In The Plex

by Steve Levy

  YouTube also benefited from taking a tolerant stance toward users who uploaded music videos, snippets from TV shows, and scenes from movies without the permission of those who owned the copyrights. In an email sent in September 2005, Hurley worried about the “truckloads” of copyrighted content. Chen successfully argued that YouTube should just press forward. Even though YouTubers knew that people who were uploading videos didn’t really have the right to do so, they believed that YouTube would be all right as long as there weren’t complaints from copyright holders about specific videos, in which case they could respond. Otherwise, they would simply assume that copyright holders permitted their content to appear on YouTube. Chen’s instinct in this case turned out to be a canny interpretation of the Digital Millennium Copyright Act, which promised a “safe harbor” to sites hosting uploaded content. But the decision to take a lax view of policing copyright was less likely a legal judgment than one determined by the carpe diem ethic of a start-up.

  The giant entertainment conglomerate Viacom would eventually sue YouTube, its attorneys arguing that the copyrighted content uploaded by users was the main reason for YouTube’s success. More likely, it was the combination of the copyrighted content and the millions of videos created by the users themselves that made YouTube a unique and valuable property. YouTube was a magnet for videos old and new, and its very existence led people to create their own. In tandem with an emergent library of (mostly unauthorized) professionally produced clips, YouTube became an unbeatable destination where the short videos on the site (YouTube limited contributions to ten minutes, and most were under three) were consumed like potato chips. As soon as one was finished, the site offered suggestions for similar diversions, or maybe watching that clip reminded you of something else you wanted to see. Could YouTube provide video evidence that a long-haired hairdresser turned rock singer named Monti Rock III had actually been a frequent guest on early 1970s talk shows? Or was that some hashish dream you had? There he is, on Johnny Carson and Merv Griffin! What’s more, there’s a clip recently uploaded from Monti, alive and well, doing a cabaret act in Miami Beach!

  In short, YouTube was beginning to become a video version of Google search. In mid-2005, Google Video instituted its own system for users to upload content. “Response has been great,” Feikin said at the time but took pains to add that such uploads—which did not get the viral boosts so often given by YouTube’s happy fans—were only one component of Google Video, which would deal with “the whole gamut of content.” And when it came to enforcing copyright, the difference between YouTube and Google Video was as stark as the contrast between Ferris Buehler and his principal. To keep on the sunny side of the studios it was wooing, Google took pains to avoid hosting pirated content. But there was also the feeling that copyright violations, when you came right down to it, were evil. For much of 2005, Google’s policy was to police videos over two minutes long to make sure they didn’t infringe. Even that was deemed too much for a public company to tolerate. In December 2005, Feikin sent a memo to her team saying that the two-minute restriction was gone and Google would now do a sweep to find copyright violations of any length. She included a list of the top twenty search terms of copyrighted material, starting with “Family Guy” and ending with “Dragonball Z.”

  By that time, Google was finally ready to roll out what it called the Google Video Store, an attempt to offer an online bazaar where users could get high-quality content. The offerings were a mishmash of content obviously organized by the principle of “this is what we got.” Unlike the iTunes store, where television shows all cost $2, Google’s prices were all over the lot. Its big attractions were CBS shows—prime-time episodes, and some “classics” from the archives, which seemed to be chosen at random, cost $2. (A couple of old Ed Sullivan shows cost $10 each.) There were one-dollar episodes of Charlie Rose, but no Jon Stewart or any other late show. NBA games were available for sale a day after they concluded—for the price of $3.95. You could see Bullwinkle cartoons, but forget about Mickey Mouse or Daffy. Music videos from Sony were on the service ($2) but no other major music company licensed its music videos. The most prominent movie studio Google convinced to show full-length movies on the service was an independent operation, GreenCine—the highlights of its meager inventory were films by the Polish director Andrzej Wajda and the documentary Mau Mau Sex Sex. The only way you could watch any of these offerings was with Google Video’s finicky player.

  In contrast, YouTube was dead simple: everything was free, you could find clips from just about anything, and it played inside your browser. God knows where its users had gotten access to some of the stuff they put up there, but because of the company’s lax policy of policing its archives, YouTube managed to have just about anything you were looking for. YouTube users had uploaded a popular clip from Saturday Night Live called “Lazy Sunday,” which became a phenomenon—5 million people streamed it until NBC demanded that YouTube remove the clip seven weeks after its appearance. The clip jacked up YouTube’s traffic by 83 percent. Later, it was cited as the event that restored luster to the aging SNL. Content providers were confused about how to deal with YouTube, but they were beginning to realize that its popularity made it impossible to ignore.

  Google had an auspicious opportunity to launch its video store in January 2006: its first ever keynote presentation at the annual Consumer Electronics Show. In an uncharacteristic display of enthusiasm for public speaking, Larry Page volunteered to do the presentation. Keynotes at CES were carefully choreographed, almost as if they were artifacts from the era of auto shows in the 1950s. Page had his own ideas. Ever the AI enthusiast, he had become enamored of Stanford University’s winning entry in a 2005 competition for autonomous robot vehicles; its modified Volkswagen Touareg, nicknamed Stanley, was the first across the finish line in a 183-mile driverless desert trek. Page wanted to ride onto the Las Vegas Hilton stage (where Elvis once reigned) on Stanley’s roof while the car itself did the driving. Even when the Google planners told him such a stunt was impossible—try getting insurance for an autonomous SUV driving a billionaire into a crowded auditorium—Page insisted. He backed down only when the head of the Stanford AI lab, Sebastian Thrun, confirmed that the plan was madness. They compromised by having Stanley’s human test driver take the wheel.

  Unlike other tech execs in well-tailored suits, Page gave his speech in a lab coat, spending much of the keynote ranting about the incompatibility of power supplies in consumer devices. By the time he got to a description of the Google Video Store, people were scratching their heads. When celebrities representing partners in the store did quick walk-ons—there were an NBA player and CBS’s head, Leslie Moonves—they seemed to have dropped in from some different planet, where cars didn’t drive by themselves and corporate executives didn’t wear lab coats. And as Page tried to explain the product details, it was clear that he was fuzzy on the complicated payment structure.

  The keynote did end on a high note. Page had insisted that there be a question period, almost as if he were running a Google TGIF. This was almost unheard of in CES keynotes. The people at Google in charge of the speech came up with an inspired idea: they spent a bundle to book the comedian Robin Williams (a huge Google fan) as Page’s sidekick for the Q and A. The conceit was that Williams would be a human Google. The comic’s manic improvisations made people instantly forget the awkwardness of Page’s presentation. The funniest moment came when a French reporter began to ask a tough question of Page but could not finish due to Williams’s relentless, politically indefensible, and utterly hilarious mocking of the man’s accent and nationality. The unfortunate Frenchman sputtered with rage. The moment fit Google perfectly: corporate presentation turned as anarchic as a Marx Brothers skit.

  After the launch came the reviews of Google Video; they were uniformly dismal. Google Video was clearly a hobbled entrant into a race where one dog was already circling the track in a blur. Yet for the next few months the Google Video team pressed on. In the sprin
g of 2006, the group spent weeks preparing an elaborate strategy to fend off YouTube, but the numbers presented in their slides undercut the delusional promises that a new approach could lead it to “win” the online video market. The Google Video team acknowledged that “the user-generated trend is huge” but didn’t seem to grasp how dominant YouTube was becoming—the little start-up located over a pizza shop was streaming 25 million videos every day, more than three times as many as Google. The Google Video team seemed to take comfort in reporting that premium content owners—which it still considered the key players in the field—viewed YouTube as “a small start-up with no cash,” “perceived as trafficking in mostly illegal content.”

  But some of their bosses saw YouTube as something else: an acquisition target. “They had beaten us—we had underestimated the power of user-generated content,” Google’s counsel David Drummond would later say. “And so we looked up one day and saw YouTube building an edgy fun brand, in a way that Google Video wasn’t. We imagined that if you put that on the Google platform, and, you know, with Google distribution, Google machines, and everything, you’d take it, you’d really, really accelerate.”

  Google wasn’t the only suitor; Yahoo was interested as well, as were a number of more traditional media companies, hoping to defibrillate their flatlined Internet sites. But for most of 2006, YouTube’s Hurley and Chen professed not to be terribly interested. “They were talking a few hundred million dollars, and we thought there was a bigger opportunity. Our whole idea was that we were going to take this thing as far as possible,” says Hurley, neatly summing up the dynamics of YouTube’s vacillation. Hurley and his partners were building a company for the long run, while simultaneously poising themselves to accept the right offer from the right company. In an August 2005 video the founders made after visiting Sequoia (Mike Moritz’s venture capital firm)—a clip definitely not uploaded to YouTube—the giddy Karim asked, “At what point would we tell them our dirty little secret, which is that we actually just want to sell out quickly?”

  As the months went on, Hurley and Chen determined that the time to sell was now. YouTube was too popular: it was overwhelmed by traffic. To build up infrastructure would require a lot more money than the original $3.5 million in venture capital it had received from Sequoia. YouTube got another round of funding for a total of $11.5 million, but even then it would struggle. Serving millions of videos a day was just plain expensive.

  Grappling with this reality in the early fall of 2006, Hurley and Chen concluded that they had to sell. Yahoo and Google were the front-runners. Hurley and Chen barely knew the Google ruling troika, having met them only once at the previous summer’s Sun Valley mogul conference. But once Google realized that YouTube was truly in play, Salar Kamangar sent out the alarm. “I was building a case for why it would be worth it to us to buy them at the price they were then asking for, which we’d previously thought was too much. We heard that they were going to be sold, most likely to Yahoo” says Kamangar, who teamed up with Drummond as the biggest advocates of the deal. They set up a series of meetings at the Denny’s in Redwood City, between Mountain View and YouTube headquarters in San Mateo. The YouTubers told Schmidt that their goal was to democratize the video experience online, and they felt that the idea resonated with him—after all, wasn’t that what Google wanted to do for the whole web? The meeting with Brin and Page went well, too. At one point Page turned to Hurley and asked, “Are you sure you want to sell your business?” That impressed Hurley—it meant that Larry cared about a good match, too. “They were authentic,” says Hurley of the founders.

  Hurley and his partners had gone by their instincts all along, although Hurley had gotten some advice from his father-in-law, Jim Clark, the entrepreneur who had founded Silicon Graphics and Netscape. Now their collective gut was telling them that Google was the right match. So they trusted their instincts one more time.

  The “few hundred million” that Hurley originally mentioned didn’t come out of the air—it was probably a fair valuation of the company. In fact, Schmidt would later say in a deposition in the Viacom lawsuit that he estimated that YouTube’s worth at that point was between $600 million and $700 million. “It’s just my judgment,” he said. “I’ve been doing this a long time.” But Google wound up paying $1.65 billion to close the deal with YouTube. “I’m not very good at math,” said the deposing attorney, “but I think that would be $1 billion or so more than you thought the company was, in fact, worth.” Schmidt provided an excellent summary of deal making in Internet time, embodying the Google principles of speed, scale, and minimizing opportunity cost.

  This is a company with very little revenue, growing quickly with user adoption, growing much faster than Google Video, which is the product that Google had…. In the deal dynamics, the price, remember, is not set by my judgment or financial model, or discounted cash flow. It’s set by what people are willing to pay. And we ultimately concluded that $1.65 billion included a premium for moving quickly and making sure we could participate in the user success in YouTube.

  If Google had been inclined toward remorse about the price, such worries were surely mitigated by a letter sent by Rupert Murdoch’s Twentieth Century Fox as the deal was closing. It declared that whatever Google was paying, Fox would pay more. In early October, as both parties scrambled to complete negotiations, both camps spent all-nighters working out the term sheets. As it happened, Google was hosting the Google Zeitgeist conference on its campus, to which partners, tech luminaries, and some press were invited. Hurley and Chen had long ago been invited, and when Drummond and other Google executives interacted with them at the conference, they all pretended that they hardly knew one another. “We were like, ‘Good to meet you,’ even though we’d been up all night negotiating this thing,” says Drummund. Google’s board convened to approve the deal in the middle of the conference, and Drummond had to smuggle Hurley and Chen individually into the meeting past curious onlookers. (Since Sequoia Capital had funded YouTube—and stood to rack up $516 million from its $9 million investment—Google board member Mike Moritz recused himself, but he was obviously ecstatic. “I always felt that YouTube done right was the fourth horseman of the Internet,” he says.)

  “This is the next step in the evolution of the Internet,” said Schmidt in the conference call announcing Google’s biggest deal to date.

  In the euphoria that came with winning YouTube, Google didn’t dwell on a disturbing implication: the purchase was necessary only because its own initiative had failed. Barely a year after going public, some of its fears had been realized: when it came to plotting certain revolutions, the company was now at a distinct disadvantage. The emails and internal presentations from both companies revealed a striking contrast. The Google Video team had spent an enormous amount of time getting approval and advice from executives. Also, Google Video—whose product manager was herself a lawyer—was constrained by oversight by a legal team all too aware that a deep-pocketed public company could not behave with the insouciance of a start-up. The YouTube team, however, didn’t have to create multiple drafts of slide shows for bosses. They did what felt right. “It’s all ’bout da videos, yo,” wrote Karim at one point to his cofounders.

  But after the purchase, Google did something very smart. Almost as if acknowledging that overattention from the top had hobbled Google’s original video effort, the company made a conscious decision not to integrate YouTube. “They were edgy and small, and we were getting big,” says Drummond. “We didn’t want to screw them up.” (Google was also smarting from its $900 million acquisition of dMarc Broadcasting, a company dealing in radio advertising, which had not gone well. “They had tried more of a top-down approach with dMarc and considered that a disaster,” says Hurley.) YouTube would keep its brand and even stay in the building it had recently occupied in San Bruno, a former headquarters of the Gap. Though some aspects of Googliness would find their way up Route 101 to YouTube (such as free food and a climbing wall), the culture of YouTube
—more Hawaiian shirt than T-shirt, with a dash of New York hipster vibe and guilty-pleasure subscriptions to Entertainment Weekly—would persist. One open area had a putting green, more in the miniature golf spirit than as an aid to lowering one’s handicap. The conference rooms were named after TV shows that had gone off the air before much of the workforce was born.

  Not that Google was hands off. Part of the deal’s logic was that the bigger company would lend its expertise and resources to YouTube to help it grow and, eventually, turn a profit. Now that YouTube could tap Google’s resources, it could do things even better. Chen and YouTube’s engineering team worked with Google’s experts on data centers and fiber, as well as product management. And certain Googlers used the YouTube acquisition to reboot their own careers in a company that seemed bigger and more impersonal than the one they had joined only two or three years before. Chad Hurley welcomed them, at least those simpatico with the YouTube microculture. Unlike Android, YouTube didn’t have autonomy in hiring, and Hurley was frustrated when candidates he liked were nixed by Mountain View. “It slowed us down,” he admits. “Google gave us the freedom to fight for people we really cared about, but over time it gets a little tiring to fight.” It was much easier to bring in Googlers who wanted to reexperience life at a smaller company.

  In San Bruno, they would call the 2007 holiday the YouTube Christmas, where all sorts of devices—iPhones, other phones, set-top boxes—came with YouTube inside. The consumer electronics manufacturers loved it, because adding YouTube was a signal to customers that it was time to buy new gadgets that could do new tricks. “Watch YouTube on your phone, that’s a value I can understand,” said Hunter Walk, who was a key Googler-turned-YouTuber.