Video Fixation
Scott Woolley 10.16.06
As the Internet alters what we watch and how, YouTube surfs the next wave.
Steve Chen and Chad Hurley almost blew it. In May of last year they launched YouTube, a new Web site for user-provided videoclips, and in the next few months legions of the young and relentless overwhelmed it, watching thousands of videos and posting hundreds of new ones every day. Chen and Hurley had used their credit cards to bankroll the cost of storing and sending out the brief clips. They were ecstatic--but scared. The more viewers their site drew, the more money they lost.
In the first few months traffic was doubling every few weeks. So they weighed selling the intrusive, unskippable ads that rivals allowed, a move they had hoped to avoid; their zap-happy viewers might flee anything that came between them and their Web TV. "The ad money was very tantalizing," Chen recalls. "We looked at it every step of the way, every week."
Then the tech twosome made an audacious gamble: They would forgo ads as long as possible, betting the plummeting cost of bandwidth--now falling 30% a year--would catapult them past ad-laden competitors, freeing them to fashion new and subtler forms of promotion after the fans were in the house. The first act has been a hit. The scrappy, frenzied YouTube site pumps out over 100 million short videoclips and takes in up to 65,000 new ones every single day. It draws 34 million unique visitors a month, ranking it among the 15 most-visited sites in the world.
Its fans form their own massive and hip clique, communicating and cross-pollinating and one-upping one another. YouTube visitors bonded with "lonelygirl15," an adolescent whose video diary entries drew up to 900,000 viewers and turned out to be fake; they thrill to the stupid tricks of their peers, enjoy skits from Saturday Night Live and pore over the home videos of strangers.
Now that Chen and Hurley have harnessed this strange bit of video vox populi, they must build it from a fad into a profitable business. They must ensure that their fans don't simply move on to the next hot site, even as they woo advertisers with the pitch that Web video is the next big thing; they have new deals under way with Cingular, Nestlé's Butterfinger, American Express and dozens more. The duo also has to cozy up to cable channels, broadcast networks and music labels, persuading them that YouTube is a great promotional platform and not a competitive threat--and certainly not a Napster-like copyright thief.
Put another way, in the next year or so they must chart a path to profit and make a serious run at creating something akin to a video-based Google. And prove that they aren't merely building the next ticking dot-bomb. Google itself had put little effort into Internet video a year ago but has now rallied to YouTube's startling rise; one day it could crush Chen and Hurley's creation--or maybe buy it.
Hurley, YouTube's chief executive, is confident the company can adapt and thrive. He believes YouTube can help redefine the $74 billion TV ad industry, combining the clout of "Google's relevant text links" with the sensory power of television to "present a compelling brand image."
The trick, adds his business partner, Chen, is to make money but stay true to the site's antiestablishment origins, creating "a revenue model that is a complement to the site, rather than being jarring." But even YouTube's admirers can see that the company is on a knife edge. "It's very fragile at this moment. I don't want to see the thing get bastardized," says Jordan Bitterman, media director for Digitas ad agency, whose clients include AT&T and Pfizer.
YouTube is at the forefront of a new video revolution on the Net. The upstart's birth coincided with a magic moment in Internet history, when online video became cheap enough to give away. Broadcast television is over half a century old; cable TV is in its 30s. Now a new type of video network promises to radically change what we can watch, who can create it and who will profit.
Across the Web thousands of sites now offer video, up from a handful a few years ago. The big film studios and TV networks are working on video shorts; local affiliates are launching their own sites. They are flanked by a phalanx of Web titans--Google, Amazon.com, Yahoo and more--and by dozens of startup boutiques. Amp'd Mobile streams cartoons of a grade school George W. Bush; Atom Films has commissioned short films on everything from videogames to breast enhancements.
Some marketers and techmakers badly want to see this revolution--and YouTube--succeed. "This is the most exciting time you could ever enter marketing; the world has been turned on its ear," says John Hayes, chief marketing officer for American Express, which is in talks to become a sponsor. No longer can firms talk "at" consumers, he says; they must find ways to listen and interact. "I call this the 'I'll decide, not you' generation," Hayes says.
YouTube ran a funny two-minute American Express spot filmed by Rushmore director Wes Anderson. Some 300,000 people have watched it, rating it 41TK2 stars out of five. "Any media buy could get that many people, but the best brands really want their consumers to interact with them," Hayes says.
What's this? An ad that people want to watch? That's not a bad idea in a world full of TiVos and fast-forward buttons.
Web video could revive key regions of techdom, sparking the purchase of waves of new gear and software and soaking up the oversupply of dark fiber that rests idle in the ground after the madly optimistic building binge of the late 1990s. "The underlying technologies are pretty spectacular," says James Crowe, chief of fiber giant Level 3. "Truck distribution, cable distribution, satellite distribution--it's all moving to Internet distribution."
Video accounts for a 60% share of Internet traffic, and that number will soar. Two years ago the cost of streaming unlimited video over the Net daunted even giants: MSNBC capped coverage of the elections in 2004 at just around 200,000 viewers on election night. Now an hourlong TV drama costs a quarter to zap to a viewer over the Net, and it will cost less than a penny in a few years. Right now most of it is fleeting bits, but just wait. "We will work our way up from an old episode of Bonanza to the Super Bowl over time," Crowe says.
Hurley and Chen insist they will stick with Net-geared, user-made short bursts. This seems to be a lost opportunity: Why not offer reruns on demand from the big networks? It may stem from a laser-sharp focus or from a lack of ambition--or it may be subterfuge; after all, Sergey Brin and Larry Page at Google started out saying they posed no threat to Microsoft.
Hurley and Chen met when they worked at PayPal, the online payment site acquired by Ebay for $1.5 billion in 2002; they linked up in 2005 to start YouTube. Today Hurley runs management and Chen, chief technology officer, oversees programmers, who make up most of the company's 60-person staff.
Hurley is 29 and trim, with long locks and Hollywood-stubble good looks; he grew up in rural Pennsylvania and is married with two kids. A design major at Indiana University of Pennsylvania, he styled YouTube's elegant and clean interface. Chen is 27, single and stockier, sporting a gold earring in each ear and spiky black hair in permanent disarray, by design. He was born in Taiwan and schooled at the University of Illinois at Urbana-Champaign campus that created the seminal Mosaic browser. He handled the nitty-gritty of how the video site would work.
YouTube set up in February 2005 and went live three months later but kept a low profile. By November the pair had raised $3.5 million from Sequoia Capital. Soon a fleeting fad began to look more like a phenomenon. Users watched 3 million clips a day in December, 10 million a day in January and 50 million in April. It was a viral epidemic. Viewers sent links to their friends and posted new fare that drew more newcomers.
Hurley and Chen had the idea for YouTube after getting frustrated when they tried to swap, online, videoclips from a party they had attended. They were intent on keeping the site simple enough for amateurs to use: no sign-ups, no special software downloads needed and, above all, no disruptive video ads.
Madison Avenue had a different idea. Advertisers wanted to insert "pre-rolls," 15-second-long, unskippable ads that would precede all videos, but the two YouTubers blocked that idea. The first time they imposed on users with a small text ad on the site, in January, they jokingly apologized, explaining they needed the cash to fix the office sink. In April they raised another $8 million in venture funding. Hard drives are not free. It was clear they would need advertising as a revenue source and soon.
They began searching for new approaches that would leave the audience unperturbed. In June they let Walt Disney Co. buy up the site for the opening of the Pirates of the Caribbean sequel, filling every banner slot.
In early August the YouTube Two went calling, meeting in New York City with Jordan Bitterman and his crew at Digitas. The duo entered the conference room to find it packed with members of every division: creative types, media buyers, production people. They struck the ad guys as less-than-slick salesmen, very modest--and a bit wide-eyed.
Chen and Hurley skipped a formal pitch and simply used a laptop to cruise around the YouTube site. The duo were open to anything: Why not have users create ads? How about shooting behind-the-scenes videos while making regular ads (ŕ la DVD extras)? Sponsored video blogs? Maybe "event marketing" shoots at sponsored film festivals?
As they headed to their next meeting, a few Digitas execs trailed the duo out to the lobby, aiming to pin them down. Bitterman pitched Hurley on ideas for American Express; Gregory Verdino sold Chen on ideas for Cingular.
On Aug. 22 YouTube set its first big push into video ads. The site created special "brand channels" to draw users to promotional material. The Paris Hilton channel has an original broadcast by the heiress promoting her Warner Bros. album and was wrapped in yet another ad layer: The channel was "sponsored" by Fox's Prison Break. YouTube also created a daily "Participatory Video Ad" on the opening page. It aims to be so good that users seek it out. NBC and ESPN quickly signed on to tout their new shows, and YouTube let its viewers whale away at the sponsors. "Ugh, the worst thing on TV," wrote one in response to an ESPN spot for Monday Night Football.
The participatory slot has been sold out ever since, likely bringing in about $175,000 and 400,000 viewers a day. No wonder Hurley says YouTube won't need more venture funding--though he won't say when it will be in the black.
Companies including Cingular and Nestlé have now signed up to sponsor contests that reward the best amateur videos. Cingular and YouTube won't put a dollar value on the 11-week promotion, but it could bring in several million for YouTube. More deals are in the works. Cingular's rivals instantly got interested.
To jazz up Butterfinger candy bars, Threshold Marketing shot "viral video" of people "making the most of any moment"--goofy folks stuck in traffic and dancing--to bait YouTube fans into making their own videos. The ad folks can veto what they don't like. "The ability to filter out things that might not be flattering was a big concern," says Dennis Mink, a partner at Threshold.
User-generated efforts are catching on elsewhere, too. American Express launched one program on its Web site to have amateur filmmakers produce 15-second spots tied to its "My Life, My Card" campaign. AmEx got 1,700 entries, which were evaluated by directors M. Night Shyamalan and Martin Scorsese. AmEx's John Hayes says he was amazed by the quality; one miniflick of a wedding at a train station in Italy made him mist up.
Hayes sees the risks of empowering consumers who might espouse views he doesn't really want to hear. (Participatory online ads sponsored by Chrysler embarrassed the carmaker after amateurs made them into anti-SUV screeds.) "It's both daunting and exciting," Hayes says, "but if you want your brand to be relevant you've got to join the conversation."
YouTube has an enviable lead in letting marketers do just that, but now it faces foes both gigantic and teensy. Google, backed by $4 billion in cash, a massive server network and blue-chip sponsors, is the most fearsome threat. Its new video site apes the YouTube look and many of its clever features.
Smaller imitators are attacking on other fronts. Revver and other video sites offer amateurs a split of the ad revenue their videos attract (as does Google). "We believe creators deserve to get paid," says Revver Chief Steven Starr. Revver collects a buck or so each time a user watches a video and clicks on the ad that follows it; the clip's creator gets a 40% cut of the ad money. The amateurs who filmed the geyser effect of Mentos candy jammed into bottles of diet Coke have reaped nearly $35,000 from Revver, he says.
Escalating his attack, Starr also calls YouTube "unethical" for its lax approach in letting fans post copyrighted material without the owner's permission, then waiting for someone to object. Last month YouTube said by year-end it will roll out software to help copyright holders quickly find their songs that users have incorporated in their homemade videos. That should help fend off copyright suits but also threatens to crimp the anything-goes ethic that made the site so popular in the first place.
YouTube just signed a deal with Warner Music Group that will let users embed some Warner wares in their music videos and amateur flicks. The deal will also give Warner more power to control the use of their music and potentially collect royalties.
Miles Beckett, a creator of the fictional "lonelygirl15" videos that lured 900,000 viewers in recent months, foresees the advent of "wiki-television": where fans get involved in the story; those who provide the most clever responses get a cut of the ad pie. "If the fans generate enough revenue from their videos they can quit their day jobs, too," Beckett says. "We think it's such a cool way to tell a story. It is just something you can't do with the traditional media."
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