YouTube

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 https://www.scribd.com/doc/214802896/Botha-on-YouTube#page=10 - a rarely-shared gold mine for anyone interested in startup investing. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you prove that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 0:19David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 0:40Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 1:02David Rosenthal?

  In half! Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 1:20Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A.com/acquired for $1,000 off, and just tell them that Ben and David sent you.

• 2:04Speaker 02

  Welcome to episode seven of Acquired. I'm Ben Gilbert.

• 2:09David Rosenthal?

  I'm David Rosenthal.

• 2:10Speaker 02

  And we're 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.

• 2:21David Rosenthal?

  Google announced that they were the most valuable company in the world?

• 2:24Speaker 02

  What?

• 2:26David Rosenthal?

  Google announced earnings and people are speculating that it might, I haven't checked the price. I haven't checked the stock price, but that Google's market cap might pass Apple's tomorrow.

• 2:37Speaker 02

  Ah, gotcha. So.

• 2:40David Rosenthal?

  Mr. Market will tell.

• 2:41Speaker 02

  Yeah. And in a steep contrast to what we normally do on this show, that is just conjecture and hypothesizing.

• 2:49David Rosenthal?

  We never conjecture on this show.

• 2:53Speaker 02

  We're going to talk about kind of an older acquisition when you look at the companies that we've looked at so far.

• 3:02Speaker 02

  Google acquiring YouTube.

• 3:05Speaker 02

  David, why don't you take it away with acquisition history and facts?

• 3:08David Rosenthal?

  Will do. So YouTube, this is a big one.

• 3:14David Rosenthal?

  Founded, YouTube was founded early 2005 by two former engineers and one former designer from PayPal.

• 3:24David Rosenthal?

  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, Roloff Botha.

• 3:42David Rosenthal?

  Just keep it in the family. 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. And then a few months later, it was very, very early growth days, having just released the product when Sequoia leads the Series A. A few months later in December of 2005, SNL, remember the Lonely Island days on SNL, the skit Lazy Sunday was, comes out and

• 4:25Speaker 02

  So it only took us seven episodes to talk about Andy Samberg here on Acquired.

• 4:31David Rosenthal?

  Ironic, I know.

• 4:32Speaker 02

  Editor's note, David looks like Andy Samberg. There should be no inside jokes in podcasting.

• 4:41David Rosenthal?

  Lazy Sunday comes out and a whole bunch of people like 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 seven million views on YouTube, which was huge. I mean, like, there were only 100,000 people on the site before then.

• 5:05Speaker 02

  Yeah, I think even at acquisition, 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.

• 5:17David Rosenthal?

  I'm sure it was a lot of college kids like me watching it over and over and over again.

• 5:21Speaker 02

  Well, the amazing thing is thinking about watching it on, you know, people filming their TVs like that, that's like what vines look like now.

• 5:27David Rosenthal?

  Yeah.

• 5:28Speaker 02

  Talk about a kind of history rewriting itself.

• 5:31David Rosenthal?

  So on the back of Lazy Sunday, among other viral hits, April 2006, the company raises an $8 million Series B, also from Sequoia with Artist Ventures, which I believe led the round. And by the summer of 2006, YouTube is, has grown in July to about 100 million video views a day, which is pretty incredible. And then, 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

• 6:13David Rosenthal?

  purchase YouTube for $1.65 billion.

• 6:18Speaker 02

  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 11 and a half million in venture capital. So the multiple 11 and a half million to 1.65 billion, that's what 100, 120 X-ing?

• 6:40David Rosenthal?

  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, 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, you know, going public with funny money in 18 months for over one and a half billion dollars. I mean, it was crazy. Even Instagram was, that we talked about on one of our first episode, was such a splash of $1 billion.

• 7:18Speaker 02

  Yeah, insane.

• 7:19David Rosenthal?

  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, 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 it didn't have, YouTube

• 7:57David Rosenthal?

  didn't have the copyright. So, and that began this protracted battle over content rights on 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.

• 8:22Speaker 02

  It is.

• 8:23David Rosenthal?

  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 the lawsuit, which is the disclosure process. And we get to see, like, 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. So you can find this online, and we'll link to it in the, in the show notes. As part of the discovery process, Google and Rolloffs, uh, sorry, Sequoia and Rolloffs, um, investment memo for the Series A of YouTube, uh, is available. Uh, and it's really incredible document.

• 9:07Speaker 02

  It is incredibly fun to read. I mean, I, I was just looking over at preparing for this show, and the, the key risks that they identify in here could not be more candid and could not be more real of concerns. And we're going to talk about this later in evaluating the, 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.

• 9:33David Rosenthal?

  Yep. And what I thought was really interesting, and, uh, we'll talk more about this throughout the show, and I think especially in the, the themes. Um, but, uh, in the memo, Rolloff 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 all the viewers, which gets more content. Um, but no, they're actually focused on improving the user experience.

• 10:13Speaker 02

  And, I mean, that's not exactly how I would describe YouTube today. Like, when I think about the things that make YouTube great, it has pretty much zero to do with the user experience of YouTube.

• 10:25David Rosenthal?

  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.

• 10:39Speaker 02

  Yeah, I'm often, well, I, this is, I want to say this for later, but I think it's, it's worth talking about now. The- 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.

• 11:04David Rosenthal?

  And can drive traffic.

• 11:05Speaker 02

  So YouTube is effectively, you know, 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 being told what they should watch, or it's just uninteresting.

• 11:20David Rosenthal?

  Hosting that YouTube and Google pay for.

• 11:22Speaker 02

  Yeah, it's free hosting and I, you know, if there was a better place, I think people would easily throw it up on that better place.

• 11:31Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 11:45David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 11:59Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 12:09David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

• 12:27Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 12:43David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 12:59Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 13:09David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. So another thing that's really interesting about this lawsuit is we have, there's a bunch of testimony from Eric Schmidt, who was then the CEO of Google and as part of the lawsuit. And he is interesting. 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. And that as the deal progressed, Google decided that it had to pay more, literally

• 13:54David Rosenthal?

  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.

• 14:31Speaker 02

  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.

• 14:42David Rosenthal?

  Well, that's what Viacom argued.

• 14:44Speaker 02

  Yeah.

• 14:45David Rosenthal?

  And ultimately lost, we should say. 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 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.

• 15:24Speaker 02

  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 such a stock-heavy transaction there?

• 15:38David Rosenthal?

  Well, I don't know at the time. I mean, I don't know how much cash Google had on hand.

• 15:45David Rosenthal?

  Presumably a lot, but this was 10 years ago.

• 15:49David Rosenthal?

  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 US soil and not in.

• 15:57Speaker 02

  That's true. Yeah, maybe they had no choice.

• 15:59David Rosenthal?

  Yeah.

• 15:59Speaker 02

  But to me, I mean, like, looking at that,

• 16:03Speaker 02

  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, you know, Larry Page, don't,

• 16:15Speaker 02

  you gotta be optimistic there and you gotta be able to see that your company is only getting, getting more valuable. It'd 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.

• 16:27David Rosenthal?

  It would also be interesting to look at, you know, we've mentioned Sequoia a lot in this show, both in the past and this episode, but in particular because of this investment memo. You know, Sequoia is one of the largest shareholders in Google and

• 16:43David Rosenthal?

  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.

• 17:03Speaker 02

  Interesting indeed. Okay, so.

• 17:06David Rosenthal?

  So, so, 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. And, and the growth just, just continues on the product side. I mean, by May of 2010, so four years later, less than four years later, they're up to, YouTube is up to 14 billion video views a month from 100 million four years earlier. By 2013, YouTube has 1 billion monthly unique viewers, visitors.

• 17:45David Rosenthal?

  And, and the growth has just continued since then.

• 17:47Speaker 02

  Okay, cool. So I've heard you say a lot about views and viewers. Gotta feed my family. How do you feel about YouTube as a business?

• 17:56David Rosenthal?

  Well, here's what's really interesting and that's happened since then, especially, you know, we've done our episode on Twitch. Netflix, you know, has also been built, uh, well Netflix as a digital streaming service has been built during the same time.

• 18:11Speaker 02

  Amazon stood up something from scratch in that time.

• 18:14David Rosenthal?

  Yep, you know, and, and YouTube is really one of the

• 18:19David Rosenthal?

  few, if maybe only major video business, well YouTube and Facebook, um, that are ad-supported now. And I wonder if it's kind of been proven that direct payments are a better model for video on the internet. Um, now, 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.

• 18:42Speaker 02

  Yeah. So you touched on two really interesting things there. One, in thinking about,

• 18:49Speaker 02

  YouTube as a profitable business, I think, um, last year, there's not a lot of good stats in this sense, but in February of 2014,

• 18:58Speaker 02

  they were doing about $4 billion in revenue, but were, um, pretty flat. I mean, they, they, uh, I guess not flat as much as they were break even business.

• 19:07David Rosenthal?

  Yeah, four, four billion in revenue, growing fast, but, uh, after payments to content creators and hosting costs and ad sales costs and all associated stuff, about a break even business, you know, zero profit.

• 19:20Speaker 02

  And so in the last year, uh, estimates that are that they are a $5 billion business, but again, still not a profitable one.

• 19:29Speaker 02

  The interesting thing to think about there is what is their average revenue per user? And the information's pretty sparse on this, but I think, uh, the latest numbers around kind of Facebook and Twitter are like somewhere in the seven to nine dollar range for, for those social services that are, 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.

• 19:54David Rosenthal?

  I would bet 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, uh, per user.

• 20:13Speaker 02

  Yeah. Yeah. So you can see why, uh, YouTube Red is a thing. So YouTube Red is a, 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, um, YouTube, the, 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.

• 20:54Speaker 02

  But as a core business, not hugely profitable or profitable at all. So, you know, 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 mean, Facebook and YouTube are two of the, the, the only properties in the world that can do it. And if YouTube starts dwindling the population of people, particularly on the, um, you know, most affluent end that are actually seeing ads, they become a less valuable ad platform.

• 21:39Speaker 02

  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.

• 21:54David Rosenthal?

  Yeah.

• 21:57David Rosenthal?

  I think that's exactly right. And, 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 and others that have sprung up in its wake, is, it fundamentally though, does have a different cost structure than other types of, of content on the internet.

• 22:26Speaker 02

  Yeah, I mean, if you just compare this to Instagram alone, you know, acquired for a billion dollars and then I think they projected it making three, three billion this year.

• 22:38David Rosenthal?

  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, or static photos. 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, you know, once, on Instagram, those people just post their, post their content or Snapchat, you know, they're posting for free.

• 23:07Speaker 02

  For free.

• 23:08David Rosenthal?

  And YouTube's paying them.

• 23:09Speaker 02

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

• 23:14David Rosenthal?

  And, 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, to stream on YouTube and they're streaming for free on Twitch.

• 23:29Speaker 02

  Yeah, that's interesting. I mean, the, the whole Twitch live streaming thing is interesting in itself, but the, even the kind of stored archive video that, that 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.

• 24:03David Rosenthal?

  Yeah, pretty incredible. Well, I feel like we should, 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.

• 24:46Speaker 02

  But now you get to do a podcast.

• 24:49David Rosenthal?

  Now I get to do a podcast about it.

• 24:50Speaker 02

  I also think right before we move on, I didn't fully, I guess I want to come around to that last point, calling it short sighted, that's assuming that they are 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, 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.

• 25:28Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on acquired Lagora, the agentic operating system that is redefining how the world's best legal teams work.

• 25:42David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Lagora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 25:59Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 26:14David Rosenthal?

  And that's how you get features that customers love like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 26:38Ben Gilbert?

  And they recently launched Legora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 26:57David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 27:27Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you. Okay, acquisition category. David, you want to take it?

• 27:55David Rosenthal?

  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 there's, 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 way to look at it because if you think about Google

• 28:37David Rosenthal?

  as an ad sales machine, which it is, much of it self-serve, but a lot of it, you know, they have a huge ad sales force. 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, you know, if you think about their core search advertising and AdWords and then the display network that they built up following the DoubleClick acquisition. And then now with video and YouTube.

• 29:22David Rosenthal?

  I think it's, I think it's an interesting, you know, like I said, quote "loss leader" product for Google.

• 29:27Speaker 02

  Yeah, I actually was gonna 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 each of these videos is so much deeper than anything they'd be able to get with YouTube as an external company.

• 30:06Speaker 02

  So, you know, again, probably primarily the product, but I think other for, for both of those two reasons.

• 30:15David Rosenthal?

  And that also gets to something I want to talk about in a minute, which is embeds.

• 30:19Speaker 02

  Yeah.

• 30:20David Rosenthal?

  But we'll get there in a minute.

• 30:22Speaker 02

  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...

• 30:36Speaker 02

  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.

• 30:49David Rosenthal?

  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.

• 31:02Speaker 02

  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?

• 31:12David Rosenthal?

  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, you know, when this was happening and one day in, you know, 2006, all of a sudden, everybody on campus was watching YouTube.

• 31:39Speaker 02

  So do you think, oh, 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 like 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 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.

• 32:16David Rosenthal?

  Yeah. I mean, I think it's, it would be, 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 to say. 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,

• 32:55David Rosenthal?

  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.

• 33:13Speaker 02

  Yeah, just talk to Justin Khan, no one wanted to watch.

• 33:16David Rosenthal?

  Yeah, well, I mean, of all 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 a hundred percent 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.

• 33:45Speaker 02

  Yeah, you used to put it on your iPod with USB so you can listen to it.

• 33:48David Rosenthal?

  Yeah, exactly, right? I'm sure that's what all of our listeners are doing.

• 33:52Speaker 02

  12 years later and the medium is just barely taking off because...

• 33:55David Rosenthal?

  Yeah, um, but, uh, but, but, you know, I mean, think about it, 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 Google videos.

• 34:28Speaker 02

  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 or didn't or would have.

• 34:45David Rosenthal?

  But you have a personal blog.

• 34:46Speaker 02

  But it's like YouTube, like, oh, I know what this is. Like, you know, it's videos of stuff that I do.

• 34:50David Rosenthal?

  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, you know, if a user double clicks on it, they go to YouTube and then they learn about YouTube and they say, oh, you know, maybe I want to host my videos there or wow, look at that lazy Sunday sketch.

• 35:07Speaker 02

  Yeah. I have one more allegory that I want to make. I was thinking about, um, sort of the debt you acquire. In doing things that are like shady because later on it's going to be an untouchable flywheel that you're, you know, you've got so much cash that it doesn't matter and you can deal with it. There's actually two things that just came to mind. One is LinkedIn 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.

• 35:50Speaker 02

  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 a hundred 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.

• 36:10David Rosenthal?

  Yeah, I mean, it's really interesting. I mean, I'm not, I don't think either of us is saying we endorse, either that we endorse this or that I think a lot of these tech companies like explicitly are thinking in this Machiavellian way. But, but, think about, you know, think about Uber and Airbnb, right? Like Airbnb, one of, they helped bootstrap their supply-side network with posting to Craigslist. Was that, you know, that was against Craigslist Terms of Service. Was that, you know, evil and Machiavellian of them? Like, 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?

• 36:47Speaker 02

  Yeah. There's, there's one more insanely good one that I heard recently. It'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 that, you know, the companies then are thinking like, well, it doesn't matter if we put this on or not, we're gonna get charged for it. So every PC leaving the door of the factory had MS-DOS on it.

• 37:28Speaker 02

  And then, once Microsoft had an alleged monopoly on the entire computing industry, well, then, then the Department of Justice comes back and says, well, that particular sales tactic is illegal. But again, Years, years, years too late.

• 37:41David Rosenthal?

  In startups, when you're, 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.

• 37:55Speaker 02

  Yep.

• 37:57David Rosenthal?

  Okay. Um, I think we've kind of covered what would have happened otherwise. Like there was a massive problem looming for YouTube.

• 38:04Speaker 02

  Someone else would have picked them up, or they would have gone bankrupt.

• 38:08David Rosenthal?

  Um, so yeah, tech themes. We've also covered a bunch of these, but, um, but you know, 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. Um, and then it moved into, uh, photos, you know, you had PhotoBucket, Shutterfly, um, and MySpace, and then, and then early

• 38:48David Rosenthal?

  Facebook popping up of people starting to, you know, get this concept of sharing photos. And then you had podcasting taking off and you had audio and, um, you know, it was kind of, you know, Sequoia loves these wave analogies, but they, you can read the memo and it's just there in black and white. You know, video is the next and potentially biggest, uh, piece of this wave that's coming. Um, so that's one. Uh, two, continued broadband adoption. I mean, this would not have been possible without broadband. And, and then three, uh, uh, the, the quote is wide proliferation of inexpensive video capture devices. Um, what was happening in 2005, 2006 was you had like FlipCam.

• 39:31Speaker 02

  Yeah, FlipCam, man, that went so well with Cisco.

• 39:33David Rosenthal?

  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.

• 39:43Speaker 02

  Yeah. I mean, you think about when this acquisition happened, was it like October of 2006?

• 39:48David Rosenthal?

  Yeah. I mean, not even a year before the iPhone. Yep. Um, all of these things that all combined to, you know, in this, this, uh, um, you know, inferno to, to create the opportunity for YouTube.

• 40:01Speaker 02

  Yeah. And, and it's really interesting. I mean, I, I've been kind of ripping Google the whole time here and, um, will continue to, but the- 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 that video on the internet is the future of people's attention. And they were absolutely right about that.

• 40:29David Rosenthal?

  Yeah, I mean, I don't have cable. Do you have cable?

• 40:32Speaker 02

  Nope. Not in my adult life.

• 40:34David Rosenthal?

  Yep, me neither.

• 40:39David Rosenthal?

  I think, I think it's time for conclusion.

• 40:43Speaker 02

  Yeah. It's interesting. The, the way that I sort of want to think about this is

• 40:50Speaker 02

  what else could Google have done if they wanted to capitalize on the trends we've been talking about? Particularly, the, the one that I was thinking of is, is, uh, video on the internet is the place where people's attention will be. And as someone who, um, you know, as a company that captures value from being somewhere in the value chain of people's attention, of people's attention, and where they spend their time, primarily in the form of seeking out information, it, you know, Google was making a defensive move that in the, if that's how people are spending time in the future, then we need to be able to put advertising in front of them on that, during that time to monetize

• 41:31Speaker 02

  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. Um, they were trying with Google Video and clearly couldn't do it internally. And I, it feels like a rebooted effort there wouldn't have necessarily been as fruitful as this acquisition. I, I don't know that they had a lot of other ways to capitalize on this wave.

• 41:59David Rosenthal?

  Yeah, I like this. And, uh, think about both then and today, what percentage of Google searches?

• 42:08David Rosenthal?

  And in YouTube, I would imagine a pretty significant percentage.

• 42:15Speaker 02

  Yeah, that's pretty interesting.

• 42:16David Rosenthal?

  And if, 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's seem, feels reasonable to me, end up in a YouTube link. And if they were, 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.

• 42:40Speaker 02

  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 homepage 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.

• 43:01David Rosenthal?

  Yeah. Or they search on Amazon.

• 43:03Speaker 02

  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, the money. But it, I like always forget to do it because I end up just searching for the product in Google because I know Amazon's going to be the first thing anyway. So Google is my front door when I know what I want and Facebook's my front door when I don't know what I want.

• 43:25David Rosenthal?

  So big-hearted of you and such a fail.

• 43:29Speaker 02

  I try. Um, what was the point 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 Porter's 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.

• 44:17Speaker 02

  Like, I don't know that that actually would have been threatening to their business.

• 44:20David Rosenthal?

  Yep. 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, you know, would product oriented founders have led that company to, you know, something that looks like Twitch? And what's going to happen to Twitch in the next 10 years?

• 44:49Speaker 02

  Yeah, that's super interesting, too. So I'm going to render my conclusion, it's a C.

• 44:56David Rosenthal?

  Wow. Is that our lowest grade yet?

• 44:59Speaker 02

  Certainly mine.

• 45:00David Rosenthal?

  What did we give Siri? I don't remember.

• 45:03Speaker 02

  It was a B minus.

• 45:06David Rosenthal?

  Okay, so for me, ah, 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, but we have to have just one grade, you know, so I'm going to ultimately render a final grade.

• 45:24Speaker 02

  50% your show, you do what you want.

• 45:25David Rosenthal?

  Yeah, right. Well, thanks, Ben. I really appreciate the trust here.

• 45:31David Rosenthal?

  So I think as a, I'm going to take first as a business, YouTube. Unfortunately, I don't think has been a particularly good business. As we've established, you know, we're 10 plus years into the company and revenues are great, but profits are basically zero. And maybe there are things that, you know, they can invest in to change that over time, or Google could have done differently. But, you know, a $5 billion revenue business with a $0 margin is not a great business. In my view.

• 46:10Speaker 02

  Fine, you start one.

• 46:12David Rosenthal?

  Yeah, 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.

• 46:24David Rosenthal?

  So, you know, on the business side, I think this is a, ah, gosh, I don't know.

• 46:31David Rosenthal?

  C minus, maybe. I mean, yeah, you're right. Like, I can't build a $5 billion business. Like, it's, it's frickin' hard, but.

• 46:39Speaker 02

  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.

• 46:45David Rosenthal?

  And people and content investments and all that. But I just don't think, 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 probably do occasionally, but only if I'm looking for a very, very specific thing.

• 47:17David Rosenthal?

  And, you know, and it's still kind of ugly, the site, and they've totally missed out on innovations like chat and.

• 47:23Speaker 02

  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.

• 47:28David Rosenthal?

  Yeah, right. You know, it took them forever to figure that out and they're kind of like, okay, now. 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, before YouTube, but really working and working with video and working at scale, it changed the world, right? And then the second one being embeds. And embeds is a double edged sword because as we're talking, you know, as we've talked about, like, when you can embed your content on somebody else's, on other people's properties, like, why do they go to

• 48:09David Rosenthal?

  your property? But as a concept, like, it's pretty amazing.

• 48:14Speaker 02

  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.

• 48:21David Rosenthal?

  Right. And you did, I mean, basically it upgraded the internet. YouTube upgraded the internet. And I don't think that's an exaggeration.

• 48:28Speaker 02

  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, I'll just put my YouTube video in that blog post.

• 48:36David Rosenthal?

  Yeah. So, and, you know, for these.

• 48:38Speaker 02

  Not to mention to your first point, when you like, it changed the world and. There's a whole category of people that are YouTubers that are making a living doing that and a whole, you know, generation of people that know those people as their celebrities.

• 48:51David Rosenthal?

  Yeah.

• 48:51Speaker 02

  And it like, I, this is

• 48:52David Rosenthal?

  PewDiePie.

• 48:53Speaker 02

  cheesiest thing, but a totally, totally democratized video creation and becoming a star.

• 48:58David Rosenthal?

  Yeah, and, um, you know, and for that reason, I think this product side is like really hard. Like they, it's been really disappointing and a big failure on several product fronts. However, on like the core things that like, it is just knocked it out of the park. So, um, I give it an A minus on the product side. Overall, I'm going to mash this up into a B for Google. Um, 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 dollars for YouTube, I think they would do that all day, every day.

• 49:40Speaker 02

  Yeah. I mean, also like just on their personalities, right? Like it's, 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 of 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.

• 50:13David Rosenthal?

  There we are.

• 50:15Speaker 02

  Cool. Thanks for joining us.

• 50:16David Rosenthal?

  See you next time.

• 50:37David Rosenthal?

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• 50:43Ben Gilbert?

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• 50:54David Rosenthal?

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• 51:15Ben Gilbert?

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• 51:27David Rosenthal?

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