$1.65 Billion Innovation and Counting

$1.65 Billion Innovation and Counting

When was the last time a company innovated from zero to $1.65 Billion in market value in less than two years from founding, and in less than one year from launch of their key product?

Beginnings of a new Broadcast company

YouTube, a consumer media company for people to watch and share original videos worldwide, serves over 70 million videos daily on their website - videos that are created and shared by everyday people. YouTube also draws 34 million unique visitors a month, ranking it in the top 15 sites by traffic volume. YouTube's mission is to convert everyday people into broadcasters of tomorrow. Is YouTube the beginning of a new broadcast company? A company that fundamentally changed the rules where people choose what they want to watch, when they want to watch, and for how much (and free in most cases) without the overload of advertisements.

Who came first?

Is YouTube a modern-day community of all the people who were using Microsoft's NetMeeting for sharing live video many years ago? There was a huge wave of people who initially embraced the live capability of sharing video in NetMeeting in the late nineties using a simple Webcam and simultaneously conducting conferencing using integrated live chat and audio. A market of live conferencing and video sharing softwares got created overnight based on this initial success. Some of the applications of live video even created a whole new adult industry. However, not a single vendor experienced any type of consumer mass market success. And then TIVO emerged from the Internet boom (or bust), wherein you can buy a simple hardware device (technically a large hard-drive that saved analog TV broadcast into digitial media) and pause, rewind and store live broadcast TV, and watch it on demand anytime. TIVO was innovative and revolutionary, and single-handedly created a huge market following for On demand TV. TIVO even became a verb wherein thousands of TV fans would talk about "Just Tivo it." However, TIVO was a personal device that did not let you share the videos with friends and families. Nor TIVO allowed you to capture your own video and store it (at least not easily) and then send it someone else.

New Innovations

Until Steve Jobs and Apple started the iPod and then iTunes revolution, which morphed into video downloads of hit TV shows onto iPods or desktops to allow people to view the shows on demand. However, even the brilliantly innovative Jobs missed what was to become a people Video revolution. Whereas Jobs was focused on creating partnerships with TV broadcast companies to monetize the market of recorded broadcast videos and grow the business at Apple, YouTube founders Chad Hurley, Steve Chen, and Jawed Karim were focused on the exact opposite - free video service created by the people for the people. They were trying to create the world's best platform and Video network wherein people can upload, tag and share videos for free. The founders almost went broke trying this innovative experiment out after the launch when the number of people uploading videos to share, and the number of people downloading videos to watch grew exponentially. However, the growth of Internet as a network and the fall in price of broadband, bandwidth and storage kept their vision going (and a few million dollar capital investment eventually by Sequoia capital). The YouTube Innovation Revolution was just beginning.

Zero to 70 million Videos served daily

YouTube, founded in February 2005, created many timely innovations that made it successful in such a short time paving its way to an acquisition by Google for $1.65 Billion dollars.

First, the vision of Founders to create a Video download service for FREE (and not getting caught up in monetizing the Video Service from the get go) at the right time when the broad consumer market was evolving into creating and sharing home videos at personal websites or community sites from just sharing pictures and images. Sound familiar? Think Google (that created the Search engine for free and did not monetize it for the longest time).

Second, the intense focus on providing the best and most comprehensive experience for users interested in uploading, watching and sharing videos. This is no easy feat. YouTube made it as easy as 1,2,3 to upload and share a video. And to create a vibrant community, it added such key features as categories, video ratings, most requested videos, most watched videos, and more. This made it extremely easy even for a novice to simply go to YouTube site and browse a video that they want to watch at the click of a mouse. And the ease of uploading and sharing videos meant that there was always fresh content that people want to watch daily. People can also create their own accounts and create their own list of favorite videos, categories, etc. Of course to make all these possible, YouTube created an innovative seamless Video platform that can deliver hundreds of millions of Video to people all over the world.

Finally, YouTube created key partnerships with various Music and Broadcast players in the industry (who soon realized that YouTube was upto something big). This included CBS, Sony, Universal, Warner, NBC and more. This gave YouTube and its people ability to watch snippets of TV shows, news, movies, sports and entertainment shows - short-form video programming or short clips. This became a win-win for both YouTube and its partners. YouTube wins because it brings in fresh content from hundreds of broadcast channels that people around the world want to watch online at their convenience for free, and the credibility from playing with the big boys. Partners win because they use YouTube to market their broadcast programming to the people in the hopes of creating more business on their TV broadcasts.

These timely innovations in business model, technology and user experience, and partnerships made YouTube an overnight success. As Eric Schmidt, CEO of Google pointed out in the Press Release announcing the acquisition: "Our companies share similar values; we both always put our users first and are committed to innovating to improve their experience. Together, we are natural partners to offer a compelling media entertainment service to users, content owners and advertisers.”

YouTube and Google

Google has announced that YouTube will remain an independent business retaining its distinct brand identity. What is not clear is what Google will do to its own Video service. What Google will provide though is the monetization for YouTube's Video services through its advertiser relationships and global reach. If 1% of the 70 million Videos that are served daily click on a Google served advertisement, this would result in 700,000 daily click-through or 255 million click-through in a year (without accounting for any new growth). And if you take a five year period, it would cost Google $1.29 a click in today's dollar. Or to put it another way, Google can create new revenue of $329 million a year without making any profits (assuming it sells ads at $1.29 a click). A steep price to pay for a Video click? Only time will tell as to how big the new YouTube Video Service becomes under the auspices of Google, and how Google will be able to cash in on its investment and eventually make this a $1 Billion business.