How can YouTube survive?

Digital-age 'freeconomics' aren't helping YouTube's quest for profitability.

It must surely rank as the most mundane business launch in history. Jawed Karim, one of the founders of YouTube, shuffles timidly in front of a video camera while standing in front of a group of elephants at San Diego zoo, with precious little idea of what he was starting. "The cool thing about these guys," he says, nervously gesturing behind him, "is that they have really long trunks. And that's pretty much all there is to say."

This 19-second video clip, uploaded to the brand-new website later later that day, 23 April 2005, may have been insubstantial, but it certainly wasn't inconsequential. Within 18 months, Karim and his partners Steve Chen and Chad Hurley had sold YouTube to Google for $1.76bn, and in doing so became one of a select band of online entrepreneurs who managed to grab our attention – and keep it.

Innumerable jaded web entrepreneurs will tell you how easy it is to get thousands of people to glance at a site, but how tortuous it is to get people to stick around or even come back again the following day. Not only do you have to fulfil a desire that people didn't even realise that they had, but it has to be done with such style and panache that your service becomes indispensable.

While the internet may have dismantled many of the traditional barriers to reaching us, the general public, if your idea is anything less than sensational, we will flatly ignore it.

But YouTube was sensational. Prior to its launch, creating a videoclip for someone else to watch online was an arcane and deeply frustrating procedure of digitisation, encoding and embedding that was way more trouble than it was worth – not least because incompatible technologies meant that many people wouldn't be able to watch it. But from humble beginnings in a room above a pizzeria in San Mateo, California, Hurley, Chen and Karim made the process simple, they made it relatively quick, and above all else, they made it free.

By mid-2006, the site was fizzing with activity as we started using our YouTube channel as a jukebox, a blogging service, a promotional tool for our bands, a home video vault, a repository of famous film and television moments – sometimes with the blessing of the copyright owners, more often without it – and just occasionally, it provided an unexpected route to stardom.

YouTube entered the lexicon and became synonymous with online video; the former British Secretary of State for Local Government, Hazel Blears, dropped the phrase "YouTube if you want to" into an attack on Gordon Brown's style of Government.

Blears making a feeble joke about YouTube is just one small measure of its phenomenal success. But while its staggering popularity is without question – some 345 million visitors worldwide descend upon the website every month – it is haemorrhaging cash.