Making the stock market charts with amateur short films

In early October, search engine operator Google acquired the leading video-sharing portal, YouTube, from its founders in a stock transaction, a deal that was worth an unbelievable 1.65 billion dollars (1.3 billion euros) to Google! Never before has a website with user-generated content been valued so highly, and never before has a short-film website achieved success within so short a time.

YouTube was founded in February 2005 by three young men: Chad Hurley, Steve Chen and Jawed Karim. They thought up the idea of founding an Internet platform for exchanging videos while trying to share party videos among friends. In December 2005, YouTube went online, and a mere six months later the sound barrier of 100 million videos a day was breached. One of the secrets behind the success and rapidly booming popularity of the site – particularly among young people – was the inclusion of social networking features that have until now been offered only by community websites.

Nevertheless, although users contributed their videos free of charge, YouTube never made a profit. This was not due to the founders’ altruism, but to the high costs incurred by the heavy traffic. If Google had not appeared on the scene, the Web 2.0 bubble, supported by venture capital, would probably have soon burst. Bill Gates mocked YouTube for not even having a business plan. What, then, makes YouTube so interesting to Google? After all, unlike YouTube, Google surely has a sophisticated business plan. The answer is, on the one hand, the chance to add number 1 standing in the video field to its other distinctions (Google Video has not been very successful). But the main motivator is the potentially huge advertising income a website like YouTube promises. The incredibly high access rates alone mean that advertisers will agree to pay steep prices. But what is really attractive is the free access to detailed user data, which Google can evaluate using new marketing tools and translate into cash. Very private information such as age, gender, occupation, lifestyle and even taste in music and fashion and other consumption preferences make for a transparent user. These blogs are nothing less than a godsend for the advertising industry! They allow advertisers to address exactly the right target groups with no coverage waste, and even to tailor their advertising to specific individual needs and preferences.

It was for this same reason that media entrepreneur and newspaper mogul Rupert Murdoch took over MySpace.com in 2005 for 580 million dollars. For someone who is old enough to be the great-grandfather of the MySpace founders, we can assume that the content of the teenager platform was not what motivated his decision, but that he instead saw it as a way to get a piece of the lucrative online advertising pie. This could prove to be a trap, however, since not all of the young users are happy with the influx of advertising on ‘their pages’. Hence, the growth curve of MySpace flattened considerably after the News Corporation takeover and was soon surpassed by that of YouTube! YouTube could meet a similar fate under Google. There are plenty of independent aspirants who sense that this is their chance to get their foot in the door. Video sharing platforms with social networking are mushrooming.

The question is also whether the users of such platforms are prepared in the long term to let their content be exploited for advertising purposes from which they themselves do not see any profit. There might be a chance, however, for business models that let filmmakers and producers share in the advertising income.

The billion-dollar deal with Google has put the three young men from YouTube in an enviable position – they could retire today if they wanted to – and California has yet another start-up legend to its credit. This success story incidentally has roots in Germany: a week after the deal was made with Google, the German mother of Jawed Karim, who was born in 1979 in Merseburg (Saxony-Anhalt), told a reporter that her family had left the USA in 1992 due to the xenophobic atmosphere that prevailed there ... The Google share price went up 10% the week after the purchase and analysts are recommending: "Buy!" But perhaps a cautious "Hold!" would be more sensible.

Reinhard W. Wolf