The Gurus of YouTube

(3 of 3)
STEVE SHIH CHEN has always been something of a risk taker. He left the University of Illinois at Urbana-Champaign a semester and a half early to work for PayPal. His family was wary: "We told him it was risky; he just had a few months left" in college, says his brother Ricky, 26. "But he was determined to give it a shot." Steve was drawn to PayPal partly because several U. of I. alums worked there, including PayPal co-founder Max Levchin, who in turn was eager to hire Steve because of his educational background. Steve had attended not only U. of I.—which has a well-respected computer-science program—but also the Illinois Mathematics and Science Academy (IMSA), a state-funded boarding school. "IMSA plus U. of I. is generally a very winning formula," says Levchin, who says the combination produces "hard-core smart, hardworking, nonspoiled" young engineers who are perfect for start-ups. "The kind of people that imsa attracts are the kind of people very prone to choose their own path," he says. They also grow up quickly, since IMSA feels more like a college than a high school. It's coed and highly competitive, the schoolwork is college level, and kids spend every possible second on the Internet.

Which isn't to say Steve is a geek—at least not an irretrievable geek. Chad gets more attention for his laid-back cool look, but Steve is actually more fun to hang out with, particularly since he started drinking a year and a half ago (right around the time YouTube was founded; he jokingly wonders if there's a connection). Steve seems to wear the responsibilities of the company more lightly than Chad, and he has absorbed less of the heavy p.r. coaching. Steve, for instance, is willing to speculate about what his wealth might mean for him: "It's funny, you know, Chad and I will probably, are definitely at YouTube for the next five years. But you do start wondering, What's next? Now that you have some cash, and it's like, Well, if I could live in any city, where would I live?"

And?

"New York, in spite of the weather, is a cool place." For now, Steve lives in the San Francisco apartment he bought a bit rashly in 2005, when he had just left PayPal and YouTube was in its infancy.

Steve was born in Taipei and has his own interesting relationship with luck. When he was a little kid, maybe 6, his mother took him to see a fortune teller who told him he would never be rich. "And that's kind of stayed with me ever since," he told me. The experience left him with a sense of dread that he takes half-seriously. "We haven't actually seen any of the money [from the Google deal] yet," he says with a laugh, "and I keep thinking there will be some legal complication, or it will fall through somehow."

But things always seem to work out for Steve, who carries an aura of mischief with him like a cloud of cigarette smoke. He drinks cappuccino well into the night and doesn't get to work until noon approaches. Levchin says that when Steve was an engineer at PayPal, he quickly established himself as the guy who could find the "shortest, cleverest path instead of hammering your head against the wall... He'd be like, 'Yeah, I can get this feature done fast.' And the QA [quality assurance] team would be like, 'Oh, man, Chen wrote this. Great. I'm going to be QAing this for a while.' Because he would definitely take short cuts. But most people wouldn't really notice, and the product would be out faster."

As YouTube developed, Chad and Steve's complementary skills began to mesh. After Chad left PayPal in 2003, it seemed possible he would do something more artistic than be a CEO; he designed messenger bags, and he did a bit of work on a film Levchin helped fund, Thank You for Smoking. "He is sort of an anomaly," says Donahue, his former roommate and the founder of HourTown.com. "Because if you look at the successful start-up stories, the formulaic founders' team is usually an engineer and a business person, or two engineers. It's rarely a designer or a truly creative person." But YouTube's success owes partly to its retro name, simple logo and alternative feel, all of which Chad contributed while Steve was making sure the videos played quickly and easily.

A mentor had also arrived with the Sequoia financing: Pierre Lamond, 76. In terms of Silicon Valley stature, Lamond approaches Chad's father-in-law Jim Clark. A founder of National Semiconductor, Lamond started at Sequoia in 1981. He monitors his investments closely, and he enjoyed receiving daily e-mails from Chad and Steve (many sent late at night) on various site metrics. He was pleasantly surprised to discover that Chad and Steve were great listeners—a rare quality in the genius culture of the valley—and that they spent money very carefully. Whenever site growth would plateau, Lamond would call them and say, "'What happened?' And they would tell me, 'We're running out of storage capacity.'" Lamond sometimes had to push them to buy more.

Early on, Chad and Steve made a crucial good decision: despite pressure from advertisers, they would not force users to sit through ads before videos played. Pre-roll ads would have helped their bottom line in the struggling months, but the site would never have gained its mythological community-driven status. It would have seemed simply like another Big Media site.

The question is, How do they preserve the site's underground image now that YouTube is merely a bijou in the Google empire? As it happens, Google executives are powerfully aware of this problem, and they are sending outward signals that YouTube will remain independent. Google recently sent a team of facilities people to the YouTube office outside San Francisco to ask how the YouTubers want the place decorated (YouTube moved to the old Gap offices in San Bruno before the acquisition, and they haven't had time to fix up the space). "The direction we were given," Google's facilities manager, Ninette Wong, told Chad in a meeting, "was to really get information from you, Chad—you, the man!—and to understand how to integrate the YouTube brand into the work space... It's really to kind of keep Google separate from YouTube." With the old start-up frugality still in mind, Chad said that his coders don't need more space to work—"They don't complain"—and that greenery is a low priority because "I hear it's expensive to maintain the plants at Google."

Google will appreciate his thrifty approach, but it's unlikely that the company knows the extent of YouTube's current independence. In a recent YouTube management meeting I sat in on, Gideon Yu, late of Yahoo! and now cfo at YouTube, told Chad and Steve, "The finance team [at Google] has been pushing me really hard on budgeting, your favorite topic. So what I'm telling them and what I'm telling us are"—he paused—"different."

A nervous laugh shot through the room, but Yu pressed on: "What I'm telling them is that there's no way we're going to get them any budgetary numbers—that it's just impossible because we have no idea what the integration looks like, blah, blah, blah. And they're buying it, a little bit. But I still think that the 'us' team, here, should put together some kind of rudimentary kind of plan... even if we don't share that upward."

To be sure, Google will get some control for its $1.65 billion. YouTube's managers must now report to Chad or Steve and a corresponding Google exec. That prompted Suzie Reider, chief marketing officer, to ask the boys whether she now has two bosses. Without skipping a beat, Steve replied, "You only have to listen half the time." Playful as always, he added that he didn't think he was going to use a Google-supplied BlackBerry that would be fitted with Google's mail and calendar system.

The biggest threat to YouTube remains potential copyright lawsuits from content providers who could claim that the site—like Napster before it—is enabling thieves. In a recent report, Google acknowledged that "adverse results in these lawsuits may include awards of substantial monetary damages." Mark Cuban, the billionaire co-founder of Broadcast.com, has said publicly for months that the potential for legal trouble makes YouTube a bad investment. YouTube has responded by publicizing agreements it has made with media companies such as nbc Universal Television to legally show video clips from, say, The Office. Still, YouTube says federal law requires only that it remove videos when copyright holders complain—not to pre-emptively monitor the site for infringements, which would destroy its spontaneity. If kids can't play sad pop songs in the background of their video blogs, why would they blog at all?

In an e-mail, Cuban pointed out a contradiction in YouTube's position: "They are spending a ton of money to license content. Which makes me curious. Why license if all that content is viable under [federal law]? And when does the licensing ever end—won't everyone want [to get] paid? Even the personal videos of cats?"

Eric Schmidt, Google's CEO, told me his company had hired an outside firm to help it analyze YouTube's legal risks. "And we concluded that Mark Cuban's arguments were false. We read them, by the way. We just think he's false. Copyright law, the safe-harbor provisions—it works, as long as we do a good job of takedown"—quickly removing videos whenever copyright holders ask.

It's hard to imagine Chad and Steve sitting through endless meetings on safe-harbor laws. They're too young, too creative and—in Steve's case, at least—too peripatetic. They usually demur on questions of what they will do next, blandly stating their hopes to "improve the product," as Chad puts it. But Levchin, their former boss at PayPal, says, "The essential crisis is coming. They better get ready. And the essential crisis for an entrepreneur is, What is this all about? Did I just make the most money in my life ever? For what purpose? And... am I going to start setting up my family office and manage my investments, or am I going to jump off another roof and hope there's a parachute?"

Which is a very old question indeed, one all newly wealthy people face when the market rewards them. Chad and Steve don't yet have an answer. They may have built a website that changed the online world in 2006, but they are still learning when to leave the party.

1. Are Evangelicals Really Sold on Palin?
2. Could Florida Survive the Big One?
3. Collider Triggers End-of-World Fears
4. An E-Mail Plea: Help Pay My Tuititon!
5. Searching for Palin's 'Hot Photos'
6. Mayor Palin: A Rough Record
7. How Sarah Palin Mastered Politics
8. Obama Meets O'Reilly: No One Dies!
9. The Man Behind Palin's Speech
10. Behind Obama's Palin Strategy