October 8, 2006 8:44 pm

How to set a course for a shooting star

Chad Hurley has the drawn face and chalky pallor that have become almost a mark of honour for internet entrepreneurs in their early days. If too little sleep is to blame, it would not be surprising.

YouTube, the online video-sharing site he launched in December with Steve Chen, chief technology officer, has hit the sort of popular culture nerve about which most people in his position only dream. Less than a year after its launch, YouTube has become the first site to turn online video into a mass market business, streaming more than 100m short videos a day to an audience of more than 30m in the US alone.

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The object of takeover advances from some of the biggest internet companies almost from the moment it was launched, YouTube has recently received a flurry of new bids that could mean it will finally agree to be bought out.

With things moving that fast, who has time to sleep?

What is taking shape in YouTube’s cramped offices above Amici’s pizza restaurant in San Mateo, a suburban wasteland south of San Francisco, has transfixed the television and music industries.

Depending on whom you listen to, this could become the first big new media company to grow out of the web’s Next Big Thing: user-generated video. Alternatively, it could turn out to be the next Napster, an out-of-control network for sharing copyrighted material that draws the legal fire of the established media industry.

Mention of the defunct file-sharing network that opened the gates to mass online piracy draws an instant response from the 29-year-old YouTube chief executive. In an interview late last month, Mr Hurley gave the Napster comparison short shrift. “I think it’s not even a close comparison,” he said. “Napster was a black market for music.”

YouTube, on the other hand, is for teenagers who want to air their angst or show off their talents as home-movie makers. “The more popular users on our site are people who are just telling their stories. It’s almost the ultimate form of reality television,” he said

That is not how Doug Morris, head of Universal Music Group, put it last month. He attacked YouTube and MySpace, the social networking site, as “copyright in-fringers [that] owe us tens of millions of dollars.”

According to this view, YouTube’s users are stuffing its servers with copyrighted music videos, clips of TV shows and other material. Even kids lip-synching to their favourite songs in their bedrooms are distributing music without permission.

Mr Hurley has certainly shown none of the hubris that turned Napster and a generation of peer-to-peer networks into mortal enemies of the entertainment industry. He controls his words carefully, always staying “on message” – that YouTube is trying to become a partner of the media giants, and could become a massive new marketplace for entertainment companies to reach their audience.

The YouTube founders have already seen first-hand the sort of internet killing they could look forward to if they play their cards right. They both got their first taste of it at PayPal, the online payments service that was later bought by eBay. (Mr Hurley was the 15th employee and the first de-signer hired by PayPal.)

Like both of those internet companies, he now claims that YouTube is the beneficiary of “network effects” that mean the bigger the site’s audience becomes the more success will feed off itself. The exhibitionists who post their home videos on YouTube are drawn by its large audience, and the content then serves to draw even more viewers.

The question now for Mr Hurley and Mr Chen is whether they emulate PayPal in one other respect: by selling out to a larger internet company. Barely two weeks ago, the YouTube chief said his company had not been involved in any acquisition talks and seemed adamant about staying independent. “We’re just going to continue to build the business on our own,” he said.

YouTube’s choice of its venture capital backers – Sequoia Capital, the same firm behind PayPal (as well as one of those behind Google and Yahoo) – reflected that desire not to sell out too early, he said. “That’s why we went with Sequoia . . . They’re not a VC that builds small companies.”

Since he spoke those words, though, YouTube has been on the receiving end of fresh acquisition overtures from Google and others. With offers said to be in the region of $1.5bn-$1.6bn, Mr Hurley’s independent streak will be severely tested.

Meanwhile, YouTube still needs to prove that there actually is a business to be built from the odds and ends of video that turn up on its site.

It must also convince entertainment companies that this can be a mutually beneficial endeavour.

In recent weeks, the video site has started the process of trying to find a formula for making money from its burgeoning audience – not least because the costs associated with distributing its videos are also rising fast – though Mr Hurley, while not giving details, insists that the company is at least financially “stable”. One example: a video promoting a new CD from Paris Hilton on a sponsored “brand channel” – a specially designed YouTube page that allows users to view branded content.

Mr Hurley is adamant that the company does not intend to resort to “pre-rolled” ads, the short commercial messages that some sites force their users to watch before seeing a video.

He also says that YouTube is not going to turn to a company such as Google, as MySpace recently did, to deliver ads to its site. Such deals have become a popular way for fast-growing websites to cash in on their new audiences.

“We have an opportunity to develop our own ad system,” says Mr Hurley. “We’d love to move forward on that and not let an easy ad deal distract us.”

It is still unclear what advertising on YouTube will look like or what ways the site will find to let advertisers engage with its audience. But, with its own online advertising network, Mr Hurley says YouTube will also be in a better position to meet the requirements of mainstream consumer advertisers. “Google has a great product. They’ve built a great business but it’s a different world when you’re truly, truly dealing with brand advertising.”

For now, some media companies at least appear willing to give Mr Hurley and Mr Chen a chance to prove their case.

In a breakthrough for the company, Warner Music signed a deal with YouTube last month that potentially lets both companies share revenue from advertising generated by the music group’s content posted on the website.

YouTube claims to have developed software that can identify copyrighted music in the videos submitted by its users. Warner will be offered the choice of having the material removed from YouTube or sharing in any income the company can generate from the video.

Ultimately, this points to the bargain that Mr Hurley hopes to strike with the entertainment industry. “We’re preparing them to stay relevant in this new market, with this new wave of content that’s going to be coming online,” he says. “There are different technologies that we’re building that help them identify their content. But it does require them to work with us.”

As the different stances struck in recent weeks by Universal Music and Warner Music show, it is too early to tell whether that is a message the entertain-ment world is ready yet to accept.

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