Category: Science & Technology Key figures: Chad Hurley (YouTube CEO), Steve Chen (YouTube CTO), Jawed Karim (YouTube co-founder), Eric Schmidt (Google CEO), Sergey Brin and Larry Page (Google co-founders)
Summary
On October 9, 2006, Google Inc. announced it had agreed to acquire YouTube, the leading online video-sharing platform, for approximately $1.65 billion in an all-stock transaction — the largest technology acquisition to that point. YouTube had been founded just nineteen months earlier, in February 2005, by Chad Hurley, Steve Chen, and Jawed Karim, all former PayPal employees. The deal closed on November 13, 2006, after satisfying customary regulatory closing conditions. Under the terms of the agreement, YouTube continued to operate as an independent subsidiary, retaining its brand, its San Bruno, California headquarters, and all 67 employees, including co-founders Hurley and Chen.
YouTube’s Founding and Rapid Rise
Origins at PayPal
YouTube was created in early 2005 by three former PayPal colleagues who had experienced difficulty sharing a video online after a dinner party. Jawed Karim has cited two events as inspiration: the difficulty of finding video footage of Janet Jackson’s wardrobe malfunction at the Super Bowl XXXVIII halftime show (February 2004) and the 2004 Indian Ocean tsunami. The domain youtube.com was registered on February 14, 2005; a private beta launched in May 2005; and the site went fully public in December 2005.
The first video ever uploaded, titled “Me at the zoo,” was posted by Jawed Karim on April 23, 2005, and showed him speaking in front of elephant enclosures at the San Diego Zoo. It runs 18 seconds. As of 2024, the video has accumulated more than 300 million views and remains one of the most historically significant pieces of content on the internet.
Explosive Growth Metrics
By mid-2006, YouTube was handling staggering traffic:
| Metric | Value (mid-2006) |
|---|---|
| Daily video views | ~100 million |
| Video uploads per day | ~65,000 |
| Unique visitors per month | ~20 million |
| U.S. online video market share | ~43% |
The site surpassed Google Video, Yahoo Video, and every other competitor to command roughly 43% of the U.S. online video market by mid-2006 — a commanding lead achieved in under 18 months. YouTube’s explosive growth was partly attributed to the ease of embedding videos in third-party websites and blogs: the site introduced an embed code feature in early 2006 that allowed users to export player widgets to any website, turning the broader internet into a distribution network for YouTube content.
Sequoia Capital Funding
In November 2005, Sequoia Capital invested $3.5 million in YouTube’s Series A funding round, and in April 2006 provided an additional $8 million in a Series B round. The total external funding raised before the Google acquisition was approximately $11.5 million — making the $1.65 billion exit return roughly 143 times the capital invested, one of the highest venture returns of the era.
The Acquisition Deal
Google’s Strategic Calculus
Google had launched its own video service, Google Video, in January 2005, but it had been consistently outpaced by YouTube despite Google’s engineering and distribution advantages. Google Video was more rigorous about copyright compliance and prohibited user uploads of professional content, limiting its appeal to casual users compared to YouTube’s more permissive environment. Google’s leadership concluded that acquiring YouTube — brand, community, and all — was faster and cheaper than organically growing Google Video to compete.
The acquisition was negotiated in secret over roughly two weeks in October 2006, driven in part by concern that other large technology companies including Yahoo! and Microsoft were also evaluating a bid. Google CEO Eric Schmidt and co-founders Larry Page and Sergey Brin personally approved the deal structure, which used Google stock rather than cash to preserve Google’s cash reserves. At closing, the $1.65 billion in Google stock was distributed among YouTube’s three co-founders, Sequoia Capital, and a small number of other investors.
Legal Clearances and Content Deals
Before closing the deal, Google sought to reduce copyright litigation risk by negotiating licensing agreements with several major media companies. In the weeks between announcement and closing, YouTube struck content and advertising revenue-sharing deals with CBS, Sony BMG, Universal Music Group, and Warner Music Group. These agreements allowed those companies’ content to remain on YouTube in exchange for a share of advertising revenue — a template that became YouTube’s primary rights-management model.
Despite these precautions, the acquisition soon faced legal pressure: in March 2007, Viacom filed a $1 billion copyright infringement lawsuit against YouTube and Google, alleging that approximately 160,000 clips of Viacom content had been viewed 1.5 billion times on YouTube without authorization. The litigation persisted for years before a settlement in 2014, and it became a landmark case in the development of internet copyright law under the Digital Millennium Copyright Act (DMCA).
Significance
The $1.65 billion acquisition defined the Web 2.0 era’s commercial logic: user attention and community, assembled at speed, could command valuations once reserved for established media empires. By allowing YouTube to operate independently rather than absorbing it into Google Video, Google preserved the community and brand that had made YouTube dominant — a strategy that proved prescient as YouTube grew into one of the world’s largest media platforms, eventually generating over $29 billion in annual advertising revenue by 2022.
The deal signaled to the technology industry and investors that the second wave of the consumer internet — built on participatory, user-driven content rather than static web publishing — had arrived at scale. It directly contributed to Time magazine’s December 2006 decision to name “You” Person of the Year, with YouTube cited as a primary reason ordinary people were reshaping media. The acquisition price also set a benchmark that shaped venture capital valuations and exit expectations for an entire generation of Web 2.0 startups.
Sources
- YouTube — Wikipedia
- Google buys YouTube for $1.65 billion — NBC News
- Google Inc. Form 8-K (acquisition announcement), October 9, 2006 — SEC EDGAR
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[YouTube History, Founders, Purchase, & Facts — Britannica](https://www.britannica.com/topic/YouTube)