CHAPTER
EIGHT
Chasing the
Fox
(2005-2006)
Rupert Murdoch, the audacious and sometimes
outrageous media mogul, made another move in July 2005 that
unnerved his peers. He was in the habit of doing so. For four
decades Murdoch’s News Corporation had been playing bold offense,
forcing other media companies to defensively respond. Starting with
a single newspaper in Australia, and then England, he build a
newspaper empire in both countries, and forced the modernization of
newspaper work rules in England. At a time when the audience for
the three broadcast networks was aging, he had pioneered the Fox
broadcast network, with its youth-oriented programming. He
established satellite broadcasting that blanketed much of the
globe. He eclipsed the once-dominant CNN in ratings with the Fox
cable news network. Journalistically, his impact could be
pernicious—spurring tabloid television with his syndicated A
Current Affair, fomenting shrill,
nineteenth-century press partisanship with Fox News, The Sun in London, and the New
York Post. But even as he was disdained in certain quarters,
he was always carefully watched. Media companies chase Rupert
Murdoch as hounds do a fox.
Murdoch again shocked
his peers when he acquired MySpace.com in July 2005 for $580 million. After
just two years of existence, the youth-oriented social network and
music site had sixteen million monthly visitors ; that number would
quadruple over the next fourteen months.
Before Murdoch’s
announcement, it was expected that Sumner Redstone’s Viacom would
lay claim to MySpace. It was a natural fit with Viacom’s MTV, with
its own youthful audience of more than eighty million monthly
viewers. And it was widely believed that Viacom CEO Tom Freston was
close to making the acquisition. But before he could, Murdoch
swooped in with a higher offer, which Redstone refused to match.
Within months, Redstone had replaced Freston, grousing to
associates that had he been more aggressive he could have sealed
the MySpace deal. Actually, what happened, according to a Viacom
official involved in the negotiations and confirmed by others, was
this: “Rupert made a preemptive bid. Sumner told Tom he did not
want to get into a bidding war.” The parsimonious Redstone had
flashed a red light to Freston.
By acquiring MySpace,
Murdoch intended to instill in News Corporation a fresh Web-centric
sensibility. By contrast, when Viacom tried to instill its MTV
television sensibility online with a music site called MTV
Overdrive, it stumbled. In early 2007, MySpace cofounder Tom
Anderson announced to the German magazine Der Spiegel, “I think we
have replaced MTV MySpace is more convenient. You can search for
things, while MTV is just delivering things to you. On MySpace, you
can pick your own channel and go where you want. That’s why TV
viewership is dropping among the MySpace generation.” MySpace had
the traffic and the buzz. MTV had the profits, of course, which
MySpace did not have. But Murdoch was nonetheless perceived as once
again having set the pace for media companies.
IN THE YEARS
SURROUNDING the MySpace deal, Internet visionaries began to
dominate discourse in the media, and the prospect of new online
challenges attracted some of old media’s most creative minds. New
media was invading the entertainment business, becoming a magnet
for talent, for those wanting to stretch their muscles or pad their
wallets. Believing that new media would define the future, more
than a few executives fled old media. Viacom lost one such
prominent executive, a man named Albie Hecht. After successfully
creating music videos earlier in his career, Hecht oversaw the
creation of MTV Network’s Spike TV, which pitches its programming
to young adult males, and then was president of Nickelodean
Entertainment. But in 2005 Hecht, then fifty-two, suddenly stepped
down, saying he wanted to get back to creating products rather than
managing them. It was seen as a blow to Viacom. “I left because one
of the lessons right now is that the small, fast-moving company
with a specific mission can strike. The Viacoms and the rest of
them are having a hard time. They take entrepreneurs and make them
executives. They take authentic brands and turn them into their
brands. And they put bureaucracy into place and reduce the risk
taking and speed to market. That’s a killer combination.” Big
companies, he said, are too impatient because they can’t explain to
public shareholders how they will quickly get a return on start-up
investments. He wanted, again, to be a fox.
Hecht, a
full-throated enthusiast partial to T-shirts, khakis, and white
sneakers, set out on a “vision quest” similar to the one Barry
Diller took when he left as CEO of 20th Century Fox in 1991,
purchased a PowerBook laptop to explore the new online world, and
embarked on a ten-month odyssey to decide where to stake his
future. Diller decided that cable would dominate the media’s
future. Hecht came to a different conclusion. He had visited
studios, directors, writers, producers, digital animation studios,
anyone who set out to create programming for the Web. “What kept
coming back to me,” he said, “was that the most exciting people,
the most exciting work I saw, was all on the Web.” One night as he
watched his seventeen-year-old son, his thinking congealed. “He was
up in his room,” Hecht said. “He’s on the phone. He’s watching TV
He’s playing a video game. He’s IMing. He’s reading—thank God he
reads! All at the same time! You look at that and you go, ‘This is
a new world with new media and new audience behavior. You have to
capture that audience by capturing the way they are engaged.’” His
son was not just receiving information or entertainment. He was
interacting. This audience wanted different modes of
storytelling.
Hecht’s son was
typical, according to a 2005 study of media usage among eight- to
eighteen-year-olds by the Kaiser Family Foundation. The study
reported that young people nationwide spent a daily average of six
hours and twenty-one minutes with media; when multitasked
activities like reading or listening to music were included, the
daily total is eight hours and thirty-three minutes, more than “the
equivalent of a full-time job.” Nearly four hours per day was
expended watching TV, videos, DVDs, or prerecorded shows, and 40
percent of this time youngsters were multitasking, usually by
simultaneously going online. Outside of schoolwork, sixty-two
minutes were spent on the computer, forty-nine minutes playing
video games, and only forty-three minutes reading. School homework
consumed an average of fifty minutes per day. A later study by the
market-data firm, Forrester Research, found that Americans between
the ages of eighteen and twenty-seven spent nearly thirteen hours
per week on the Internet, nearly two and one half more hours than
they spent watching TV
When he left Viacom,
Hecht established a company, Worldwide Biggies, in a brownstone
office not far from Times Square. With venture capital funding of
nine million dollars, and a staff of twenty-two, they create
interactive Web shows and video games and other multiplatform
activities. “I use the word engagement
as the new metric, as opposed to viewing,” he said. “Some people
call it leaning forward as opposed to leaning back.” In the
products they produce, they look for “six levels of engagement.”
The audience must be able to (1) watch (on any device); (2) learn
(by searching for information about it on the Web); (3) play
(games); (4) connect (social networks, IM); (5) collect
(microtransactions involving money on the Web); and (6) create
(user-generated content). “If we have four of the six, we put it
into development. If we get six out of six, we think we have a
hit.” He has since created successful Internet games and a popular
mockumentary series on Nickelodeon called The Naked Brothers
Band.
The new hits will
differ from the old ones, he said. Storytelling will have to
change. “We’re learning that now. Some of it is that a story isn’t
necessarily a story. Facebook is a story. What’s the story? ‘I’m
going to look at what Albie is doing now. I’m going to go on my
Facebook page and it said that Albie is now doing an interview. And
just yesterday Albie posted seven pictures.’ That’s a story.”
Hecht, like many a high-concept Hollywood executive, thinks in
formulas, but his are broader (in a business sense). He said games
are about “experience,” TV about “character,” and movies about
“stories.” In the stories Worldwide Biggies is working on, he said,
“If we can move someone so they love this character, and they’re
moved through a story, and they’re playing a game, and they’re
connecting with their friends about that game, and they’re
collecting objects in that, and at the end of this experience they
have created their own video of this experience, we’ll have moved
them into a different type of storytelling.”
He believes the Web
is not just a distribution platform. Rather, because of its
interactive nature, he believes, “The platform itself is content.”
Hecht feels like an entrepreneur again. “It’s all about the new
Wild West for me,” he said.
JASON HIRSCHHORN WAS
ANOTHER Viacom refugee. He grew up in Manhattan wanting to be a
music entrepreneur. When he was fifteen, in 1986, New York City
bars were lax about checking the IDs of teenagers, until the
“preppy” murder case. A teenager, Jennifer Levin, left an East Side
bar with Robert Chambers late one night in 1986. Her body was found
that morning in Central Park. Bars cracked down on minors, and kids
could not easily congregate.
Borrowing his
father’s empty briefcase, Jason approached the owner of the old
Fillmore East, where he had been bar mitzvahed, and made this
offer: on nights the place was closed he would fill the hall with
teenagers, in return for half the gross. No alcohol would be
served. The owner agreed to the experiment. Jason called all his
private school friends and asked them to call their friends; this
extemporaneous network became viral. Seven thousand teenagers
showed up. “We grossed seventy thousand dollars the first night,”
he said.
When Jason was a
senior at New York University, he discovered the wonders of the
Internet. “You could ask questions and find things,” he marveled.
He started building a music-trading site. From his East
Ninety-sixth Street apartment, and with an assist from his sister,
he built a site, the CD Club Web Server, that offered users advice
on how to work the CD clubs and catalogues to get the most for
their money. Consumer Reports described it as a great resource,
prompting Columbia House, a music catalogue, to phone to tell him
to take down their trademarks.
“Why don’t you just
advertise?” he asked, half joking.
Instead, they
proposed to pay ten dollars for everyone he signed up. “All of a
sudden,” Hirschhorn said, “I’m making thirty thousand dollars a
month!” With this money he built Musicstation.com, which linked to other music
sites. He created a music search engine that scanned the Web and
television to find music, place it in categories, and fashion a
music index. Not long after, five media companies got into a
bidding war to buy his company. A lifelong MTV fan, he chose Viacom
in early 2000. He was twenty-eight and “I was the lone digital
guy.” Over the next six years, he was promoted six times, becoming
the youngest senior executive at Viacom, the chief digital officer
of the MTV Networks. Soon after Viacom pulled back from its bid to
buy MySpace, a bid he had instigated, he resigned. While he won’t
criticize the failure to acquire MySpace, he was frustrated. “I was
an entrepreneur who came into a big company and tried to treat it
as a start-up,” he said. “Big companies don’t innovate. They
operate. Frankly, I think MTV should have owned the
Internet.”
He was thirty-five
and opted to take what he said was a 90 percent pay cut and accept
equity to become president of the Sling Media Entertainment Group.
Sling Media sells a product, the Slingbox, which allows users to
watch their home television and DVR on their PC, MAC, or mobile
devices. His editors selected what they think of as “the best
stuff, putting it on the front page” of a Sling media guide. They
plan to make money by selling ads and sharing revenues with their
content providers. One day, he hopes, Sling Media will also create
its own content. Sling Media aims to become another distribution
platform, letting users watch what they want when they want it on
various devices, and letting Sling gather data on user preferences
which they would share with content partners. Once again, Hirshhorn
struck gold. Soon after he joined, Sling Media was sold for $380
million to EchoStar Technologies, the satellite television company.
“We’ve built a virtual cable distributor online,” he said. He knew
that the Slingbox, like Apple TV, could prove to be a dud, or that
he could feel restrained operating under a new corporate owner. But
Jason Hirschhorn was very rich and had a sandbox to play
in.
For a while at least.
Chafing under the constraints he felt working within a traditional
media company that he said “did not move fast enough into the
digital age,” in late 2008 Hirshhorn did what he had done at Viacom
and left in search of another sandbox. He found it in the spring of
2009, when the company he wanted Viacom to buy—MySpace—had slumped
and Murdoch brought in new management, including Jason Hirshhorn as
chief digital officer.
MARC ANDREESSEN HAS
SPENT much of his life working in the digital sandbox, achieving
the fame and financial success others seek. A large man with an
immense, shaved, egg-shaped head, his restless leg hammers the
floor, and he speaks rapidly in a booming voice. His professed
motto is, “Often wrong, never in doubt.” A self-made
multimillionaire at age thirty-eight, Andreessen has often been
right. As a computer science major at the University of Illinois at
Urbana-Champaign, he worked at the university’s National Center for
Supercomputing Applications. Inspired by Tim Berners-Lee’s vision
of open standards for the Internet, in 1992 he and a coworker, Eric
Bina, created an easy to use browser called Mosaic. The browser
worked on a variety of computers, facilitating the hypertext links
that allow Web surfing and Google search, helping users to
effortlessly hop from site to site. After graduating in 1993, he
moved to California, where he met Jim Clark.
The former founder of
Silicon Graphics, Clark shared Andreessen’s conviction that the
browser could be a transformative technology, and he had the money
to advance that dream. Not long after, Andreessen became cofounder
and vice president of technology for the company that would become
Netscape Communications.
With Netscape’s IPO
in 1995, Andreessen became very prominent in new media circles. He
also became very rich, and even richer when Netscape was sold to
AOL for $4.2 billion in 1999. After a brief stay as chief
technology officer for AOL, Andreessen started Loudcloud, a
Web-hosting company that sold software and consulting services.
After its own IPO in 2001, Loudcloud was sold to EDS and changed
its name to Opsware, with Andreessen remaining for a time as
chairman.
He had no interest in
being a CEO, though. “I’m a well-trained introvert,” he told me.
“Being with people drains me of energy.” He had a wide range of
interests, though, and deep pockets, and he wanted to marry both.
He chose to become an angel investor. He put money into Digg, a
social news site, and Twitter, among others. He joined the board of
eBay. He wrote a blog that displayed his eclectic and wide range of
interests—in books, TV shows, movies, politics, press criticism,
Wall Street, debt to capital ratios.
The investment about
which Andreessen is most passionate is Ning, a social network that
enables those who join—artists, musicians, students, educators, a
fan club for the Jonas Brothers, a snowboard community, etcetera—to
create their own communities of interests. The idea came out of his
association with Gina Bianchini, who met Andreessen soon after she
received a master’s degree from the Stanford Business School and
started a company in 2000. When her company was sold in 2004,
Bianchini and Andreessen brainstormed her idea of forming a social
network among those who seek like-minded communities and his idea
of providing a platform on which to build them. They named the site
Ning because that was the best name they could agree on that cost
no more than $10,000, he said. The site would have two revenue
sources: Google’s AdSense to reach advertisers wishing to
communicate with each community and those niche channels willing to
pay a monthly fee to Ning for a range of services, including $19.95
per month for space to sell their own ads with Google or to forgo
ads entirely. By the summer of 2008, Bianchini said, there were
465,000 social networks on Ning, with 10 million registered users,
40 million unique users each month, 5 billion monthly page views,
and 116 employees working from a building in Palo Alto. As
chairman, Andreessen has an office there, but appeared only a
couple of days each week, and rarely in the morning. “I wouldn’t be
sitting here without him,” said Bianchini. “He funded Ning and made
me CEO. He put up the money, and he took only 50 percent of the
equity.”
His closest friend,
Ben Horowitz, who worked with him at Netscape and in early 2009
became his partner in starting a $300 million venture capital fund,
describes Andreessen as a Renaissance man. “You can talk about the
economy, fashion, military strategy, whatever, with Marc. I don’t
know anybody else like that who goes across so many
domains.”
Andreessen likes to
be alone, to stay up most of the night surfing the Web and reading,
and rising late and avoiding meetings. He found a kindred spirit in
Laura Arrillaga, who teaches at Stanford’s Business School and is
the daughter of Silicon Valley’s wealthiest real estate tycoon and
Stanford benefactor, John Arrillaga. “Laura reinforces my
hermitlike tendencies,” he said. “We love to be home.” They are, he
said, “dream customers” for old and new media. “We have more DVDs.
We have Blue-ray Discs. We do downloads. We’re a huge iTunes
customer. We’ve got, between the two of us—she still uses her old
house as her office—eight or nine Direct TV dishes. We’re about to
add Comcast’s Video on Demand, because I want to try that. We’re
about to add a Windows’ Media Center PC.” They have a Vudu box,
Apple TV, two Tivos, several PVRs and DVRs, and numerous high-speed
Internet connections. In all, their monthly subscription bill comes
to about $2,500, he said.
Although he consumes
old media, Andreessen delights in tossing grenades at it. As late
as 2005 and 2006, he said, traditional media was “totally putting
their head in the sand. They were in complete denial.” He cited
YouTube, the burgeoning video Web site, as exhibit A: “YouTube ends
up being this hub for tens of millions of people to watch video. In
two years, it’s going to be a direct competitor to TV networks and
cable networks. A direct competitor with more users and viewers....
All of a sudden, that’s a new hub. It’s like the old joke: ‘Where
are they going? I’m their leader and I must find
them!”’
He sees the Internet
as a medium that will soon have 2.5 billion users worldwide, an
audience far larger than any reached by traditional media. And the
audience will be composed of those who “want whatever they want
when they want it.” They will want to skip commercials and watch
movies or TV programs on multiple devices and be able to get DVDs
of movies the day they are released in theaters. “When has the
music industry and the movie industry and the TV industry ever had
a market that big to deal with before?” Andreessen said. “And when
has distribution ever been this cheap?” The costs that burden
traditional media, from paper to printing and manufacturing to
trucks to sharing revenues with movie theaters, could be
drastically reduced, he said. “An entrepreneur looks at that and
says, ‘Oh, my God, it’s a monster opportunity!’ Somebody who is
protecting an existing business says, ‘Oh, my God, I’m going to go
out of business!’ Now they’re both right. It depends on whether
they radically make the changes they need to make.”
GOOGLE WAS BOLDLY
MAKING CHANGES. It outmaneuvered Murdoch, Viacom, and Yahoo and
stunned the media world when in October 2006 it purchased YouTube
for $1.65 billion. The deal eclipsed any that Google had done
before, and the potential impact of YouTube was vast. Since its
start in February 2005, YouTube by the fall of 2006 was attracting
thirty-four million monthly viewers, or four out of every ten video
Web site visitors. And this number was soaring. What visitors
viewed on YouTube was mostly “user-generated content,” or short
homemade video clips: a pet trick, an artfully told joke, firsthand
footage of the devastation from Hurricane Ka trina, Janet Jackson’s
“wardrobe malfunction” at the Super Bowl—that users uploaded and
sent to YouTube. Increasingly, though, YouTube was expanding its
audience with clips from Saturday Night
Live and The Daily Show with Jon
Stewart, with sports highlights and music videos; these,
too, were recorded and shared by users, arousing piracy
concerns.
The reason YouTube
was persuaded to sell, said cofounder Chad Hurley, then
twenty-nine, was simple: They feared the site lacked the resources
to cope with its explosive growth. “When we started, we thought one
million daily uploads would be great.” Instead, they were getting a
hundred times that many. “We thought we’d burn up our bandwidth. We
worried our servers would go down.” The marriage to Google, he
said, meant more investment capital, more servers and computers,
more brainpower, more help finding partners and figuring out how to
place advertising on their site. “We needed resources to scale the
company. We only had a staff of sixty people dealing with the
weight of the world. An option was to raise more money and hire
more people and take a long time. But we were visible, unlike the
early Google. We had competition. We were challenged by the old
media.” He and his cofounder, Steve Chen, were enamored of Google’s
focus on users and its emphasis on the long term. “They wanted to
give us the freedom not to have to maximize revenues right
away.”
YouTube and Google’s
ambitions were immense. Hurley described the site as “a democratic
platform” for user-generated and “independently produced content.”
He vowed that the “creative people who produced content would have
more opportunities in the future without answering to a network.”
Had network executives heard those words, their paranoia would, no
doubt, have been stoked. They would have been even more perturbed
to hear Eric Schmidt say that YouTube’s real challenge was to
figure out how to sell advertising. “If that works,” he told me,
“it will seem like the birth of the CBS network in
1927.”
Because YouTube was
making no money, there was a fair amount of sneering from media
executives. Like Napster, they said YouTube would be hobbled by
copyright lawsuits and would be unable to monetize its enormous
traffic. “Right now,” Microsoft CEO Steve Ballmer declared,
“there’s no business model for YouTube that would justify $1.6
billion. And what about the rights holders? At the end of the day,
a lot of the content that’s up there is owned by somebody else.”
That “somebody else,” the broadcast and cable networks believed,
was them. YouTube, they asserted, built its success on their backs;
thirteen of the twenty most popular videos on the site, the
Wall Street Journal reported in early
2007, were professionally made, not user generated. Sumner
Redstone, whose Viacom owned The Daily Show
With Jon Stewart, told Charlie Rose, “There are some issues
with YouTube. They use other people’s products. The only way they
avoid litigation now is they stop doing it if you call
them.”
To acquire YouTube,
Google tapped its enormous market capitalization. The company’s
stock value at the time the deal was announced was $132 billion,
giving it a competitive advantage over the largest media companies
on earth, none of which was worth more than one-third this amount.
Those still oblivious to the challenge posed by Google were
awakened by the YouTube acquisition. “They can buy anything they
want, or lose money on anything they choose to,” said Irwin
Gotlieb. “I can only do things that are rational to do for my
business.”
Media companies were
chasing a new fox. It did not go unnoticed by Gotlieb—or other
savvy executives—that Google was expanding its online advertising
portfolio to include video. Or that YouTube users would only swell
Google’s unmatched database. More ominous for traditional media,
Google, despite its denials, was now in the content business. Like
the television networks, YouTube publishes content produced by
others and sells advertising. The more consumers linger on YouTube,
the more pages they view, and the more page views, the more
YouTube’s ad rates rise. In search, Google sped users off its site
without any particular interest in their destination; with YouTube,
it had a stake. The purchase of YouTube represented something else
as well. Their Google Video store, announced by Larry Page nine
months earlier at the Consumer Electronics Show, was a flop.
“YouTube was an admission by Google that they couldn’t just build
things,” said Danny Sullivan, longtime editor of Search Engine Land.
WHAT FOLLOWED was a
protracted round of negotiations between the broadcast and cable
television companies and Google. The discussions revolved around
three issues: money, copyright, and trust.
Money was a stumbling
block. Traditional media companies sought a version of the system
they had long relied upon: an up-front license fee from
distributors to air their content. Google agreed to pay something
but argued that with a new distribution platform they should not be
locked into old and expensive formulas. YouTube, Google argued, was
a terrific promotional platform that would expand traditional
media’s audience. The networks countered: Show me the money! Cable networks also claimed that if
they licensed their content to YouTube for a lower price than they
charged distributors, cable systems owners would demand the same
discount.
After months of
negotiations, traditional media walked away. “They didn’t value our
content at a price point we thought was worthwhile,” said
NBC/Universal CEO Jeff Zucker. “They built YouTube on the back of
our content, and wouldn’t pay us.” NBC, like other television and
cable networks, refused to allow their programs to appear on You
Tube, though the network has not loudly protested as YouTube clips
boosted the ratings of, for example, Saturday
Night Live. Philippe Daumann, the CEO of Viacom and Sumner
Redstone’s longtime legal adviser, complained that it was
frustrating to negotiate with Google. “Every time we thought we
came down to a certain point, they changed their mind,” he said.
“And they changed the people in the negotiations. I learned that
Google had an interesting management structure. I talked to their
CEO, and then when Eric went down a certain path he had to have a
discussion back in Mountain View with his two associates. Often
there would be a total change in direction.”
Schmidt countered
that Viacom made demands Google could not meet, including an
insistence on large up-front license fees. Because YouTube had “no
revenue at the time,” he said Google proposed to share advertising
revenues rather than pay an up-front fee. We would “give the
majority of revenue to them,” said Larry Page, “as long as it’s
real revenue.” Viacom and others declined. Asked how he justified
locking into an agreement with, say, AOL, to guarantee payments
when AOL chose Google as its search engine, Schmidt said, “We had
competition at the time.” This suggests that with YouTube, Google
was not looking over its shoulder at Microsoft. Google’s position
was at least partly shaped by a belief that it had leverage in this
negotiation.
The more
consequential issue, said Daumann, was not money but copyright
protection—protection against what he referred to as “theft.”
YouTube was taking Viacom’s content, he continued, “not as an
experiment, not con-sensually, but rather they just take it and
say, ‘Why don’t you watch what happens!”’ Google said it was the
legal responsibility of old media to tell them what should be
yanked from YouTube and said it would immediately comply. Old media
disputed this interpretation of the law, insisting that the
responsibility, and the expense, of policing belonged to YouTube.
Jeff Bewkes, the CEO of Time Warner, echoed Daumann’s concern. The
problem is that once Time Warner’s content appears on YouTube, he
said, “it gets redistributed to five other places—MySpace, Gorilla,
whatever. Those people are now the new sources of the thing.” He
added that Google maintained they were not responsible if another
site lifted Time Warner’s content from YouTube, giving them
“deniability in the event of theft.”
The third issue,
trust, was in some ways the most vexing. Daumann was insulted when
Google tried to assure him of the promotional value of YouTube. “I
don’t need somebody else to say, ‘It’s good for you!’ Let me decide
what’s good for me. Maybe I’m totally wrong. Maybe I’m totally
stupid, and maybe it would be better for me to put all of my shows
on YouTube immediately. Maybe I’m just an idiot. But it’s my right
to be the idiot. I think YouTube is an effective promotional tool.
We put trailers all over the Internet. We don’t run a walled garden
here. We have deals with just about everyone—except YouTube.” He
held a hardening conviction that Google was a pirate. Google held a
hardening conviction that traditional media wanted to halt progress
and slip their paws into Google’s pocket.
Bewkes, unlike
Daumann, was willing to believe that Google “was well intentioned,”
blaming engineers who are thinking not of his copyright concerns
but of solving the “engineering problem of getting it out there.”
Asked what a company like Time Warner wanted from YouTube, he
conceded, “It’s difficult to figure out.” Like his peers, he wants
“what we have wanted for seventy-five years, for our copyrights not
to be stolen and used by other commercial enterprises who get paid
and we don‘t, and they choose the time it is exhibited without ever
contacting us.” But in this new world where every media company
gropes for a way out of the tunnel, he said, “There is a question
of the best way to do that.” Web programmers like Albie Hecht
thought old media was stuck in denial. “You either find a way to
make your product available to the public in the right way, or
they’re going to get it anyway,” he said. “So you can either create
another generation of video as opposed to audio pirates, or you can
do the smart thing and give it to them,” and figure out a way to
monetize it.
The chasm between new
and old was as wide as the gap between Mel Karmazin’s view of how
to sell advertising and Google’s view. They each spoke of piracy,
but old media thinks it is preventable and new media says it wants
to try but is dubious that absolute prevention is possible. They
each spoke of content, but by content they meant different things.
For traditional media companies, it is usually defined as
full-length, professionally produced TV programs or movies. For
YouTube, it is shorter-form clips, mostly user generated. In many
ways, the debate is pointless since both user-generated and slickly
produced content commands attention. “Content is where people spend
their time,” said Herbert Allen III, the forty-one-year-old
investment banker who is president of Allen & Company. “Content
is not just what’s on Comedy Central. Content is Facebook too.
Content is how the consumer chooses to spend time.”
What is really at
stake, Allen suggested, is control of the thriving distribution
platform that is the Internet, a platform “of endless choice and
immediate fulfillment. Media companies are used to the exact
opposite. They have thrived on the pricing power that comes from
complete control of distribution. Since the consumer has already
voted in favor of the Internet, media companies will have to find a
new economic proposition for their content. Media companies have to
embrace the fact that the consumer is now firmly in
control.”
IRATE AND ANXIOUS as
they may have been, as 2006 drew to a close, the TV companies were
scrambling to find Internet platforms. Some, like the local
broadcast stations that formed the backbone of the networks, were
largely bereft of an Internet strategy. Other media companies made
a genuine effort not to resign themselves to their fate. Among the
most active suitors of the new media was Robert Iger, who became
CEO of the Walt Disney Company in 2005. He purchased Pixar, the
groundbreaking digital animation studio, from Steve Jobs in early
2006. Iger’s predecessor at Disney, Michael Eisner, was mistrustful
of Jobs, and Iger was warned to keep him at arm’s length. Instead,
he invited Jobs, now his largest shareholder, to serve on the
Disney board. “I figured that if things go well for Disney, they’d
go well for him,” Iger said. “If things didn’t go well for Disney,
I’d have more than Steve Jobs to worry about. And to have someone
like that in the boardroom when we’re discussing technology was
great. I love working with him.” Iger felt he was building into the
company’s DNA a digital, user-first perspective. He remembered
asking Jobs how often he visited Apple’s design lab or technology
center, thinking he’d say once a week. Jobs told him he visited
three or four times a day. Iger said that now “I try to spend one
hour a day surfing the Internet. I just surf and
look.”
But at least one
inspiration came from old media. “The first thing I did after
becoming CEO was read Elisabeth Kübler-Ross,” said Iger, referring
to the five stages of grief described in her book On Death and Dying. “First came the denial phase.
Then the anger phase. Then the bargaining phase. Then depression.
Then acceptance. That’s what the music industry did. They listened
to a cacophony of voices and let those voices drown out the most
critical audience, which was its customers.” Determined not to
repeat the mistake of the music companies, he became the first
network and studio owner to license his shows and movies on Apple’s
iTunes. ABC station managers and movie theaters protested. He was
not swayed, insisting that ABC and Disney were in the content
business, not the network or movie theater business, and reminding
critics that the average age of those who streamed shows on
computers or handheld devices was only twenty-nine. To be relevant
to young people, he said Disney had to break old habits. In the
first year on iTunes, he said, Disney streamed a hundred million
shows and movies. Although iTunes represented just 1 percent of
Disney’s revenues, it generated $44 million in revenues in 2006, a
figure analysts projected would mushroom to over $320 million in
2008.
Murdoch and others
made moves. Seeking to bring fresh storytelling to the Web, Murdoch
signed seasoned Hollywood producers Marshall Herskovitz and Edward
Zwick to create a slickly produced series called Quarterlife, for
MySpace. NBC Universal’s corporate parent, General Electric,
announced that it was placing $250 million in an equity fund to
invest in digital companies with robust growth prospects, including
Albie Hecht’s Worldwide Biggies. Comcast, which has more
subscribers than any cable company, would launch Fancast.com, an
ad-supported cable Web site that hoped to attract full-length
content from all suppliers. Viacom and CBS joined others in
investing $45 million in Joost.com, a YouTube rival that chose not to display
user-generated content but instead to offer full-length programs
from MTV, Comedy Central, and CBS, sharing ad revenues in exchange.
The TV giants discussed forming their own Internet platform to
compete with YouTube. Although many participated in the
discussions, only two initially joined: News Corporation, which as
the new owner of MySpace saw YouTube as a direct competitor, and
NBC Universal. The new platform was named Hulu, and it would look
very much like television on the Internet, with full-length
programs from the two networks interrupted by commercials in the
old-fashioned way.
Sumner Redstone
declined to join Hulu; Viacom’s content, he believed, appealed to
younger viewers than Fox’s or NBC‘s, and in any case, he and
Daumann wanted control over where their content appeared. CBS,
which was split off from Viacom but which did not lose Redstone as
its controlling shareholder, came close to a licensing agreement
with YouTube, but pulled back. Redstone didn’t want CBS to make
such a deal; nor did its network peers. Like Redstone, CEO Les
Moonves said CBS would not agree to display its programs
exclusively on Hulu. “The issue of the moment is whether Google is
going to dominate advertising,” observed private equity investor
Steven Rattner, then managing principal of the Quadrangle Group,
which invests in media companies. “The airlines always kept
McDonnell Douglas in business because they did not want to depend
on just Boeing. Everybody wants at least two
suppliers.”
Still, CBS
established a more cooperative relationship with YouTube and
Google. This reflected, at least in part, the different nature of
the two businesses. As a cable program and movie supplier, Viacom
got the bulk of its revenues not from advertising but from the
license fees cable distributors like Comcast and Time Warner paid
them. Unless YouTube offered a reasonable license fee, Viacom
risked blowing up its cable business model. CBS, a broadcaster
reliant on advertising as its sole source of revenue, saw YouTube
as a worthwhile experiment to tap into new revenues that might
replenish the revenue CBS lost as its audience shrank.
CBS also had a more
assertive digital strategy. Les Moonves decided that he would not
treat the Internet as a single distribution channel that his
network could control; instead he would spread CBS content on over
two hundred Web sites. He had to overcome resistance from the
traditionalists in CBS. Jeff Fager remembers the contentious 2005
meeting he attended. Fager is the executive producer of 60
Minutes, the longest running program in
evening television history, and he wanted to expand his audience.
He had worked out a proposed agreement with Yahoo that would give
the Internet site a total of sixteen clips, up to two minutes long,
from the CBS show each week. Yahoo would sell advertising against
these clips. Fager pitched the deal to a roomful of CBS executives.
He assured them CBS News would retain control of the editing
process, that he would have a staff of seven to edit these pieces,
that Yahoo had agreed to pay half this staff cost and to split the
advertising revenues. “I argued that we needed to reach a larger
and a younger audience and to find new revenue sources,” he
recalled. The average age of his Sunday evening audience was
approaching sixty. “The resistance was: ‘Why do we want to give one
of our best brands to the competition?’” They would be diluting the
exclusivity of a venerable CBS program found nowhere else. CBS
executives wrongly thought of the Internet as just another
distribution platform, and anyone airing 60 Minutes should pay big bucks. They did not see the
Internet as a transformative medium, a medium with thousands of Web
sites that could serve as CBS platforms, an interactive platform, a
promotional platform that would lure younger viewers to CBS. “The
sentiment in the room was not to do it,” said Fager.
But Les Moonves
intervened. “Look at all the new people we can introduce to 60
Minutes,” Moonves remembers saying.
“And since we don’t syndicate 60 Minutes, we are not cannibalizing it. There is no
downside for us.” That was the decision, and soon 150 million Yahoo
visitors would view 60 Minutes clips
each year on Yahoo, far more than the 10 million streamed on
CBS.com. (Of course,
one day 60 Minutes video streams might
produce big bucks, but not yet; the experiment was cancelled in
2008, after producing only one million dollars, to be split
annually with Yahoo!)
Moonves also
announced another partnership, with YouTube, in the fall of 2006.
CBS would allow the video service to air short-form clips, usually
none longer than three minutes, from its entertainment, news, and
sports divisions, with CBS and YouTube sharing any advertising
revenues. CBS would also become the first network to agree to test
a new YouTube technology that would identify its pirated content on
YouTube. “We’re pleased to be the first network to strike a major
content deal with what is clearly one of the fastest growing new
media platforms out there,” Moonves declared in the joint press
release. Redstone blessed the deal, said a CBS executive, because
showing clips of CBS long-form shows was a promotional platform to
enhance their value, while showing clips of short riffs from such
Viacom programs as The Daily Show With Jon
Stewart would rob them of value. In the not too distant
future, CBS would follow Murdoch’s lead with a major digital
acquisition, CNET.
CBS’s switch to
playing offense coincided with the appointment in 2006 of Quincy
Smith as president of CBS Interactive. “I think Quincy is one of
the most advanced thinkers in this space,” said David Eun, who was
a Time Warner executive before becoming Google’s vice president for
strategic partnerships; he now works out of Google’s New York
office as their principal negotiator with traditional media
companies. Smith’s task, in part, he continued, “is to go back and
educate his very smart colleagues that this will not kill their
business,” because YouTube is not “a destination” that competes
with CBS, but rather another platform. The challenge to media
companies is to get “their content to where the audience is.” Eun
credits Moonves: “What he’s decided is that he has to change. He
needed someone and he empowered him.” Of the geekspeak that gushes
from Smith’s mouth, Moonves said, “I understand half of what he’s
saying, on a good day! But the important thing is, he understands
everything.”
SMITH IS PROUD to be
called a geek, though this was not what was expected of him when he
entered the world. He was born in December 1970 on Manhattan’s
Upper East Side. His father, Jonathan Leslie Smith, became the
youngest partner at Lehman Brothers; his mother, Elinor Doolit tle
Johnston, was a Bennington College graduate and the editor of Art +
Auction Magazine. A computer was
Quincy’s childhood pet.
He enjoyed a
privileged childhood—Collegiate, Phillips Exeter, Yale philosophy
major—that suggested a life on Wall Street, or the CIA. His
ponytail did not. He cut it, though, for his first job as an
analyst for Morgan Stanley’s Capital Markets group, in 1994. But
computers and technology were what really inspired him. He moved
the next year to the technology group in Menlo Park, under Frank
Quattrone. He worked on the 1995 Netscape IPO, going on the road
with cofounders Marc Andreessen and Jim Clark, and with CEO James
Barksdale. In October 1995, he joined Netscape as their chief deal
maker and Wall Street liaison. He helplessly watched as Microsoft
bundled the free Internet Explorer browser in with its dominant
operating system, weakening Netscape.
Andreessen’s company
was profitable, but Netscape was sold to AOL for $4.2 billion in
1999, where the browser lives as the open-source Firefox. Smith
left and joined the Barksdale Group to invest in Internet
start-ups.
It took just part of
his time, and Omid Kordestani, whom he had worked with at Netscape,
tried to lure Smith to Google in 1999. He had several interviews,
including one with Page and Brin, but was rejected. “I didn’t
graduate with a Ph.D.! I didn’t even go to business school,” he
said. “The coach”—Bill Campbell—“wanted me to join a couple” of the
companies he was advising, but Smith stayed with the Barksdale
Group until early 2003, when he joined Allen & Company. “The
day I joined,” remembers Smith, “the coach stopped talking to me.
He said, ‘I have no respect for investment bankers.’”
For the next three
and a half years Smith labored on a number of big deals, including
the Google IPO. He was introduced by Andreessen to his future wife,
Kat Hantas, who coowned a small Hollywood production company with
the woman who was then dating Andreessen. In the summer of 2006,
Les Moonves called and Smith began to do advisory work for CBS.
Moonves said he wanted to hire a new digital executive to move more
au daciously into the digital space. Smith funneled people in to
see Moonves. After each interview, he said, “I felt the harpoon.”
Moonves wasn’t satisfied with the candidates. He entreated Smith to
take the job. The clinching argument came, Smith said, when Moonves
told him: “You know, I used to be an actor. One night I was going
to a premiere and my agent called and said, ‘Good luck. We’re all
in this together.’”
“No we’re not!”
Moonves told the agent.
“That’s the line that
got me,” said Smith. This was an opportunity to be an actor, not an
adviser. “The day I joined CBS,” Smith said, “I got an e-mail from
Bill Campbell: ‘Welcome back to work. Now don’t fuck up the
quarter!”’
In a sedate company
partial to charcoal suits or blazers, Smith called people dude,
wore his wavy black hair long and his sideburns down to the bottom
of his earlobes, favored loud purple shirts and chinos and shiny
Adidas JAM’s that were popular in the hip-hop world. He wanted to
move fast, yet knew he had to help bring traditional CBS along
gradually, Sumner Redstone included. When CBS budget executives
questioned him about how much his proposed digital schemes would
cost, he tried to instruct them that they should refer to these not
as costs but as “investments.” He recognized the differences
between his old friends in the Valley and his new friends at CBS.
He said, “Every win in my external world is a loss inside.” He
wanted to quarterback a digital offense, yet knew he also had to
play defense for the network. “When you’re Google or Facebook
you’re all offense,” he said. But he understood that traditional
companies have legacies to protect. “In our world you have sixteen
reasons not to move too fast.” He credits Moonves for pushing
change. “They are letting me do a lot. Are there certain things I’d
like to do more? Yes.” He won’t identify these, but he was acutely
aware that he had to persuade, not just act.
When he acted he
would do so based on a bedrock belief that “the Web is not simply a
more efficient video distribution system. The bigger opportunity
for the Web is as a new media.” He didn’t believe CBS would ever
make “a material amount of our broadcasting dollars from
rebroadcasting full episodes” of its programs online. He believed
the Web would require CBS to devise fresh forms of programming, to
create new and shorter ways of telling stories. He could proudly
point to the fact that in its first month as a channel on YouTube,
CBS clips got twenty-nine million views, making it the single most
watched content on the site. It offered, he thought, great
promotional value.
He described his job
by recalling a conversation he had with a friend before accepting
Moonves’s offer. He repeated the friend’s analysis as if it were
his own: “‘Your problem is that traditional media is sitting in a
castle. If you ask them to run outside in the middle of the rain of
arrows and go down a river and cross a bog to go up a hill to get
to what we don’t know is over there, we can’t assure them it is out
of arrow range. No promises. Facing that option, traditional media
is going to stay in the castle. And what’s going to happen to the
castle? Those arrows are going to turn into catapults. You have to
do something to escape.’” Smith adds his own coda, a kind of
halftime talk to stir his new team: “You can be good in television
and radio. But you’re a media guy. Don’t you want to be good
online? It’s a new medium. And aren’t you better than those geeks
in Mountain View? Right now they’re kicking your ass!”
AS QUINCY SMITH AND
CBS were reaching out to Google, Google fitfully tried to assuage
traditional media’s concerns. Eric Schmidt blamed Google’s lack of
outreach on its newness. “When you’re a small company,” he told
Time, “you sort of have to do
everything yourself, and as you get more established, you begin to
realize you’ll never get everything done by yourself.” Google
reached an agreement with News Corporation’s MySpace that was
similar to the one they had made with AOL. In return for being
chosen as MySpace’s search engine, Google guaranteed the social
network nine hundred million dollars in revenues over the next
several years. YouTube made a series of smaller deals to pull in
content from old media, gathering what company officials said at
the time was a total of one thousand content partners, including
the National Basketball Association, CBS, Sony, The Sundance
Channel, and a channel to air the full library of Charlie Rose.
Before 2006 came to
an end, Google tried to send a signal to traditional media that its
intentions were honorable. It reached an accord with the Associated
Press and three other wire services—the Canadian Press Association,
AFP (Agence France-Presse), and the UK Press Association—thus
eliminating the possibility of lawsuits dating back to 2004. The
agreement allowed Google News to host and carry complete or partial
stories as well as pictures from these wire services, and for
Google search to link to these wire service stories; in return
Google agreed to pay an undisclosed license fee. This was an
acknowledgment that a wire service like the AP, whose articles are
syndicated to countless newspapers, posed particular problems for
Google search. Every time a user did a search, a waterfall of the
same AP story appeared from different newspapers, clogging the
search results. Google called this “duplicate detection,” and
announced that the agreement with the wire services “means we’ll be
able to display a better variety of sources with less duplication.
Instead of 20 ‘different’ articles (which actually use the same
content), we’ll show the definitive original copy and give credit
to the original journalist.” Google justified paying a license fee
to the AP and other wire services—but not to newspapers—by claiming
that since these four news agencies “don’t have a consumer website
where they publish their content, they have not been able to
benefit from the traffic that Google News drives to other
publishers.”
Solving one problem
created another, though. More than a few newspapers tried to make
the same deal and were rebuffed, said a senior executive at Dow
Jones, parent company of the Wall Street
journal’s Digital Network. “If they’re really about the
user, they should want to say, ‘Some sources are better than
others.’ We’ve had many conversations with Google. The bottom line
from their perspective is that they are not interested. They are
about algorithms and links and ‘the wisdom of crowds.’ But is that
really best for the user?” And since the journal charges for its online edition and is
behind a firewall, Google cannot offer full links to journal stories as they do with other
newspapers.
Amid declining sales,
the anxiety of newspapers was inflamed. It was not difficult to
incite newspaper owners. The average daily circulation of the
largest 770 U.S. newspapers fell 2.8 percent in the first six
months of 2006, and 2.5 percent the prior six months. Although
online traffic for the top 100 newspapers rose 8 percent in the
first half of 2006, and online ad dollars grew even faster, the
gains did not compensate for the losses. The rule of thumb is that
an online ad brings in at most about one-tenth the revenue as the
same ad in the newspaper. There are two reasons for this: readers
spend much less time reading a paper online than they do a
newspaper, and because ad space is not scarce on the Web,
advertisers pay lower rates. A regular newspaper reader of the
New York Times spends thirty-five
minutes each day with the print version, according to Nielsen,
while those who read the Times online spend only thirty-seven
minutes a month reading it. These figures can be misleading,
because they average in the occasional visitors who may spend a
minute or less online with those who are online devotees.
Nevertheless, there is a wide disparity between online and print
newspaper readers. Those who can read the paper online for free
help explain the drop in newspaper circulation. And those who spend
less time with newspapers have less time to scan the ads, which
helps explain the drop in advertising. Advertising in major
newspapers, which grew barely 1 percent in 2005, would actually
drop 1.7 percent in 2006 and 8 percent in 2007. Coupled with the
other dismal facts—the falling value of newspaper stocks and their
rising debt load—only added to their agitation.
Inevitably,
resentment toward the AP spread among newspapers. The AP is a
nonprofit cooperative owned by its fifteen hundred or so
newspapers. It employs a staff of about four thousand, and because
the AP smartly diversified, a third of its revenues come from
selling video and online news to its members. While most of its
newspaper constituents struggle, the AP’s revenues grow annually at
about 5 percent. The licensing agreement with Google promised to
boost these revenues. Unable to share this growth, U.S. newspapers
began to petition the AP to lower the fees it charged them. As part
of their cost cutting, the Chicago
Tribune-owned newspapers, along with about 7 percent of the
AP’s U.S. newspapers, announced plans to cancel their relationship,
a step that, contractually, takes two years.
In the spring of
2007, Rupert Murdoch summoned all his News Corporation newspaper
editors and publishers from around the world to a retreat at his
ranch in Carmel, California. There they spent a couple of days
wrestling with one terrifying question: What is the future of
newspapers? Their conclusions, according to Jeremy Philips, the
News Corporation executive vice president who prepared the agenda,
were bafflingly mixed. The short-term outlook for newspapers
promised more declines in advertising, circulation, and classified
ad revenues; the long-term prognosis—if the papers could hold
on—promised lower costs for printing, paper, and distribution
online. “The headline is a paradox,” said Philips. “The macrotrends
underlining these businesses have never been stronger. The
consumption of news is greater than ever before. And the cost of
delivering news is lower than ever before.” He noted that the
online version of The Times of London
and the New York Times have ten times
the readers as their print editions had. On the other hand, he
continued, “The microeconomic trends are problematic. The
advertising available has declined because there are more places to
advertise. Newspapers have lost control of classified advertising.
In addition, the migration to online leads to a revenue gap because
the print reader is more valuable today. And young people are
reading fewer newspapers. This is a long-term trend.” In a world
where online links to content obscure the brand names that produce
it, the economic vise tightens faster for small and midsize
newspapers as their costs rise and their revenues
decline.
THE CONTROVERSIES DID
NOT HINDER Google’s growth. At the end of 2006, it had 10,674
full-time employees, about half of them engineers. It had reached
$10 billion in revenues, a year ahead of Wall Street analysts’
expectations, and $3.5 billion in profits, meaning that for every
dollar collected, a hefty thirty cents was profit. (Amazon, which
was sucessfully branching out from selling books to selling other
goods, made a profit of about two cents on every dollar; Wal-Mart
made almost four cents.) Google pleased many of its partners—from
AOL to MySpace to thousands of Web sites—then paying them a total
of $3 billion from its AdSense program. In their annual letter to
shareholders, the founders spoke of improvements in search and
pitched their new products. However, the core of their
thirteen-page letter consisted of endorsements from those who
benefited from Google, including Quincy Smith of CBS, who was
quoted as saying: “YouTube users are clearly being entertained by
the CBS programming they’re watching as evidenced by the sheer
number of video views. Professional content seeds YouTube and
allows an open dialogue between established media players and a new
set of viewers.”
There was much in the
annual letter to sharpen traditional media’s concern about Google’s
intent. User-generated content was “central” to the site’s success,
the letter said, and these users would “become the broadcasters of
tomorrow.” Page and Brin spoke of their new efforts to sell radio
and newspaper advertising, declaring, “Our goal is to create a
single and complete advertising system.” This system, they added,
was one in which Google was “helping advertisers of all sizes buy
and place offline ads more effectively”
A rain of arrows
would soon be aimed at Google. Quincy Smith thought this was a
mistake. “I’ve never seen a company so loved on Wall Street and by
advertisers, yet so despised by media companies,” he said. “Media
companies don’t understand that the platform is the business.
Google is a platform. They help you monetize your content.” For
many media companies, however, this was a risk they were unwilling
or unable to take.