GOOGLE WAS BOLDLY MAKING CHANGES. It outmaneuvered Murdoch, Viacom, and Yahoo and stunned the media world when in October 2006 it purchased YouTube for $1.65 billion. The deal eclipsed any that Google had done before, and the potential impact of YouTube was vast. Since its start in February 2005, YouTube by the fall of 2006 was attracting thirty-four million monthly viewers, or four out of every ten video Web site visitors. And this number was soaring. What visitors viewed on YouTube was mostly “user-generated content,” or short homemade video clips: a pet trick, an artfully told joke, firsthand footage of the devastation from Hurricane Ka trina, Janet Jackson’s “wardrobe malfunction” at the Super Bowl-that users uploaded and sent to YouTube. Increasingly, though, YouTube was expanding its audience with clips from Saturday Night Live and The Daily Show with Jon Stewart, with sports highlights and music videos; these, too, were recorded and shared by users, arousing piracy concerns.
The reason YouTube was persuaded to sell, said cofounder Chad Hurley, then twenty-nine, was simple: They feared the site lacked the resources to cope with its explosive growth. “When we started, we thought one million daily uploads would be great.” Instead, they were getting a hundred times that many. “We thought we’d burn up our bandwidth. We worried our servers would go down.” The marriage to Google, he said, meant more investment capital, more servers and computers, more brainpower, more help finding partners and figuring out how to place advertising on their site. “We needed resources to scale the company. We only had a staff of sixty people dealing with the weight of the world. An option was to raise more money and hire more people and take a long time. But we were visible, unlike the early Google. We had competition. We were challenged by the old media.” He and his cofounder, Steve Chen, were enamored of Google’s focus on users and its emphasis on the long term. “They wanted to give us the freedom not to have to maximize revenues right away.”
YouTube and Google’s ambitions were immense. Hurley described the site as “a democratic platform” for user-generated and “independently produced content.” He vowed that the “creative people who produced content would have more opportunities in the future without answering to a network.” Had network executives heard those words, their paranoia would, no doubt, have been stoked. They would have been even more perturbed to hear Eric Schmidt say that YouTube’s real challenge was to figure out how to sell advertising. “If that works,” he told me, “it will seem like the birth of the CBS network in 1927.”
Because YouTube was making no money, there was a fair amount of sneering from media executives. Like Napster, they said YouTube would be hobbled by copyright lawsuits and would be unable to monetize its enormous traffic. “Right now,” Microsoft CEO Steve Ballmer declared, “there’s no business model for YouTube that would justify $1.6 billion. And what about the rights holders? At the end of the day, a lot of the content that’s up there is owned by somebody else.” That “somebody else,” the broadcast and cable networks believed, was them. YouTube, they asserted, built its success on their backs; thirteen of the twenty most popular videos on the site, the Wall Street Journal reported in early 2007, were professionally made, not user generated. Sumner Redstone, whose Viacom owned The Daily Show With Jon Stewart, told Charlie Rose, “There are some issues with YouTube. They use other people’s products. The only way they avoid litigation now is they stop doing it if you call them.”
To acquire YouTube, Google tapped its enormous market capitalization. The company’s stock value at the time the deal was announced was $132 billion, giving it a competitive advantage over the largest media companies on earth, none of which was worth more than one-third this amount. Those still oblivious to the challenge posed by Google were awakened by the YouTube acquisition. “They can buy anything they want, or lose money on anything they choose to,” said Irwin Gotlieb. “I can only do things that are rational to do for my business.”
Media companies were chasing a new fox. It did not go unnoticed by Gotlieb-or other savvy executives-that Google was expanding its online advertising portfolio to include video. Or that YouTube users would only swell Google’s unmatched database. More ominous for traditional media, Google, despite its denials, was now in the content business. Like the television networks, YouTube publishes content produced by others and sells advertising. The more consumers linger on YouTube, the more pages they view, and the more page views, the more YouTube’s ad rates rise. In search, Google sped users off its site without any particular interest in their destination; with YouTube, it had a stake. The purchase of YouTube represented something else as well. Their Google Video store, announced by Larry Page nine months earlier at the Consumer Electronics Show, was a flop. “YouTube was an admission by Google that they couldn’t just build things,” said Danny Sullivan, longtime editor of Search Engine Land.
WHAT FOLLOWED was a protracted round of negotiations between the broadcast and cable television companies and Google. The discussions revolved around three issues: money, copyright, and trust.
Money was a stumbling block. Traditional media companies sought a version of the system they had long relied upon: an up-front license fee from distributors to air their content. Google agreed to pay something but argued that with a new distribution platform they should not be locked into old and expensive formulas. YouTube, Google argued, was a terrific promotional platform that would expand traditional media’s audience. The networks countered: Show me the money! Cable networks also claimed that if they licensed their content to YouTube for a lower price than they charged distributors, cable systems owners would demand the same discount.
After months of negotiations, traditional media walked away. “They didn’t value our content at a price point we thought was worthwhile,” said NBC/Universal CEO Jeff Zucker. “They built YouTube on the back of our content, and wouldn’t pay us.” NBC, like other television and cable networks, refused to allow their programs to appear on You Tube, though the network has not loudly protested as YouTube clips boosted the ratings of, for example, Saturday Night Live. Philippe Daumann, the CEO of Viacom and Sumner Redstone’s longtime legal adviser, complained that it was frustrating to negotiate with Google. “Every time we thought we came down to a certain point, they changed their mind,” he said. “And they changed the people in the negotiations. I learned that Google had an interesting management structure. I talked to their CEO, and then when Eric went down a certain path he had to have a discussion back in Mountain View with his two associates. Often there would be a total change in direction.”
Schmidt countered that Viacom made demands Google could not meet, including an insistence on large up-front license fees. Because YouTube had “no revenue at the time,” he said Google proposed to share advertising revenues rather than pay an up-front fee. We would “give the majority of revenue to them,” said Larry Page, “as long as it’s real revenue.” Viacom and others declined. Asked how he justified locking into an agreement with, say, AOL, to guarantee payments when AOL chose Google as its search engine, Schmidt said, “We had competition at the time.” This suggests that with YouTube, Google was not looking over its shoulder at Microsoft. Google’s position was at least partly shaped by a belief that it had leverage in this negotiation.