By Sara Kehaulani Goo
Washington Post Staff Writer
Saturday, October 7, 2006; D01
SAN MATEO, Calif. -- There's no sign outside the office of Internet video sensation YouTube Inc., located in a second-story loft along the main retail strip of this small Silicon Valley town. Two glass doors, sandwiched between a pizza place and a Japanese restaurant, lead to a clunky elevator, which chugs up one floor and deposits visitors inside YouTube's one-room suite, where 60 young employees are crammed elbow-to-elbow, staring into computer screens.
The receptionist, Shannon Hermes, who doubles as office manager and human resources assistant, talks fast and warns staff members to escape through the back exit to avoid the uninvited TV news truck out front. YouTube cannot keep up with the 400 weekly requests pouring in from the media, she explained, nor field the 230 hourly incoming phone calls.
"We're under siege," she said.
YouTube, a free Web site created last year to help people share homemade videos, has become a hit with users worldwide, drawing 34 million monthly visitors who watch an average of 100 million video clips a day. Now the young Internet star is at a critical point as it attempts to morph from quirky start-up into major-league media company.
YouTube is rolling out new video ad formats, cutting deals with movie and music studios to promote their wares and preparing to move into upscale digs. At the same time, reports are circulating that it may be close to a deal to be acquired by Google.
Both firms declined to comment yesterday on what they called rumors, including a report in the Wall Street Journal that they were close to a $1.6 billion deal. YouTube has been in talks with dozens of other media companies in recent months, some involving business partnerships and others flirting with outright acquisition.
The trick, analysts say, will be whether YouTube can retain its popularity as it becomes a real business.
On a recent afternoon, co-founder Chad Hurley, 29, and his business partner and friend Steve Chen, 27, reflected on the company's challenges as they sat in a tiny, windowless room filled with red beanbag chairs.
"We're definitely in transition," said Hurley, clad in jeans, white shirt and black blazer. "We've received a lot of attention, but we've also got a lot of work to do and a long way to go."
YouTube became a hit by letting people post their homemade videos online as easily as they do their digital photos. Every week, it seems, a new YouTube star is born as the world cottons to the often off-beat fare. One week, it's a 77-year-old British grandfather reflecting on his life and youth. Another, it's two Chinese teenagers lip-synching to the Backstreet Boys from their dorm room. Violently graphic images of American soldiers in Iraq also have made their way to YouTube.
It's unclear how well this amateur fare will mix with the professional and commercial videos that the site is adding as it seeks to generate revenue. In the past several months, YouTube has scored deals with NBC Universal, Paris Hilton and Warner Music to add professionally made video advertisements on the site. YouTube offers these advertisers prime real estate to showcase their videos on the right-hand side of its home page.
While some users have posted comments accusing the site of selling out to corporate interests, Hurley maintains the onus is on advertisers to create compelling video.
NBC recently ran a promotion on YouTube that appealed directly to users and already has generated postings from more than 500 people. Instead of being a typical TV commercial, the video promoting NBC's fall programs showed an actor talking into what appeared to be an amateur camcorder.
"Hi, my name is Bill," the actor said. "Lately, I've noticed a lot of negative comments about NBC putting their promos here on YouTube and about YouTube for 'selling out to the man.' Well, I do some of those promos and I'm here to tell you that NBC is not some cold, corporate machine. It's people like me, trying to put their son through prep school and buy their daughter a horse."
Many YouTube members thought the clip was funny and up front; others seemed annoyed.
"Only havin' PC, DVD, and VHS as my major entertainment providers, I can safely say that this is amusin' while completely useless to me," wrote one YouTuber. "So go ahead NBC, ain't no skin off my hard drive."
Another wrote: "Even though NBC is a cold, heartless conglomorate and this video doesn't change anything, at least they're taking a different approach to sell their shows."
Hurley said the company's model challenges advertisers to come up with more creative messages. "The whole philosophy is we want everyone to participate -- if it's personal or professional content -- and we really want people interacting with that content, determining if it's entertaining or informative through views and comments and ratings and whether it rises to the top," Hurley said. "It's a very democratic process."
YouTube, which has received $11.5 million in funding from the venture firm Sequoia Capital since December, does not disclose revenue figures or how its deals with advertisers work, other than to say they involve revenue-sharing based on the number of times a video is viewed.
A company spokeswoman said the firm is financially "stable" and is not seeking another round of funding.
Analysts said, however, that YouTube's costs are considerable because video files are larger than text files, and its bandwidth costs grow as more people use the site.
Greg Kostello, a former executive of music site Mp3.com who now heads a competing video site, vMix.com, estimated that YouTube is spending at least $2.3 million a month to support the site.
Industry analysts also question whether YouTube can escape the kind of copyright lawsuits that crushed the original music file-sharing service, Napster.
YouTube has had trouble from the start with users posting copyrighted movie and TV clips to the site. It is being sued by several smaller firms for copyright infringement and could face more legal actions.
A Universal Music Group executive recently said YouTube and MySpace "owe us tens of millions of dollars," referring to the many music videos, TV shows and movie trailers posted to those sites without permission. The copyright issue looms so large that Mark Cuban, co-founder of Broadcast.com and owner of the Dallas Mavericks basketball team, told an advertising conference last month that only a "moron" would buy YouTube.
YouTube's founders said they were well aware of the hurdles the company faces. As part of their deal with Warner Music, the company must quickly develop a technology that will automatically flag material that might be copyrighted as it is submitted to the site. Now, YouTube needs to convince the other record labels, movie studios and TV networks that it will crack down on copyright violations, and win them over as advertisers.
In short, YouTube's business plan is converting enemies into friends.
YouTube's been so busy that its loft office looks half-unpacked, with boxes of new computer keyboards sitting on the floor. Yet the company is preparing to move next week into an office building five times the size of its current space.
On the wall next to Hurley and Chen's desks, someone has taped photocopies bearing the founders' faces made up in tiny dots from the Wall Street Journal. In the hallway, an Ikea bookcase contains three shelves, one propping up three-ring binders labeled, "Digital Millennium and Copyright Infringement Act, Vol. 1 and 2." On the top shelf sits a can of air freshener to mask what staffers said was a rodent problem.
The YouTube founders said they had been too busy to keep up with the latest YouTube starts and their cultural impact. Like everyone else crowded into the loft, they work seven days a week and can count the number of days off this year on one hand. "Sometimes when you're sort of in this barricade on the inside, it's hard to tell what the public perception is," Chen said.