differs from other content platforms due to video hosting and content payments.
• The company's investment in content creators is compared to platforms where content is posted for free.
• YouTube's strategy to attract content creators with payments is contrasted with Twitch's free streaming model.
• The shift from YouTube's traditional ad platform to a subscription model could indicate a strategic pivot.

"YouTube splitting 55% of their ad revenue out and paying it out to those producers."

The quote emphasizes YouTube's revenue-sharing model with content creators, which is a significant factor in its cost structure and affects its profitability.

• The acquisition of YouTube by Google was a case study in an investment banking interview.
• The shift to YouTube Red is considered potentially short-sighted if YouTube remains ad-focused.
• The discussion includes the mention of a possible grander plan for YouTube's business model.

"This is a particularly fun episode because my very first job interview, or interview for my very first job when I worked at UBS in investment banking after college, I was interviewing in January 2007 and this acquisition had just been announced and I did this as a case study."

This quote provides a personal connection to the historical context of YouTube's acquisition, illustrating its relevance in the business and finance world.

• Statsig is introduced as a new sponsor for the episode.
• Statsig's feature management and experimentation platform is described.
• The platform's capabilities in linking product features to business metrics are highlighted.

"So now Statsig is the modern version of that promise and available to all companies building great products."

The quote introduces Statsig as a tool for companies to make data-driven decisions, emphasizing its role in the product development ecosystem and its connection to the episode's sponsor.

• Statsig is highly effective for deploying and testing AI features.
• Notion's rapid product evolution was facilitated by Statsig.
• Statsig integrates with data warehouses, accommodating various data storage solutions.
• The platform is compatible with existing feature flagging systems, negating the need for migration.

" is a great platform for rolling out and testing AI product features. So for anyone who's used notion's awesome generative AI features and watched how fast that product has evolved, all of that was managed with Statsig?"

This quote highlights Statsig's capability in managing the rollout and testing of AI product features, specifically mentioning Notion's use of generative AI features.

• The acquisition category is typically divided into people, technology, product, business line, and other.
• YouTube is considered a "loss leader" for Google, contributing to its advertising portfolio.
• The acquisition of YouTube by Google is categorized as "other" due to its strategic value beyond the product itself.
• YouTube's integration with Google's search algorithm and data analytics is significant.

"But I think I'm actually going to go with other on this one. And I think it's a little bit what you were talking about just now, Ben, but I'm not unique in coming up with this and I was inspired by a few articles that I read in preparing for this show."

David Rosenthal expresses his inclination to categorize the acquisition of YouTube by Google under "other," influenced by external analyses and the strategic value YouTube brings to Google's ad portfolio.

• Google had its own video search platform before acquiring YouTube.
• Google Video continued to operate post-acquisition, allowing video uploads.
• YouTube outperformed Google Video in growth and engagement.
• The scrappiness of YouTube and its ability to accumulate a user base and content was a key differentiator.
• YouTube's strategy included hosting content without proper rights, which later became a legal issue.

"So what were they doing wrong? I mean, why did they need YouTube? And why couldn't they do it with Google Video? Where did they fail there?"

Ben Gilbert questions the shortcomings of Google Video and why Google felt the need to acquire YouTube, prompting a discussion on the strategic and operational differences between the two platforms.

• YouTube played a crucial role in popularizing streaming media.
• Broadband penetration was not as widespread before YouTube's rise.
• The concept of streaming, including live streaming, was not mainstream before YouTube.
• Embedding videos on personal websites and blogs helped spread YouTube's popularity.

"Yeah, the live streaming that we think of now, but even just streaming media, I mean, real networks was a thing, obviously, and we're here in Seattle, but before YouTube and broadband penetration wasn't basically 100% that it is now."

David Rosenthal reflects on the state of streaming media before YouTube's influence and how the platform helped shape modern media consumption habits.

• Startups often engage in practices that can lead to legal challenges, such as YouTube's early content policies or LinkedIn's invasive email tactics.
• These practices can create "unfair advantages" but may result in significant penalties later.
• Microsoft's MS-DOS sales tactic is another example of a practice that was later deemed illegal.

"There's one, there's one more insanely good one that I heard recently that's quite a bit older. Microsoft apparently had this practice where they would sell you the rights to use MS DOS, but it didn't matter whether you actually put MS DOS on that computer or not."

Ben Gilbert discusses historical instances where companies engaged in questionable tactics to gain market dominance, comparing them to YouTube's early practices.

• User-generated content, broadband adoption, and inexpensive video capture devices are identified as key tech themes.
• A wave analogy is used to describe the progression from blogging to photos, and ultimately to video.
• The memo from Sequoia Capital predicted video as the next significant wave.
• The proliferation of devices capable of capturing video was integral to YouTube's growth.

"So that's one, two, continued broadband adoption I mean, this would not have been possible without broadband. And then three, the quote is wide proliferation of inexpensive video capture devices."

David Rosenthal extracts key points from Sequoia Capital's memo, emphasizing the importance of broadband and accessible video capture technology in the rise of platforms like YouTube.

• The acquisition of YouTube by Google happened just before the launch of the iPhone, which along with other factors, created the opportunity for YouTube's growth.
• Google's bet was on the shift from traditional television to online video consumption, anticipating the future of cord-cutting and online video services.

"Yeah. I mean, you think about when this acquisition happened. Was it like October of 2006? Yeah. I mean, not even a year before the iPhone." "But they made a big bet that people would move from watching their televisions to watching video online."

The quotes highlight the timing of Google's acquisition of YouTube in relation to the advent of the smartphone era, specifically the iPhone, and Google's foresight in predicting the shift in media consumption habits.

• Google's acquisition of YouTube was a defensive strategy to ensure their place in the value chain of people's attention, especially as video on the Internet became more prevalent.
• The acquisition was seen as necessary because Google Video was not successful, and other potential acquisitions or internal efforts may not have been as fruitful.

"Google was making a defensive move that if that's how people are spending time in the future, then we need to be able to put advertising in front of them during that time to monetize it."

The quote explains Google's motivation behind acquiring YouTube, which was to secure a position in the emerging online video market to continue capitalizing on user attention through advertising.

• A significant percentage of Google searches lead to YouTube, and if YouTube were not owned by Google, it could have been a threat to Google's business model.
• The concern was that if a single site gains enough traffic, it could gain leverage over Google or become a direct destination, bypassing Google's search engine.

"I don't know, I'm going to pick a number out of thin air. But 10%, 15% of Google searches, I think that feels reasonable to me, end up in a YouTube link."

The quote indicates the substantial amount of Google's search traffic that ends up on YouTube, emphasizing the strategic importance of YouTube to Google's ecosystem.

• YouTube has generated significant revenue but has struggled to achieve profitability, which raises questions about its success as a business.
• Despite its shortcomings as a product, such as user experience issues, YouTube has had a profound impact on the Internet by popularizing streaming media and video embeds.
• The platform has democratized video creation and enabled a new generation of content creators and celebrities.

"YouTube, unfortunately, I don't think has been a particularly good business. As we've established, we're ten plus years into the company and revenues are great, but profits are basically zero."

The quote critiques YouTube's financial performance, acknowledging its high revenue but highlighting its lack of profitability.

• The acquisition is graded as a 'C' overall, with a split between its business performance and its impact as a product.
• Despite the challenges, the acquisition is still seen as a worthwhile investment for Google, aligning with the company's moonshot thinking and its impact on the digital landscape.

"I think if you asked Larry and Sergey and Eric if they could go back to 2006 and would they spend $1.65 billion for YouTube, I think they would do that all day, every day."

The quote suggests that despite the challenges, the founders of Google would still see the acquisition of YouTube as a valuable decision, given its strategic importance and impact on the Internet.

• Crusoe is presented as a company that provides a clean compute cloud specifically for AI workloads, partnering with Nvidia and utilizing wasted, stranded, or clean energy.
• Crusoe's data centers are located at stranded energy sites, which allows them to offer better performance per dollar than traditional cloud providers due to lower energy costs.
• The company's unique positioning allows it to operate in remote locations where energy is available, unlike other cloud providers that need to be near Internet traffic hubs.

"Because Crusoe's cloud is purpose built for AI and run on wasted, stranded or clean energy, they can provide significantly better performance per dollar than traditional cloud providers."

The quote highlights Crusoe's unique value proposition of providing a specialized AI cloud infrastructure that is both cost-effective and environmentally friendly due to its use of otherwise wasted energy sources.