I have such a file in it. My only thought for why my first mod didn't work was because I hadn't selected it when choosing my files in the CK. Is this the reason?

The update esm is what Bethesda uses to...update the esm. In previous games they patched the existing base esm (Oblivion.esm etc), now they do it via an update esm. All the bug fixes and stuff that was added after v1.0 (including the day 1 patch) are in the update esm. I guess it's a good idea to select both the Skyrim and update esm when modding.