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How Google's $1.65 billion YouTube bet became a half-trillion-dollar media empire
In 2006 Google paid a big price in stock for a 20-month-old video site with huge traffic, little revenue and a lot of legal risk, and it grew into one of the biggest media businesses in the world.
In late September 2006 the billionaire Mark Cuban told a room of advertisers that only a "moron" would buy YouTube, and that it would be "sued into oblivion." Less than two weeks later, Google agreed to buy it. Today YouTube brings in more than $60 billion a year, which makes the deal one of the best-value acquisitions in corporate history.
By the numbers
- Price paid (2006)
- $1.65B in stock
- YouTube's age at the deal
- About 20 months
- YouTube revenue, 2025
- $60B+
- YouTube ad revenue, 2025
- $40.4B
- Estimated standalone value
- $475B–$550B
- Monthly users (2024)
- 2.7B+
The deal
On Monday, October 9, 2006, Google said it would buy YouTube for $1.65 billion in a stock-for-stock deal. It was the biggest purchase in Google's eight-year history, and the first time a website built on content uploaded by its users had been valued at more than $1 billion. No cash was involved. When the deal closed on November 13, 2006, Google issued 3,217,560 Class A shares to YouTube's owners, plus options, restricted stock units and a warrant covering another 442,210 shares. The number of shares was worked out from Google's average share price over the 30 trading days to November 9. Google's stock kept rising after that, so by closing the shares were worth about $1.76 to $1.79 billion. That is why some reports give a higher price than the $1.65 billion headline figure. Adjusted for inflation, $1.65 billion comes to about $2.4 billion in 2024 dollars. Google also held back 12.5% of the shares in escrow for a year to cover indemnification claims. That cushion was worth more than $200 million, and the obvious worry it was meant to cover was copyright.
The backstory
YouTube was started by three former PayPal employees: Chad Hurley, Steve Chen and Jawed Karim. The domain was registered on Valentine's Day 2005. Karim uploaded the first test video on April 23, 2005, and by the time the site officially launched that December it was serving more than 2 million views a day. Sequoia Capital, through partner Roelof Botha (another PayPal alumnus), put in $3.5 million in November 2005 to pay for rent, salaries, servers and bandwidth. It added $8 million in April 2006. The growth was explosive. By the autumn of 2006 the site was serving more than 100 million video views a day, with 65,000 new uploads every day. It had roughly half the online video market. But every view cost money in bandwidth, YouTube had little success making money from the traffic, and media companies were finding their shows and music videos on the site. According to Britannica, YouTube began looking for a buyer. Google needed a fix of its own. It had launched Google Video in 2005, but the service never drew much traffic. CEO Eric Schmidt presented the deal as a natural fit with Google's mission to organize the world's information. Hurley, then 29 and YouTube's CEO, told the Associated Press the team was excited to have the resources to "move faster than ever before." Investors approved. Google's shares rose about 2% on each of the two trading days around the news, adding nearly $4 billion in market value, which was more than twice the price.
By the numbers
In 2006 one analyst thought YouTube might make $146 million in revenue in 2007. In 2025, YouTube's advertising revenue alone was $40.4 billion, up from $36.1 billion in 2024, according to Alphabet's annual reports. Including subscriptions such as YouTube Premium, YouTube Music and YouTube TV, Alphabet says YouTube's revenue passed $60 billion in 2025. That is more than 35 times the purchase price, earned in a single year. The research firm MoffettNathanson calculated YouTube's 2024 revenue at $54.2 billion, second only to Disney among media companies, with about $7.8 billion of operating income. In 2025 it estimated that YouTube on its own would be worth $475 billion to $550 billion, roughly 30% of Alphabet's value. The site went from 12.8 million US users in mid-2006 to more than 2.7 billion monthly users worldwide by early 2024. The early backers did very well too. Sequoia, which CBC described as YouTube's sole venture-capital backer, received 941,027 Google shares worth about $442 million at the time, on roughly $11.5 million invested.
Why it worked
Google was buying the audience, not the technology. Its own video product had the engineering but not the users. YouTube had the users, and video was becoming the main way people spent time online. The other half of the logic was that Google already ran the best advertising machine on the internet. YouTube had lots of viewers but could not make money from them, and Google knew how to sell ads. The most important decision was what Google chose not to do. The deal came with a promise that YouTube would run independently to protect its brand and its community. It stayed in San Bruno, California, every employee kept their job, and Hurley stayed on as CEO until 2010. Google did not merge it into Google Video, and YouTube carried on running much as it had before. Fast Company's oral history of the deal says that balance between integration and independence is what paid off. Good timing helped as well. Apple put a YouTube app on the first iPhone in 2007, and Google later added paid content, such as movies and shows made specifically for YouTube, alongside the ads.
What almost went wrong
Cuban's warning was a serious one. A few months before the deal, Google's own executives had called YouTube a "rogue enabler" of content theft, according to documents that came out in later litigation. Universal Music's chief executive had said that YouTube and MySpace owed his company tens of millions of dollars. Google tried to defuse this by announcing content deals with Universal and other media companies on the same day as the acquisition, following a Warner Music agreement in September. Some of the big media companies still went to court. In March 2007 Viacom, the owner of MTV, Comedy Central and Nickelodeon, sued YouTube and Google for more than $1 billion, claiming widespread copyright infringement. The case could have threatened YouTube's whole business model. In 2010, however, federal judge Louis Stanton ruled for Google under the safe-harbor rules of US digital copyright law: as long as YouTube removed infringing videos when rights holders notified it, it did not have to police uploads itself. The two sides settled in 2014 on undisclosed terms. In the meantime YouTube built a system to flag copyrighted material as it was uploaded. The price was also controversial. Plenty of people thought $1.65 billion was a lot to pay for a site not yet two years old that was struggling to make money. Wharton's Andrew Metrick pointed out that the amount was small next to Google's $130 billion market value. That turned out to be the real point: for Google, the cost of being wrong was affordable, and the reward for being right had no obvious ceiling.
The lesson
Buy the market leader and don't try to build a copy, especially when your own copy is already losing. Size the bet against your own balance sheet as well as against the target's current revenue. A stock deal worth just over 1% of Google's market value bought a platform now valued at about 30% of the parent company. Protect yourself against the biggest known risk, as the escrow did here, and then leave the founders and the product alone long enough to grow.
Sources (all free to read)
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