Acquired - Episode 7: YouTube

Episode Date: February 3, 2016

Ben and David test the widely-held belief that YouTube was one of the most successful tech acquisitions of all time. In today's world of next-generation video platforms, mobile video, streaming, and chord-cutting, was it actually a great purchase by Google? As discussed in the show, here is Sequoia's original YouTube investment memo - a rarely-shared gold mine for anyone interested in startup investing.Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!

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We've got the truth. Welcome to episode seven of Acquired. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today 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 acquisition. Google announced that they were the most valuable company in the world to tell you about Google's Google announced that they were the most valuable company in the world uh what Google announced earnings oh yeah people are speculating that it might uh I haven't checked the price I haven't checked the stock price but that it Google's market cap might pass Apple's tomorrow ah gotcha so mr market will tell yeah in in uh steep contrast to what we

normally do on this show that is just conjecture and and uh hypothesizing we never conjecture on this show we're going to talk about um kind of an older acquisition when when you uh look at the the companies that we've looked at so far, Google acquiring YouTube. David, why don't you take it away with acquisition history and facts? Will do. So YouTube, this is a big one. YouTube was founded early 2005 by two former engineers and one former designer from PayPal.

Part of the much-ballyhooed PayPal mafia. And interestingly, we'll get more into this later, YouTube was one of the very first investments at Sequoia by another member of the PayPal mafia, Rolof Bothe. Just keep it in the family. Um, so it was founded in early 2005. Uh, and, um, and then in November of 2005, uh, Sequoia and Roloff, uh, come in and they lead a $3.5 million series a um and uh and then a few months later it was very uh very early growth days having just released the product uh when sequoia leads the series a a few months later in december of 2005 snl uh remember the lonely island days on snl this get lazy sunday uh was uh comes out and um wait

so it only took us seven episodes to talk about andy sandberg here on acquired ironic i know editors note david looks like andy sandberg there should be no inside jokes in podcasting. 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 an aggregate or just one of the versions of this clip of Lazy Sunday generates 7 million views on youtube which was huge i mean like there were only 100 000 people on the site before then yeah i think even at acquisition um they had an audience of 72.1 million but they were reporting 19.1 monthly active users so i mean to get that kind of view count that early and that was even you know a year i'm sure it was a lot of college kids like me watching it over and over and over again well the amazing thing is thinking about watching it on um you know people filming their tvs like that that's like what vines look like now

yeah talk about a kind of history rewriting itself so on the back of lazy sunday uh among other viral hits uh april 2006 the company raises an eight million dollar series b also from sequoia with artist ventures uh which i believe led the round um and by the summer of 2006 uh youtube is uh has grown in july to uh about a hundred million video views a day um which is pretty incredible. And a whole bunch of problems that arose with that, which we'll get into in a minute. But very shortly after, October 9th, 2006, Google announces that they are going to purchase YouTube for $1.65 billion.

Incredible. I mean, this is just over a year and a half after the founding the company literally in a garage um they'd only raised 11 and a half million in venture capital so the multiple 11 and a half million to 1.65 billion that's what a hundred 120 xing pretty incredible i mean this kind of stuff and this was 2006 this stuff didn't happen in 2006 i mean after the you know the internet bubble the lingering after effects are still reverberating through the valley even a few years later and the idea that a company would go from founding to actually being sold to a real company, Google, not just going public with funny money in 18 months for over $1.5 billion.

I mean, it was crazy. Even Instagram that we talked about on our first episode was such a splash of $1 billion. Insane. So Google acquisition closes by December of 2006. 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 and posting material like SNL is an NBC property, not a Viacom property, but like Lazy Sunday, knowingly allowing it to persist on the site even though YouTube didn't have the copyright. And that began this protracted battle over content rights and youtube that really was only finally resolved in 2014 seven years later it was a whole series of dismissals and appeals and judgments and then finally the viacom and Google settled in 2014.

It's hard to believe. It is. Okay, so this lawsuit happens. But which is, you know, we'll talk about in and of itself. But there's this amazing byproduct of about YouTube, about Sequoia's investment in YouTube, about the acquisition. So you can find this online and we'll link to it in the show notes. As part of the discovery process, Sequoia and Roloff's investment memo for the Series A of YouTube is available. And it's a really incredible document. It is incredibly fun to read.

I mean, I was just looking over it preparing for this show. And the key risks that they identify in here could not be more candid and could not be more real of concerns. I mean, we're going to talk about this later in evaluating the acquisition and where the world is today and all that. But, you know, key risks, competition slash defensibility. Like here we are, what, 10 years after the acquisition and Facebook is stealing video share revenue. What I thought was really interesting, and we'll talk more about this throughout the

show, and I think especially in the the themes um but uh in the memo roloff and sequoia when addressing competition and defensibility they say the team will need to remain laser focused on improving the user experience which isn't what you would really expect when you think about defensibility like in nowhere in this memo does it talk about network effects and youtube is you know on the surface you would think network effects defensibility through having all the content which leads to all the viewers which gets more content but no they're actually focused on improving the user experience and i mean that's not exactly how i would describe youtube today like what when I think about the things that make YouTube great, it has pretty much zero to do with the user experience of YouTube. Yeah, and in a lot of ways, YouTube has actually, I think, really failed.

Like, who goes to YouTube.com and then discovers something or searches for something on YouTube? No, you come through other channels and then you leave. Yeah, I'm often, well, I want to save this for later, but I think it's worth talking about now. I'm a little bit bearish on YouTube primarily because it's not a destination site. They are reliant on traffic from other channels and those other channels, namely Facebook, where people go first to decide what they're going to be looking at, are having their own platforms and actively pulling people onto those platforms. And can drive traffic. So YouTube is effectively a super fancy CDN at this point.

They're a place where the videos get hosted, where people don't necessarily rely on going to YouTube for discovery or what they should watch. It's just uninteresting. Hosting that YouTube and Google pay for. Yeah, it's free hosting. And, you know, if there was a better place, I think people would easily throw it up on that better place. Yeah. And so we'll get into more of this in detail. But back to another thing that's really interesting about this lawsuit is there's a bunch of testimony from Eric Schmidt, who was then the CEO of Google as part of the lawsuit. And he is interesting. 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. And that as the deal progressed, Google decided that it had to pay more, literally a billion dollars more, to keep it from competitors.

And that YouTube had indicated to Google that, quote, had indicated to us that they would be sold, is what Eric says. Which is super interesting because, you know, there's these content rights issues swirling around the company. There's the massive hosting fees that they were paying at the time and are still continuing to pay. And yet the growth was explosive. And it's interesting that they essentially put themselves up for sale and that we have this testimony here, which is really cool. Well, do you think, I mean, one way that I would interpret that is we are going to be sold is we are going to go out of business

unless we have someone that is financing all these lawsuits. Like we have no option. Well, that's what Viacom argued. Yeah. And ultimately lost lost we should say but um but yeah super interesting you've got this property this product that is clearly you know incredible product market fit growing like i don't know anything i i think nothing that the internet had ever seen uh until that point i mean maybe i guess 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 it 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.

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. David, if you're Google, why do you do a, such a stock heavy transaction there? Well, uh, I don't know at the time. I mean, I don't know how much cash Google had on hand. Presumably a lot, but this was 10 years ago. Yeah. And whether they could, whether their treasury could, you know, how much cash they had on hand and how much cash of that was available and on U.S. soil and not in.

Right, that's true. Yeah, maybe they had no choice. Yeah. But to me, I mean, like looking at that, Google was only going to go up. And it's easy to say that now, looking at the skyrocketing that it's done. But if you're Larry Page, you've got to be optimistic there, and you've got to be able to see that your company is only going to get more valuable. It would be interesting to go back, actually, and look at all these shares now

and do the math and see what's the current value of that. It would also be interesting to look at, we've mentioned Sequoia a lot in this show, both in the past and this episode, but in particular because of this investment memo, Sequoia is one of the largest shareholders in Google. And I don't know if they were still shareholders at that time, but they have a history of keeping their public shareholdings,

which would be very interesting that the largest investor in YouTube might also have been the largest or one of the largest shareholders in Google at the time of this acquisition. Interesting indeed. Okay, uh just to wrap up so what happened next 2006 time magazine names quote you person of the year but the cover is youtube and the theme of you and user generated content um and and growth just, just continues on the product side. I mean, by May of 2010, so four years later, less than four years later, um, they're up to YouTube is up to 14 billion video views a month from a hundred million four years earlier.

Uh, by 2013, YouTube has a 1 billion monthly unique, uh, viewers, uh, visitors. Um, visitors, and the growth has just continued since then. Okay, cool. So I've heard you say a lot about views and viewers. Got to feed my family. Yeah. How do you feel about YouTube as a business?

Well, here's what's really interesting, and that's happened since then, especially we've done our episode on Twitch. Netflix has also been built. Well, Netflix as a digital streaming service has been built during this same time. Amazon stood up something from scratch in that time. Yep. You know, and YouTube is really one of the few, if maybe only major video business, well, YouTube and Facebook, um, that are ad supported

now. Um, and I wonder if it's kind of been proven that direct payments are a better model for video on the internet. Um, now, and obviously Twitch has advertising, but, um, as we talked about, I think most of the commerce, most of the dollars flowing through Twitch are in this form of subscriptions. Yeah. So you touched on two really interesting things there. One, in thinking about YouTube as a profitable business, I think last year, there's not a lot of good stats in this sense, but in February of 2014, they were doing about $4 billion in revenue but were pretty flat.

I guess not flat as much as they were a break-even business. 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. And so in the last year, estimates are that they are a $5 billion business, but again, still not a profitable one. The interesting thing to think about there is what is their average revenue per user? And the information is pretty sparse on this, but I think the latest numbers around kind of Facebook and Twitter are like somewhere in the $7 to $9 range for those social services that are ad supported.

It's probably in that $7, $8 range, maybe a little bit less because it's, you know, the ad units. Probably less because if in 2013 they had a billion unique visitors and if, say, they made $5 billion in revenue last year, imagine that number of uniques has only gone up since 2013. So you're talking about less than $5 per user. Yeah. Yeah. So you can see why YouTube Red is a thing. So YouTube Red is a service they announced last year that you can pay $10 and get ad-free YouTube. And it's their sort of answer for how do you get the music that is on YouTube as sort of a streaming service for when you're not actively watching a video, you don't want the ad interruptions, all that. So that's a $10 a month service. On the one hand, and I am going to call this short-sighted, but on the one hand, they need to do that to

make it a profitable business. I mean, it's been a 10-year experiment here since the acquisition, and there's a lot of other ancillary benefits that Google gets out of having YouTube, but as a core business, not hugely profitable or profitable at all. So maybe moving to this other model gives them uh you know more cash flows where they're able to be a profitable business on the other hand it flies directly in the face of youtube as an ad platform and they're getting their highest value users which are the people that the advertisers actually want to reach to not see the ads and to do brand advertising you need enormous scale i I mean, Facebook and

YouTube are two of the only properties in the world that can do it. And if YouTube starts dwindling the population of people, particularly on the most affluent end that are actually seeing ads, they become a less valuable ad platform. So what we're seeing here as Google transitions to trying to make YouTube a profitable business with YouTube Red is potentially a huge shift in the entire strategy of what YouTube as a business is. Yeah. I think that's exactly right. Um, and, uh, you know, video as incredibly compelling as it is and as large as it's become on the internet, mostly thanks to YouTube and all of these services, you know, Facebook video and Twitch, um, and others that have sprung up in its wake, um, is it fundamentally though does have a different cost structure than other types of of content on

the internet yeah i mean if you just compare this to instagram alone you know acquired for um a billion dollars and then i think they projected it at um making three three billion this year well and the and the cost structure is different on on two fronts you know one there's the hosting and then the delivery of the video which costs a lot more than text or static photos um but two is is the content payments you know and youtube has really been aggressively investing in this and it's not just payments to the professional media organizations of the world it's payments out to content partners that are uh you know once what you on Instagram, those people just post their content or Snapchat, you know, they're posting for free.

For free. And YouTube's paying them. YouTube's splitting 55% of their ad revenue out and paying it out to those producers. And, you know, we know on Twitch, you know, lots of the most popular streamers have talked about how YouTube has approached them and offered them large payments, very large payments, uh, to stream on YouTube and they're streaming for free on Twitch. Yeah, that's interesting. I mean, the, the, the whole Twitch live streaming thing is interesting in itself, but the, even the, um, kind of stored, uh, archive video that, that, uh, YouTube is,

is that's their bread, bread and butter. I mean, Facebook has a product that is pulling people away in huge numbers because that's everyone's first step. And I think that the stat that I recently saw was 70% of Facebook videos are uploaded natively. That used to be people embedding YouTube videos and it's just been this massive, massive shift. Yeah, pretty incredible. Well, I feel like we should move on to acquisition category. But before we do, one more quick aside that I want to throw in. 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 in my interview. I thought, man, this was going to be like the best job ever. Talk about like internet company strategy and media and like this would be awesome. And then I learned investment banking was actually something very different but but now you get to do a podcast now i get to do a podcast about it i also think right before we move on i i didn't fully i guess i want to come around at that last point calling it short-sighted that's assuming that they are straight sticking with being an ad platform and particularly a brand advertising platform. If there is some grander plan, you know, I think it's short-sighted if that's the current business.

If there is a grander plan to move to more of a Spotify type subscription business, which we'll see if they can, you know, weather that storm of the crazy margins that you have to pay out to content producers at that point. But, you know, it's short-sighted in that they maintain that same advertising platform strategy. All right, listeners, our next sponsor is a new friend of the show, Huntress. Huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to mid-sized businesses and provides enterprise grade security with the technology, services and expertise needed to protect you. They offer a revolutionary approach to managed cybersecurity that isn't only about tech.

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or click the link in the show notes. Our huge thanks to Huntress. Okay, acquisition category. David, you want to take it? Yeah, so I think the obvious one here is product. As a reminder, our self-identified major categories are people, technology, product, business line, and other. 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. But people have been talking for years now about YouTube as Google's, quote, loss leader. And I think that's an interesting um way to look at it because um if you think about google as an ad sales machine which it is um much of it self-serve but a lot of it you know they have a huge ad sales force um and you think of youtube as a part of the overall portfolio of products that Google's ad sales team is selling, even if the business itself isn't profitable as a business and the product has huge problems. But it's really enabled Google to have multiple types.

If you think about their core search advertising and adwords and then the display network that they built up following the double click acquisition um and then now with video and youtube um i think it's i think it's an interesting you know like i said quote lost leader product for google yeah i i actually was going to go with other also but for a totally different reason. They're able to bring data that they're getting from the videos that people are uploading and watching into the Google search algorithm on all media types. And I think that, sure, they could do what they're doing with Twitter now and embed kind of a passed along search to YouTube and return the first couple of videos. But what they're doing with, with the content on YouTube and the analytics and metrics of people watching these videos and understanding, you know, the topical things that are going on into these videos

is so much deeper than anything they'd be able to get with YouTube as an external company. So, um, you know, again, probably primarily the product. Um, but I i think other for for both of those two reasons and that also gets to uh something i want to talk about in a minute which is embeds um yeah uh but we'll get there in a minute uh one point i want to make here so google was had been playing with a product for a few years called google video search before they acquired youtube and interestingly enough they actually left it running for like a year or two after the acquisition in its exact same form where you could actually upload videos to google video and then left it up for you know much much longer and it's interesting schmidt actually talks about this in his testimony,

saying that one of the reasons that they were so compelled to pursue YouTube was that it was clear that YouTube was growing way faster and had way better engagement than Google Video. Yeah, 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? I don't know. This is a really interesting question. Part of me wonders if

it is like, you know, kind of related to the Lonely Island, Lazy Sunday, like it kind of just got virality and it started taking off. And I mean, I remember I was in college when this was happening. And one day in 2006, all of a sudden, everybody on campus was watching YouTube. So do you think that's kind of interesting to think about that YouTube did better than Google Video because YouTube, by the nature of being a scrappy startup, was able to basically acquire a bunch of debt in the form of lawsuits because they were doing things like you know letting people upload all these illegal videos primarily because they didn't have great technology to filter it out and and really no means to but also like that was the thing that sort of got their flywheel going and once it was in motion they could do all sorts of things to sort of pay down that debt later on. But fundamentally, they had the users and they had content flowing in.

Yeah, I mean, I think it would be probably wrong and at least unclear to say that part of YouTube's strategy was to illegally post content that they didn't have access to. I mean, this is what the whole lawsuit was about. And YouTube won the lawsuit. So, you know, legally, the courts have decided. So we can say unequivocally that that happened. Yeah, according to the courts. But, you know, I think it's unclear. And, like, you know, we work with startups.

You know, like, things are, you don't really have a good handle on what's going on in the early days. And people use your platform for what they use it for but i think it does illustrate you know the scrappiness the um you know the memorableness of youtube you know and the idea that that could like plant in your brain as a concept of i mean so many of these things i want to talk about when we get to tech themes like streaming that was not a concept that existed before youtube really yeah just talk to justin khan no one wanted to watch yeah well i mean 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 like most uh before youtube you know and broadband penetration wasn't the you know basically

100 that it is now like people downloaded content and watched videos that they had stored on their hard drives or listened to music or podcast you know podcasts originally were downloaded into itunes right the idea that you would stream something live put on your ipod with usb so you can listen to it yeah exactly right i'm sure that's what all 12 years later and the medium is just barely taking off because yeah um but uh but but you know i mean think about like youtube was really able to popularize this and then and then the other piece of it i think is embeds um which i want to talk about in a minute you know i mean youtube could benefit from this

amazing service that it offered that, that clearly millions and millions and now billions of people love, which is watching hosted video on the internet. Um, but you didn't have to go to youtube.com. You had to go to google.com slash videos to discover and watch. It's true. And it wasn't clear.

Yeah. I remember thinking like, well, what videos would I have that i even it's it's like a naming thing oh man what videos would i have that i want to upload to google video i don't know but it like requires some weird creativity that i don't i don't it didn't but you have a personal blog oh i know what this is like you know it's videos of stuff that i do yep or or you have you know your own website about personal blog or whatever,

and you want to embed a video in there. Yeah, you do that. And then if a user double clicks on it, they go to YouTube, and then they learn about YouTube. And they say, oh, maybe I want to host my videos there. Or, wow, look at that Lazy Sunday sketch. Yeah. I have one more allegory that I want to make.

I was thinking about sort of the debt you acquire in doing things that are like shady, because later on, it's going to be an untouchin just lost that lawsuit where the thing that they were doing that we all hate and that everybody notoriously rips on them for is like somehow they can never stop emailing me and they've been incredibly invasive in the inbox and they took all my contacts and they invited them all to linkedin for me and that was user hostile and illegal and they years and years and years later now finally got hit with the penalty that was like i don't know it was in the neighborhood of like 100 million dollars and the value that they gained from that in the early days and all that lock-in is way more but you know the horse is way out of the barn like the race is over yeah i mean it's

really interesting i mean i'm not uh i don't think either of us is saying we endure either that we endorse this or that i think a lot of these tech companies like explicitly are thinking this machiavellian way but but think about um you know think about uber and airbnb right like airbnb one of they helped bootstrap their supply side network with posting to Craigslist. That was against Craigslist's terms of service. Was that evil and Machiavellian of them? I don't know. They probably didn't think about it that much. They were probably just trying to grow and not die and stop selling cereal, right? Yeah. 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. You were charged as a Microsoft customer for the number of CPUs that you shipped, period, no matter if they had DOS on them or not. And that did an incredible thing because the companies then are thinking like, well, it doesn't matter if we put this on or not, we're going to get charged for it. So every PC leaving the door of the factory had MS-DOS on it. And then once Microsoft had an alleged monopoly on the entire competing industry, well, then the Department of Justice comes back and says, well, that particular sales tactic is illegal.

But again, years, years, years too late. In startups, when you're trying to survive and grow, you know, people say this, but this is it in practice. You know, unfair advantages. If you don't have one, somebody else does. And, you know, youtube had an unfair advantage over google video yep okay um i think we've kind of covered what would have happened otherwise like there was a massive problem looming for youtube someone else would have picked them up or they

would have gone bankrupt um so yeah tech themes we've also covered a bunch of these, but, um, but you know, I, I pulled, I pulled three, I have a couple others, but, um, I pulled three out of the Sequoia memo that I thought, um, were, were that YouTube really illustrated that they identified, you know, one user generated content. You had this kind of, um, wave that started with blogging with blogger in the sort of early 2000s and then it moved into photos you know you had photo bucket shutterfly and myspace and then and then early facebook popping up of people starting to you know know, get this concept of sharing photos. And then you had podcasting taking off and you had audio.

And, you know, it was kind of, you know, Sequoia loves these wave analogies. But you can read the memo and it's just there in black and white. You know, video is the next and potentially biggest piece of this wave that's coming. 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. What was happening in 2005, 2006 was you had like flip cam. Yeah, flip video, man. That went so well with Cisco. Yeah. was you had like flip cam man that went so well with cisco yeah and you had digital

cameras still cameras shipping with video modes uh and this was new and then and then shortly thereafter cell phones happened smartphones happened 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. Yeah. All of these things that all combine to, you know, in this inferno to create the opportunity for YouTube. Yeah, and it's really interesting. I mean, I've been kind of ripping Google the whole time here and will continue to. But they made a big bet that people would move from watching their televisions to watching video online. And we weren't calling it cord-cutting then,

and we didn't know that we'd have these Netflix-like subscriptions and things like that, but they were definitely making the bet that video on the internet is the future of people's attention. And they were absolutely right about that. Yeah, I mean, I don't have cable. Do you have cable? Nope.

Not in my adult life yep me neither um i think uh i think it's time for conclusion yeah it's interesting the the way that i sort of want to think about this is what else could google have done if they wanted to capitalize on the trends we've been talking about? Particularly the one that I was thinking of is video on the internet is the place where people's attention will be. And as someone who, you know, as a company that captures value from being somewhere in the value chain of people's attention and where they spend their time, primarily in the form of seeking out information, 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. So what else could they have done? Netflix wasn't really a business yet that looked anything like this. That would have been sort of a silly acquisition.

They were trying with Google Video and clearly couldn't do it internally, and it feels like a rebooted effort there wouldn't have necessarily been as fruitful as this acquisition i don't know that they had a lot of other ways to capitalize on this wave yeah i like this and uh think about both then and today what percentage of google searches end in youtube I would imagine a pretty significant percentage. Yeah, that's pretty interesting. And if Google were sending, 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. And if Google were sending 10% to 15% of its traffic to a non-google property i mean i guess it kind of does that with like amazon um yeah yeah that's interesting is that bad for google's business if they're i guess it's bad if someone gets big enough so that they actually become a destination site where you go right to that home page instead of using google to search for it or facebook to discover it through what your friends and facebook are surfacing to you which are basically the two ways that people find things on the internet right now

yeah they're like they search on amazon yeah well i mean i even probably search products on google that i know will come up on amazon first and i'm a i freaking have an amazon smile button in my bookmarks bar so that i always know to go there so that Code.org gets the money. But I always forget to do it because I end up just searching for the product in Google because I know Amazon is going to be the first thing anyway. So Google is my front door when I know what I want and Facebook is my front door when I don't know what I want. That's so big hearted of you and such a fail. I try. What was the pun I was going to make there?

That is, okay, if it actually, let's go work off the hypothesis that a huge chunk of the traffic passing through Google goes to a single site instead of an aggregated bunch of little sites. that should be a problem because then in sort of a like porters five forces way that business gets power over google and then people start going directly to that thing and they don't need like the retailer of google anymore and they can just get their their material directly from directly from youtube youtube has been owned by google for 10 years, and they still can't manage to make youtube.com slash a destination site. Like, I don't know that that actually would have been threatening to their business. Yeah. On the other hand, you could argue that Google really had no motivation to invest in doing so, and had YouTube remained independent, which, as we kind of established, was impossible.

But let's imagine they could have um you know would uh product oriented founders have led that company to um you know something that looks like twitch and what's going to happen to twitch in the next 10 years yeah that's super interesting too so i'm going to render my conclusion it's a c wow is that our lowest grade yet certainly mine what did we give siri i don't remember b minus um okay so for me oh gosh i kind of part of me really wants to split this into two pieces and so I think I'm going to do that and give a grade for each but we have

to have just one grade you know so I'm going to ultimately render a final grade 50% your show you do what you want thanks Ben I really appreciate the trust here so I think as a I'm going gonna take first as a um business youtube um unfortunately i don't think has been a particularly good business um as we've

established you know we're 10 plus years into the company and revenues are great, but profits are basically zero. Um, and maybe there are things that, you know, they can invest in to change that over time or Google could have done differently. But, um, you know, a $5 billion revenue business with a $0 margin is not a great business. Um, in my view, fine, you start one. Yeah, right. right hey i'm a vc my job is to is to judge other people's businesses not to you know do the hard work of actually building them it's great um so you know on the business side i think this is a gosh i don't know c minus maybe i mean yeah you're right Like I can't build a $5 billion

business. Like it's, it's fricking hard, but, um, and that 1.65 billion is just the beginning. I mean, think about the operational costs of pouring more money into this business over the years and people and content investments and all that. Um, but I just don't, you know, it's not a great business by great business standards. Then I think the other lens I want to look at this through is the product lens and this one's super interesting because like YouTube is not a great product either like it's really crappy in a lot of ways like as we've been discussing I mean maybe folks out there do but like Ben and I don't go to youtube.com very often i mean i probably do occasionally but only if i'm looking for a very very specific thing um and uh you know and it's still kind of ugly

the site and they've totally missed out on innovations like chad and i don't think i've ever opened the app directly i've only ever been kicked into it we even talk about mobile but god yeah right you know it took them forever to figure that out and they're kind of like okay now um but just on the like pure innovation side and i've talked about this already the concept of streaming media and yes it existed with real networks and others before um before youtube but really working and working with video and working at scale um it changed the world right and then the second one being embeds um and embeds is a double-edged sword because as we're talking you know as we've talked about like um when you can embed your content on somebody else's on other people's properties like why do they go to your property but um as a concept like it's pretty amazing awesome as like

a site owner i don't have to like host and do figure out the codec and the delivery mechanism for all my own videos right and you did i mean basically it upgraded the internet youtube upgraded the internet and i don't think that's an exaggeration yeah it's an infrastructure layer that that didn't previously exist and then was just totally off the shelf. Oh, yeah, I'll just put my YouTube video in that blog post. Yeah. So, you know, for these. Not to mention to your first point when it changed the world.

There's a whole category of people that are YouTubers that are making a living doing that. And a whole generation of people that know those people as their celebrities. Yeah. I mean, like. PewDiePie. of people that know those people as their celebrities yeah like i this is a cheesiest thing but a totally totally democratized video creation and becoming a star yeah and um you know so and for that reason i think this product side is like really hard like it's been really disappointing and a big failure on several product fronts. However, on the core things,

it has just knocked it out of the park. So I give it an A- on the product side. Overall, I'm going to mash this up into a B for Google because I think, you know, I could be wrong, but 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. Yeah. I mean, also, just on their personalities, right?

I'm not going to call it a moonshot, but it sort of falls in the vein of, like, what if anybody could make movies and then anybody in the world could watch them and like this idea was not as fathomable in 2002 and obvious as it is today right like the world a couple years before youtube compared to the world now it sort of does look like a crazy moonshot and if they can do that and it doesn't at least cost money to run it's a good thing there we are cool thanks for joining us see you next time at least cost money to run. It's a good thing. There we are. Cool. Thanks for joining us.

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