YouTube

00:00All right, listeners, now is a great time to tell you about longtime friend of the show, Vanta. So, David, I want to paint a picture that many founders listening will recognize. You're about to close your biggest customer yet. The product team has hit a bunch of milestones. The sales team built this fantastic relationship. Everyone at the potential customer is fired up. Your legal team has the contract done. But then an email comes in from the security team. Ah, yes, it's usually a very polite email asking something like, before proceeding, could you share your SOC 2 report? Or do you mind sharing your ISO 27001? If you don't have one, that deal just went from closing this month to closing next quarter, maybe. Now you have to go find an auditor, go through every system, write the policies, and then prove that you follow them. Right. Or you could just use Vanta.

00:53They are the leading agentic trust platform, which means that you can connect it to your systems at your company, and it automatically pulls all the relevant data. And it tells you exactly what's missing for a SOC 2, an ISO 27001, or whichever framework your customer asked for. Vanta gets you through the audit, and then it keeps going. It watches your controls every day afterwards, so the report that you hand to the next customer is still true. Yep. And even more impressive is the Vanta agent. It continues to run in the background so it can find the issues and draft the fixes. This is the work that eats weeks of an engineer's time before an audit, and now it mostly just gets done before anyone has to ask. And the results are super impressive.

01:34A recent industry report says that Vanta's customers see a 526% return over three years, and that it pays for itself within the first three months. If you've ever had one of these security emails stall a deal, you know exactly how that math works. More than 16,000 companies now run on Vanta. 16,000! Listeners, there were 2,000 when David and I started working with Vanta. That's incredible what they've accomplished. And these are companies from large enterprises like Atlassian and Snowflake to the NewGuard, like Ramp and Cursor. We've been fans of Vanta for years, and hundreds, like literally hundreds, maybe even at this point thousands of acquired listeners have become Vanta customers over that time. If you want $1,000 off, check out Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired. And just tell them that Ben and David sent you. Who got the truth?

02:29Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way. Who got the truth? Welcome to Episode 7 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? What? Google announced earnings. Oh, yeah. People are speculating that it might... Oh, when it opens tomorrow? I haven't checked the stock price, but that Google's market cap might pass Apple's tomorrow. Ah, gotcha. Mr. Market will tell. Yeah, in steep contrast to what we normally do on this show, that is just conjecture and hypothesizing. We never conjecture on this show.

03:32We're going to talk about kind of an older acquisition when you look at 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. Founded... 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, Roloff Botha. 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 early growth days having just released the product when Sequoia leads the Series A. A few months later in December of 2005, SNL...

04:54Remember the Lonely Island Days on SNL, the skit Lazy Sunday comes out. And... Wait. So, it only took us seven episodes to talk about Andy Sandberg here on Acquired. Ironic, I know. Editor's note, David looks like Andy Sandberg. There should be no inside jokes in podcasting. So, 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 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, 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 before.

05:56I'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, you know, people filming their TVs like that. That's like what Vines look like now. Yeah. Talk about kind of the history rewriting itself. 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 has grown in July to about 100 million video views a day, which is pretty incredible. And then 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.

06:58I mean, this is just over a year and a half after the founding of the company, literally in a garage. They'd only raised $11.5 million in venture capital. So, I mean, the multiple, $11.5 million to $1.65 billion, that's, what, $120X-ing? 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, you know, going public with funny money in 18 months for over $1.5 billion. I mean, it was crazy. Even Instagram was, that we talked about on one of our first episodes, was such a splash of $1 billion. Insane. So, Google acquisition closes by December of 2006.

08:03In 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 it didn't have, YouTube didn't have the copyright. So, and that began this protracted battle over content rights and YouTube that really was only finally resolved in 2014. Seven years later, there 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, 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.

09:14And 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 show notes. As part of the discovery process, Google and Roloff's, or sorry, 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 at 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.

10:06Like, here we are, what, 10 years after the acquisition and Facebook is stealing video share. What I thought was really interesting, and we'll talk more about this throughout the show, and I think especially in the themes. But 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, 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.

10:58Like, 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, this is, I want to say 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. But, you know, YouTube is a destination site. They're 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.

11:44So, 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. 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. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. So, David, here's a question that I do not think most enterprise CIOs or CEOs could actually answer today if they were asked. How many agents actually run inside your business? Yes. I don't think anybody really knows. And, of course, then there's the harder questions. Like, what can they access? And who gave them that access? And is any of this paying for itself?

12:42ServiceNow has an answer to all those questions. The super intelligence control tower. As friend of the show, CEO Bill McDermott says, it's the one place to see, secure, measure, and help govern your agents' models and workflows across your entire business, no matter who built it. Yep. So, for example, it finds the agent that someone in procurement spun up on their own and then tracks what it's doing and its ongoing cost. When the CFO inevitably asks whether any of this is working and if there's ROI, you'll be ready with the number. And importantly, if something goes wrong, it can detect and revoke access immediately. There's even a kill switch built into the product. And ServiceNow is uniquely positioned for this because they've spent the last 20 years building the operating backbone of the enterprise from IT to HR, sales, service, and cybersecurity.

13:32They know how work gets done, helping support over 100 billion workflows a year across more than 90% of the Fortune 500. The world's most complicated businesses, like many that we've covered here on Acquired, already run on ServiceNow. And now they're running their AI there too. If you're trying to turn AI ambition into real outcomes, just go to servicenow.com slash acquired and just tell them that Ben and David sent you. So 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. 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.

14:28And 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 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, we should say.

15:31But 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, I guess Facebook existed then, so it was probably growing at a similar rate. Um, and yet had these massive existential questions that, uh, even though it was a huge price, um, 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, uh, 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. Um, presumably a lot, but this was 10 years ago. Yeah.

16:30Um, and whether they could, uh, 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, you know, Larry Page, you gotta be optimistic there and you gotta be able to see that your company is only getting, get more valuable. It'd be interesting to go back actually and look at all these shares now and do the math and see, um, what's the current value of that?

17:09It would also be interesting to look at, um, you know, we've mentioned Sequoia a lot in, in this show, uh, both in the past and this episode, but in particular, because of this investment memo, um, you know, Sequoia is one of the largest shareholders in Google. And, uh, I don't know if they were still shareholders at that time, but they have a history of keeping their public shareholdings. Um, which would be very interesting that the largest investor in YouTube, uh, might also have been the largest or one of the largest shareholders in Google at the time of this acquisition. Hmm. Interesting indeed. Okay. So, so, so, uh, just to wrap up. So what happened next? 2006 time magazine names quote you person of the year, but the cover is YouTube, uh, and the theme of you and user generated content. Um, and, and the growth just, just continues on the product side.

18:04I 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, and, and the growth has just continued since then. Okay, cool. So I've heard you say a lot about views and viewers. Gotta feed my family. Yeah. So how do you feel about YouTube as a business? Well, here's, what's really interesting. And that's happened since then, especially, you know, we've done our episode on Twitch. Um, Netflix, you know, has also been built, uh, well, Netflix as a digital streaming service has been built, uh, during the same time. Amazon stood up something from scratch in that time. Yep. You know, and, and YouTube is really one of the, um, few, if maybe only major video business.

19:04Well, 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 script subscriptions. Yeah. Yeah. So you touched on two really interesting things there. One in thinking about, um, YouTube as a profitable business. I think, um, last year, there's not a lot of good stats on this sense, but in February of 2014, um, they were doing about 4 billion in revenue, but were, um, pretty flat. I mean, they, they, they, uh, I guess not flat as much as they were break even business. Um, they, yeah, 4, 4 billion in revenue growing fast.

19:51But, 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. And so in the last year, uh, estimates that are that they are a $5 billion business, but again, still not a profitable one. Um, um, 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, uh, the latest numbers around kind of Facebook and Twitter are like somewhere in the seven to $9 range for, for those social services that are, that are ad supported. It's probably in that seven, $8 range, maybe a little bit less because it's, um, you know, the, 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.

20:51So you're talking about less than $5 per, uh, per user. Yeah. Yeah. So you can see why, uh, 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, um, you to 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, and I, I'm 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 the core business, not hugely profitable or profitable at all.

21:41So, 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. 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.

22:36Um, 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, 3 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, or static photos. Um, but two is, is the content payments, you know, and YouTube has really been aggressively investing in this.

23:35And 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, 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, and, you know, we know, um, on, 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, is that's their bread. Bread and butter.

24:25I mean, Facebook has a product that is pulling people away in huge numbers because that's everyone's first step. And I think that, um, 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, I feel like we should, uh, we should move on to acquisition category. But before we do one more quick aside, um, that I want to throw in, this is a particularly fun episode because my very first, uh, job interview or interview for my very first job, uh, when I worked at UBS and investment banking, uh, after college, I was interviewing in January, 2007. And this acquisition acquisition had just been announced. And, and I did this as a case study in my interview. I thought, man, this was going to be like the best job ever.

25:19I could 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, 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, 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, um, you know, whether that storm of the crazy margins that you have to pay out to content producers at that point.

26:03But, um, you know, it, it's short-sighted in that they maintain that same advertising platform strategy. All right, listeners. Now is a great time to talk about one of our favorite companies, Lagora, the agentic operating system for legal work. Yes. Most of you have dropped a contract into a chatbot by now, but as a lawyer, how far can that really take you? It's never seen your firm's precedents. It doesn't respect confidentiality and you can't check where its answer came from. So Lagora's founders approached this the way that great founders do. Early on, the team moved into the office of a big law firm in Stockholm and learned, for months, how the work actually gets done. A couple of thousands of enterprise customers and a hundred thousand users later, they still work that way. They employ a hundred legal engineers on staff.

26:54These are lawyers sitting inside of firms and legal departments to deploy Lagora onto live situations like the deal closing this week or the policy review due Friday. The product has gotten very powerful in a short period of time. A year ago, the goal was a good answer from a chatbot. With the Lagora agent, you hand it the work and it comes back with a plan. Tasks like running diligence on a data room or reviewing a new vendor contract get completed inside the tool you use every day, like Microsoft Word, and against your own precedents and playbooks. Every finding is sourced, the lawyer directs the work and signs off before the system executes any steps. Every legal team can get access to the same AI models, so the models themselves do not give you an edge. What you can do with your own data, people, playbooks, that's the whole game.

27:44Today, over a hundred thousand legal professionals at more than eighteen hundred law firms and in-house legal teams in over 50 markets use Lagora. And when Lagora goes head to head with its top competitor in a pilot, it wins 70% of the time. A demo is one thing, but what matters most is an associate who reaches for it at two in the morning during a closing or whether a general counsel trusts what it says before the board meeting. So if your legal team wants to check it out, whether you're at a firm or in-house, go to lagora.com slash acquired and be sure to tell them that Ben and David sent you. 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.

28:40And 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 way to look at it because if you think about Google 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.

29:38You 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. I think it's an interesting, you know, like I said, quote, loss leader product for Google. Yeah, I actually was going to go with other also, but for a totally different reason. And the 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.

30:20But 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, you know, again, probably primarily the product. But I think other for for both of those two reasons. And that also gets to something I want to talk about in a minute, which is embeds. Yeah. Yeah. Well, we'll get there in a minute. 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.

31:04Interestingly 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. 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.

31:55And 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. 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 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. It was 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.

32:44Yeah, 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 strategy was to 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. So we can say unequivocally that. 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, 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.

33:38That was not a concept that existed before YouTube, really. Yeah, just talk to Justin Kahn. 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 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. Yeah, you have to put it on your iPod with USB so you can listen to it. Yeah, exactly. Right. I'm sure that's what all of our listeners are doing. Yeah, 12 years later and the medium is just barely taking off because... Yeah.

34:23But, you know, I mean, think about it. Like YouTube was really able to popularize this. And then the other piece of it, I think, is embeds, which I want to talk about in a minute. You know, I mean, YouTube could benefit from this amazing service that it offered that clearly millions and millions and now billions of people love, which is watching hosted video on the Internet. 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. Yeah, it's true. And it wasn't clear. Yeah. I remember thinking like, well, what videos would I have that I even... 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... But you have a personal blog. Oh, I know what this is. Like, you know, it's videos of stuff that I do.

35:18Yep. 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. 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 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. And 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.

36:10And 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. 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, 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 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.

37:01Was 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? Like. Yeah. 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 going to get charged for it.

37:52So every PC leaving the door of the factory had MS-DOS on it. And then once Microsoft had an alleged monopoly on the entire computing 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. 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. So, yeah, tech themes. We've also covered a bunch of these. But, you know, I pulled three. I have a couple others.

38:45But I pulled three out of the Sequoia memo that I thought were that YouTube really illustrated that they identified. You know, one, user-generated content. And you had this kind of 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 early 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, 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.

39:46And 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. And you had digital cameras, still cameras, shipping with video modes. And this was new. And then shortly thereafter, cell phones happened. Smart phones 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 combined to, you know, in this, this, you know, 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 the. They made a big bet that people would move from watching their televisions to watching video online.

40:45And 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. Yeah. 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, the, um, the one that I was thinking of is, is, uh, video on the Internet is the place where people's attention will be.

41:33And 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 time 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. Um, they were trying with Google Video and clearly couldn't do it internally. And I, 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. Yeah, I like this.

42:28And, 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, and if Google were sending, I don't know, I'm going to pick a number out of thin air, but, uh, 10%, 15% of Google searches. Does, I think that's, seems, feels reasonable to me, end up in a YouTube, uh, 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. 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 homepage instead of using Google to search for it or Facebook to discover it through what your friends and Facebook are surfacing to you.

43:25Which are basically the two ways that people find things on the internet right now. Yeah. Or 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, uh, 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, 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 is my front door when I don't know what I want. That's so big hearted of you. You don't exist. And such a fail. I try. Um, what was the plan I was going to make there? That is, okay.

44:07If 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, um, 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. Um, on the other hand, you could argue that, uh, Google really had no motivation to invest in doing so. Um, and had YouTube remained independent, which as we kind of established was impossible.

45:01Um, 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. It's like a B minus. Yeah. Um, okay. So for me, ah, gosh, I kind of, part of me really wants to split this into, two pieces. Um, 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. 50% your show. You do what you want. Yeah. Right. Well, thanks Ben. I really appreciate the trust here. Um, so I think as a, um, I'm going to take first as a, um, business YouTube.

46:09Um, 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. 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 freaking hard, but, um. And that 1.65 billion is just the beginning.

47:09I 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 chat. 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.

47:56Yeah, 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, I mean, 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 in beds, um, and in beds 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. It's 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.

48:49And you did, I mean, basically it, it upgraded the internet. YouTube upgraded the internet. Yep. 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, I'll just put my YouTube video in that blog post. Yeah. So, and you know, for these. 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. Yeah. And it like, I, this is the cheesiest thing, but it 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.

49:32Like 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 for YouTube? I think they would do that all day, every day. Yeah. I mean, also like just on their personalities, right? Like it's, I'm not going to call it a moonshot, but if 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?

50:27Like 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. There we are. Cool. Thanks for joining us. See you next time. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes. There is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next. This is where Statsig comes in.

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