Economics of Hi-Tech Industries Group 1 Frankie Ho Henri Chong Ruan Yin Alexander Berkmann Jacco Vogels

Outline 1.History of Youtube 2.Revenue Model 3.Copyright and Legal Issues 4.Why does Youtube outperform others? 5.How does Youtube affect our lives? 6.Future of Youtube 7.Q & A

Founders: Chad Hurley, Steve Chen, and Jawed Karim. They were all early employees of PayPal. History

"YouTube.com" was activated on February 15, The creators offered the public a preview of the site in May 2005, and six months later, YouTube made its official debut. On November 7, 2006, Time Magazine named Youtube “Invention of the Year 2006”

History It started at a Silicon Valley dinner party in 2004 with the founders discussing how easy it was to share photo’s online, but how hard it was to do the same with video’s. They decided to do something about that and made a simple routine for taking video’s in any format and making them play in basically any web browser on any computer. They build a kind of virtual video village where people could post their own video’s and watch, rate and comment on and search for and tag other people’s video’s.

History New Technology In August of 2005, Macromedia released FlashPlayer 8, which uses On2 Technologies' VP6 video codec, significantly decreasing download time. Users don't have to use a separate video player, like Windows Media Player or Realplayer. They can now watch decent video in a web page instantly. Without this new technology, YouTube would not have taken off as fast as it did.

The company began in a garage. Until recently they had their office above a pizzeria in San Mateo, California. In November of 2005, venture capital firm Sequoia Capital invested an initial $3.5 million. Additionally, Roelof Botha, partner of the firm and former CFO of PayPal, joined the YouTube board of directors. In April 2006, Sequoia put an additional $8 million into the company, which had experienced a boom in popularity and growth in just its first few months.

Sequoia Capital's Partners Steve Jobs, Apple Computer Larry Ellison, Oracle Bob Swanson, Linear Technology Sandy Lerner and Len Bozack, Cisco Systems Jerry Yang and David Filo, Yahoo! Jen-Hsun Huang, NVIDIA Dan Warmenhoven, Network Appliance Michael Marks, Flextronics Larry Page and Sergey Brin, Google Chad Hurley and Steve Chen, YouTube

History Some statistics for YouTube; The 10th most popular website on Alexa (website that provides information on web traffic). 100 million clips are viewed daily on YouTube. 65,000 new videos uploaded per 24 hours. The site has almost 34 million unique visitors each month. According to the website Hitswise.com, Youtube commands up to 64% of the UK online video market. Source: Woolley, Scott. “Video Fixation", Forbes.com, Forbes, Retrieved on

History On October 9, 2006, it was announced that the company will be purchased by Google for US$1.65 billion in stock. YouTube will continue to operate independently, and the company's 67 employees and its co-founders will continue working within the company.

Revenue Model How does Youtube make money? The founders started financing the company with credit card debt. But: the more visitors, the more money they lost. They did not want to include unskippable ads in their videos (as their rivals did) as not to disturb the viewing experience of their visitors They decided to forgo ads as long as possible and betted on the cost of bandwith to decrease significantly. In that way soaring past competitors and being able to develop new forms of promotion after the fans were “in the house”. Source: Woolley, Scott. “Video Fixation", Forbes.com, Forbes, Retrieved on

Revenue Model Their running costs (mainly bandwidth) may be as high as US$ 1m. And as their traffic levels continue to increase, so do these costs. This led critics to say that they did not have a viably implemented business model. From their home page ads they could make somewhere around US$ 5.25m each month. Adding the revenues from their video page ads they could make somewhere around US$ 7.5m each month. Youtube recently introduced a “brand channel” to draw users to promotional material. These channels are in turn sponsored as well. Source:

Revenue Model This indicates that Youtube is very profitable. Youtube is reluctant to bring out these numbers themselves, because if content owners knew just how profitable Youtube is, they would think twice before giving Youtube their content for free. Youtube is trying to convince media companies that they can actually help them make money (more on this later).

Copyright YouTube policy does not allow content to be uploaded by anyone not permitted by United States copyright law YouTube discovers those videos through self-policing (flagging) or through the search terms that uploaders associate with clips But users create alternative words as search terms and flagging was easy to abuse. So YouTube proceeded to remove copyright infringement from the list of offenses flaggable by members

Problem was not solved, and no one cared because it was not worth a trial against Youtube But with Google taking over, lawsuits worth billions of US$ could be coming 2 choices for the media companies - rundown YouTube (like napster) or - take the chance (for the first time ever) Copyright

If they can’t stop the copyright infringements, they may make money from it, and get free promotion. The decision marks a major shift in the way media organisations are thinking about content provision. Google is setting aside more than $200m to deal with possible lawsuits and copyright settlements over the next year. Google had been visiting as many media companies as it could to sort out content licensing issues and to harness the power of the internet to promote, distribute and monetise their content. Copyright

A technology designed to detect copyright material could give YouTube a needed dose of legal legitimacy but that same technology could hurt YouTube's edgy appeal. Recent agreements with high-profile content creators require YouTube to introduce a new technology, designed to scan a digital audio file and compare the electronic "fingerprints" to databases of copyright material. Content providers will also be allowed to leave that content on the site, and share revenue from advertising that appears next to the copyrighted video. Copyright

YouTube doesn't filter content itself. Instead, the technology will allow copyright owners to identify their content, locate it and then make a decision based on whether they want to remove it. But copyrights can be tricky on sites like YouTube. YouTube has to start convincing the TV, movie and music executives who find copyrighted material on YouTube that it's a revenue opportunity and not a ground for lawsuits Copyright

Stepped-up monitoring by entertainment companies raises the likelihood that YouTube fans won't find what they're used to getting - and will go searching for the next online video rebel Examples: YouTube deleted japanese videos, 1000 sport videos and all videos with content from Comedy-Central (like South Park and The Daily Show) - some of them were very popular

Copyright The real challenge old media face isn't protecting their copyrighted material. It's figuring out what to do when the rest makes something better

Micro (User view) 1. User generated content 2. Acts as a community (network effect) 3. User-Friendly interface 4. Fewer chance to be blocked in early stages 5. Diverse Video — movie, Music Video Why does Youtube outperform others?

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Macro 1.Good Positioning (video search engine) Eg: Wikipedia 2.Flock effect -initiated by “Lazy Sunday” 3.Content Creation Cycle Why does Youtube outperform others?

Similar websites like: -vids.myspace.com -video.google.com -video.yahoo.com -metacafe.com Why does Youtube outperform others?

Online Video Average Stay Time (minutes) Source:

-More subscriptions (2 bases combined) -Higher resolution available -Larger storage space -More click-thru rates -Commercialized -Fewer copyright infringing videos -High price The Future of

-Internet Culture e.g. Online tutorial classesOnline tutorial classes -Time consumption pattern -Video-blogging e.g. cutemish’s blogcutemish’s blog How does Youtube affect our lives?

Google acquires Youtube. Why? For Google, 1.Google wants to expand its market share 2.Supersede the failing Google Video 3.Save cost on competition 4.Incorporate Youtube in Google’s system, e.g. FedEx with Gmail Google’s Acquisition

For Youtube, 1.Youtube can prevent lawsuit 2.Financially easier to manage 3.Enjoys economies of scale - More resources and capital - Better servers/ internet speed - More innovations Google’s Acquisition

References History Revenue Model Copyright myspace_cx_df_0428video.htmlhttp:// myspace_cx_df_0428video.html Why does Youtube outperform others? - Nov06)P.12,13http:// Nov06)P.12,13

Q & A

Thank You !