CHAPTER
THIRTEEN
Compete or
Collaborate?
To achieve a balance of power against Napoleonic
France, Prince Metternich of Austria helped organize the weaker
European monarchies—Austria, Prussia, Russia—into an alliance. And
in the Congress of Vienna, which followed the defeat of Napoleon,
he maneuvered to maintain peace in Europe by forging an agreement
among these nations to prevent the rise of another superpower. They
would achieve a delicate balance of power among European
nation-states, with no nation dominant. As in nineteenth-century
Europe, today’s traditional media companies must decide how to deal
with the new superpower, Google. Do they aggressively compete or do
they collaborate? Can they achieve a balance of power? The strategy
media companies choose will pivot, as it did in Metternich’s day,
on whether they assume they are strong or weak. If executives of
old media believe their business model is strong—that content is
king—their strategy will likely veer from those who believe they
are gravely threatened. If executives feel particularly vulnerable,
convinced that they require substantial financial and security
guarantees before risking their copyrighted material, they are
likely to focus on these fears rather than on their best hopes for
the Internet. And if they distrust Google’s intentions, cooperative
agreements will be elusive.
Although Google
appears less vulnerable than Napoleon turned out to be, many
traditional media companies chose to stick out their chests. Viacom
filed a lawsuit, as the book publishing industry had. Fox and NBC
refused to join Redstone’s lawsuit but teamed up to create Hulu as
a rival to YouTube out of fear that YouTube would cannibalize their
audience and cheapen the value of their content. “The economics
around these digital properties are not yet fully formed—that’s
five years away,” NBC Universal CEO Jeff Zucker told a Harvard
audience in early 2008. “We can’t trade today’s analog dollars for
digital pennies.”
Zucker’s
dollars-for-pennies claim is “not the right way to look at it,”
said David Rosenblatt, Google’s then president, global display
advertising, and the former CEO of DoubleClick. “That implies that
the preservation of your existing business is more important than
understanding what the new economy will be. My great-grandfather
was in the ostrich-feather business. He went out of business in the
early part of the twentieth century because ostrich feathers, which
women wore attached to their hats and had worked well in carriages,
no longer fit into automobiles. He could have said, ‘I need to find
smaller feathers to preserve my business.’” Despite these
entreaties, Zucker, like many of those in traditional media, viewed
Google as a frenemy.
Microsoft, like
Viacom, treated Google as an outright enemy. This was never more
evident than during the winter of 2008, when it made a Murdoch-like
bid of $44.6 billion to acquire Yahoo, a valuation of $31 per
share, or 62 percent more than Yahoo’s stock price at the time. The
battle that ensued left Microsoft and Yahoo bloodied and
embarrassed, each wounded by self-inflicted blows.
There were reasons
for Microsoft to pursue Yahoo. On paper, it was a way to increase
Microsoft’s then meager 9 percent share of the search market and to
boost the $3.2 billion in online advertising Microsoft totaled in
2008, a figure dwarfed by Google’s more than $20 billion; it was a
way for Microsoft to piggyback on Yahoo’s lead over Google in
display advertising; it was a way for Microsoft to combine its MSN
portal and e-mail with Yahoo and achieve a dominant market share;
it was a way to shore up Microsoft’s defenses against Google’s
cloud computing offensive.
Yahoo clumsily
resisted. After initially rejecting the offer, Yahoo CEO Jerry Yang
and his board feigned interest; then again said they were not
interested; then swallowed a poison pill so costly—saying at first
that it would award each of its fourteen thousand employees a
two-year window in which, if Microsoft won, they could quit and
pocket generous severance benefits—that Yahoo was later compelled
to abandon it. Yang and his board then said they’d accept
thirty-seven dollars per share; then lowered this to thirty-three
dollars; then said they’d consider selling just their search engine
and not the rest of Yahoo. Microsoft’s moves were equally
maladroit. Steve Ballmer called off discussions, then put them on,
then off again; he sought partners to make another run at Yahoo;
then threatened to mount a proxy fight to remove the Yahoo board;
then said he was no longer interested in Yahoo. By the end of 2008,
the general he had placed in charge of Microsoft’s battle plans, a
man named Kevin Johnson, had left the company.
This comedy continued
at the Dow Jones/Wall Street Journal’s
annual D Conference in San Diego. Ballmer and Yang met privately
that day, May 27. In the opening session that evening, Ballmer,
answering pointed questions from Journal columnists Walt Mossberg and Kara Swisher,
insisted, “We are not rebidding for the company.” But he opened the
door a crack, saying, “We reserve the right to do so.” The next day
on stage, Jerry Yang answered their questions and said the
opposite, declaring that Microsoft had slammed the door shut and
“was not interested anymore in buying the company.” In November,
Ballmer told his annual shareholders’ gathering that Microsoft had
“moved on” and was “done with all acquisitions discussions” with
Yahoo. In December, he said he was interested in acquiring Yahoo’s
search business “sooner than later.”
Yahoo shareholders
were bludgeoned by these gyrations. In January 2009, Yahoo’s stock
was trading at around $12.00 per share, well below its $19.18 price
on the day Microsoft made its initial bid a year earlier. Each
company appeared indecisive. As the venture capitalist Roger
McNamee observed, “The two biggest forces competing against Google
have banged heads and knocked themselves unconscious.”
Microsoft was
unaccustomed to losing. The ever-competitive Ballmer, a Microsoft
adviser admitted, was filled with “jealousy” and rage that Google
was doing what Netscape had done a decade before, not merely
challenging but “mooning the giant.” Jealousy and rage are not the
sturdiest foundations for rational decision making.
Microsoft seemed to
affect Google’s testosterone level as well. Sergey Brin told the
Associated Press that Microsoft’s takeover bid was “unnerving.” It
would grant Microsoft near-monopoly power, not just over operating
systems and browsers but would also “tie up the top Web sites, and
could be used to manipulate stuff in various ways.” Eric Schmidt
insisted that he believes in sitting down and talking to everyone.
But did this include Microsoft? Reflecting a professional lifetime
of being on the other side of the Redmond giant, Schmidt said, “If
Microsoft wanted to do a business deal with us, we’d do it. You
betcha. But we’d bring a tape recorder!”
Jitters aside, Google
would find a way to gain advantage from the Yahoo-Microsoft melee,
but not without getting bloodied itself. The company’s Executive
Committee and Board of Directors held meetings to devise a blocking
strategy. They discussed petitioning the Justice Department to
obstruct the merger, using the same antitrust arguments Microsoft
had employed to try to stop Google from acquiring DoubleClick. They
wrestled with whether to make their own bid for Yahoo, but decided
it would be difficult to integrate two large companies with
different cultures and assumed, in any case, that the government
would disallow on antitrust grounds a merger of the two dominant
search engines. They reached out to Jerry Yang and in the spring
jointly devised a roadblock strategy; they announced that Google
would become the selling agent for a large portion of Yahoo’s
search ads. “It gives them a tool to avoid being swallowed by
Microsoft,” Eric Schmidt said at the time. Asked in September 2008
what was the most important Google event of the previous six
months, Schmidt said, “the Yahoo business deal.... It was a setback
for Microsoft.”
Google’s effort to
have the Justice Department block Microsoft’s bid for Yahoo brought
to mind Ralph Waldo Emerson’s delicious observation that “a foolish
consistency is the hobgoblin of little minds.” Like other
corporations, Google and Microsoft extol the virtues of
government’s leaving them unfettered, free to innovate—except when
they call on government to intervene in order for them to gain a
competitive advantage. But antitrust concerns were a real issue for
others. The Association of National Advertisers, which represents
major companies such as Procter & Gamble, petitioned Justice to
block a Google/Yahoo alliance. The World Association of Newspapers,
which represents eighteen thousand newspapers, urged both the
Justice Department and the European Union to block the deal. This
opposition unnerved Page and Brin. According to a member of
Google’s senior management team, the idea that Justice was more
concerned about Google’s becoming a monopoly than Microsoft
provoked an uncomfortable discussion at a September 2008 executive
committee meeting. The founders, this executive said, were “very
upset” to be compared with Gates’s “evil empire.” They ranted about
how Google was making the Web more accessible, not trying to kill
competition. That the government could think they were trying to
squelch search competition, or might possess too much leverage over
advertisers, baffled them. They could not comprehend the
anti-Google sentiment that was building.
This executive
committee meeting coincided with the annual Google Zeitgeist press
luncheon, and there I asked Brin and Page, “How do you feel when
people accuse you of potentially doing evil?”
Not surprisingly,
they didn’t really answer my question. “If you look at our
products, search being our most popular one,” Brin said, “we don’t
lock anyone into search.”
“The value to the
world,” said Page, “of having access to everything for free
everywhere, all the time, really fast, without degraded service
anywhere, has really been a tremendous thing.”
A decade earlier,
Bill Gates had felt similarly hurt that the government would call
his motives into question by filing charges that Microsoft, which
provided 95 percent of PC operating systems in America, was a
monopoly. This blind spot to public fears, to emotion, prevented
Gates from properly reading people, from anticipating the
challenges that would materialize in Washington. Now Page and Brin
seemed to have the same blind spot.
This emotional
opaqueness was on display on the second day of the 2008 Zeitgeist.
Al Gore was to conclude the conference by interviewing Page and
Brin. The three men chatted on stage for a few minutes when Page
interrupted to say that Brin wanted ten minutes to share something.
Brin stepped to a microphone and riveted the audience for about ten
minutes with a precise, impersonal account of his mother’s recent
diagnosis of Parkinson’s disease. He explained that his wife, Anne
Wojcicki, had cofounded 23andMe to study genetics, including the
genetics of Parkinson’s. He said the evidence of a genetic link to
Parkinson’s was at first slight, but studies had recently unearthed
one gene, LRRK2, in particular a mutation known as G2019S, that in
some ethnic groups creates a familial link through which the
disease travels.
Brin said he had dug
deeper, reading genetics journals, searching for pieces of DNA
shared with relatives. Ultimately, he learned that he shared with
his mother the G2019S mutation. He spoke as if he were talking
about someone else. The implications of this finding are
imprecisely understood, he said. What was clear was that he had “a
markedly higher chance of developing Parkinson’s in my lifetime
than the average person.” Sounding like a scientist, he pegged the
odds “between 20 percent to 80 percent, depending on the study and
how you measure it.” This knowledge left him feeling “fortunate,”
he said; the mutation had been discovered early in his life and he
could reduce the odds through exercise, certain foods, and by
employing his substantial wealth to support further research. With
the audience seated in stunned silence, he concluded, “That’s all I
wanted to say,” and sat down.
Compared with Steve
Jobs, who had declined to discuss his own health and issued opague
statements even as he grew visibly ill, Brin was admirably
forthcoming. Yet it never seemed to occur to him to turn his
attention to introducing to the audience his very pregnant, beaming
wife, soon-to-be mother of a child who might very well carry that
same gene. Certainly it did not seem to occur to him to display
emotion, to allay the concerns his comments would arouse among
Google employees or shareholders. What was billed as “a personal
statement” was really a science lesson. The way Brin dealt with his
DNA mirrored the way Google dealt with Washington, politics, or
traditional media: just give us the facts, don’t blur them by
discussing your fears or feelings.
The Justice
Department did finally intervene against Google, informing the
company that if it did not terminate its ad sales partnership with
Yahoo, it would be sued for antitrust violations, just as Microsoft
had been the previous decade. Three hours before Justice was to
file antitrust charges, Google dropped the deal.
Microsoft did not
capture its prize, at least not through 2008. However, by the end
of that year Microsoft seemed eager to return to the bargaining
table, if only to purchase Yahoo’s search business. Gates’s company
continued to lose search market share, and emerged from this battle
with Yahoo looking feckless and defensive, not the posture one
assumes before a foe with Napoleonic power.
In the confusion,
other media companies maneuvered to achieve their own best balance
of power. In tactics worthy of Metternich, Time Warner pursued
simultaneous discussions with Yahoo, Microsoft, and Google about
either selling off AOL or forming a partnership. The News
Corporation schemed to combine with Microsoft to bid for Yahoo and,
at other times, with Yahoo to block Microsoft.
Among the more
interesting aspects of this drama was witnessing Microsoft cheered
on as an underdog. “Microsoft,” said Philippe Daumann, the CEO of
Viacom, “is the one company that can most effectively challenge
Google’s emerging dominance.” A victorious bid by Microsoft would
provide advertisers with more leverage, Irwin Gotlieb said. “We’re
always better off with more than one strong party.” He added, “The
real concern is that once Google has an eighty percent market
share, they can change the auction rules.”
At Microsoft’s annual
two-day forum for advertisers on its Redmond campus in mid-May of
2008, the company’s new head of advertising, Brian McAndrews, was
the first to speak. He described the online advertising
opportunities Microsoft was offering, and sketched for attendees
Microsoft’s pitch to advertisers: “We seek ongoing input from you.”
He did not cite Google by name, but his meaning was clear: We seek
to work with you as partners, and the other guy does not. On the
final day of the forum, Irwin Gotlieb was eating scrambled eggs at
a breakfast buffet, greeting people as they came by to shake his
hand or lay a palm on his shoulder. Microsoft’s sales pitch, he
told those who came to ask his thoughts, is not new. “They’ve been
saying it for a while. Microsoft has never been perceived by people
like us as someone who is looking to destabilize an existing
business model because they feel like it.” They were not vying to
enter the advertising business the way others were. He, too, did
not invoke Google’s name, nor did he have to.
Microsoft intended to
close the forum by presenting a new plan to overtake Google, a plan
it privately touted as “a game changer.” Company executives took
care to brief people like Gotlieb beforehand, seeking not just his
input but his enthusiasm for a program they hoped would attract
more advertisers, more purchases, and more searches. For the
unveiling of this plan, Bill Gates, who would step down the next
month from his day-to-day duties at Microsoft to concentrate on the
work of his foundation, appeared on stage to announce what he
called “a milestone.” He was tieless and jacketless, his sandy hair
uncombed, and he stood at the foot of the amphithe ater and
described the program they called Cashback. The idea was that
Microsoft would offer a cash rebate to consumers who did their
searches on Microsoft and clicked to purchase products from more
than seven hundred merchants, including Barnes & Noble. In
essence, Microsoft was offering a reward for consumers who used its
search engine rather than Google’s. Yusuf Mehdi, senior vice
president of strategic partnerships at Microsoft, helped shape
Cashback and described it as “maybe a genius idea,” a program that
would transform Microsoft into “the Robin Hood of the search
business.” The initiative offered Google “two bad choices,” he
said: duplicate Cashback and lose income, or don’t and lose market
share.
Mehdi and Microsoft
were spectacularly wrong. The program did not excite many of the ad
agency people in attendance, partly because the Microsoft program
already had a name in the advertising community: it was a rebate
program. Perhaps it failed to excite because Microsoft didn’t come
up with a catchy name and a finely tuned sales pitch—“geeks acting
like marketers,” muttered one attendee. In the press too, Cashback
failed to generate the headlines or excitement Microsoft
anticipated. Still, the jury was out. “If consumers perceive that
the search process on Google and Microsoft are the same,” predicted
Sir Martin Sorrell, “what Microsoft is offering will be
important.”
By November 2008, the
verdict was in. Cashback had not boosted Microsoft’s search share.
Google’s search market share in the United States had risen from
57.7 percent a year before to 64.1 percent. In September, when I
asked Eric Schmidt about Cashback, he could not resist: “All
attempts by Microsoft to give people back money they paid them is
great!” By January 2009, the two executives who headed Microsoft’s
advertising efforts, Brian McAndrews and Kevin Johnson, would
depart.
Meanwhile, Sorrell,
whose WPP steers an annual total of between five hundred million
and eight hundred million dollars of his clients’ advertising
dollars to Google, grew more agitated. What enraged him, he said on
a panel at the Cannes International Advertising confab in June, was
that Google was now reaching out and talking to his ad agency
clients directly, something he claimed Google had vowed not to do.
In WPP’s annual report, Sorrell noted that although WPP and the
next three largest marketing companies combined had 50 percent more
revenues than Google, their combined market value was 75 percent
less. He expressed hope that Google was now working “to develop the
constructive side of our relationship.”
Had he attended
Google’s 2008 national sales conference, held June 11 and 12 at San
Franciso’s Hilton Hotel, he would have been more alarmed. In the
main ballroom, Eric Schmidt and Tim Armstrong were onstage. Below
them sat a Google sales force of fifteen hundred people, one-third
of whom had been hired in the past year. Why did Google need such
an army of salespeople? “Because our customers must talk to someone
at Google,” Schmidt said.
Many of these new
Googlers were account executives, like the people who work for
Sorrell or Gotlieb. And their mission, Schmidt emphasized in his
remarks, was to share with advertisers the targeting techniques
that made search advertising a rousing success. Online, he said,
Google was pouring engineering resources into making itself the
leader in display advertising on YouTube. In traditional
television, he said, they started by “reaching into the long tail”
and he expected that “over a five- to ten-year period ... we’ll
become a very significant player in traditional television because
of our targeting. The same thing when you look at radio or print.”
Consumers of traditional media, he continued, “are scared. They’re
scared of what they’re reading in the paper. They’re scared about
what’s happening in their company. You show up and you offer a new
message, a message of hope, a message of change and
opportunity.”
Page and Brin showed
up unannounced, and Schmidt spontaneously invited them to join him
onstage. The troika sat in oversized armchairs and had a
lighthearted colloquy before turning to the audience for questions.
The first two were from a sales manager named Seth Barron, and both
concerned missing pieces in Google’s effort: “How do we make it
easier for agencies to work with us?” he asked first. It was a
question that would have pleased Sorrell. The second question would
not: “What resources do we need to be able to effectively compete
for deals and eventually do bigger and better deals with companies
like the Procter & Gambles and Mars of this
world?”
“Today,” said
Schmidt, “we lack the tools. We’ve identified this as a big hole in
our strategy, and we’re either going to build them or buy
them.”
“The piece that is
missing is production,” said Barron. “The creative execution, the
operational execution—those are the factors where we stumble today,
and where our competition has world class solutions.” Later,
Schmidt said that the “competition” Barron referred to was Yahoo
and Microsoft and display advertising. But these are not the
companies that produce “world-class solutions” to the puzzles of
advertising. The true answer is probably that Google’s real
“competition” is WPP and GroupM and their peers—the biggest players
in the business of advertising.
THERE ARE THOSE WHO
ASSUME Google has a master plan for world conquest, as Napoleon
did. By early 2008, it was not unusual to encounter a traditional
media executive who at the end of an interview whispered, “Have you
read Stephen Arnold’s study on what Google is really up to?”
Stephen E. Arnold heads a consulting firm, Arnold Information
Technology, and starting in 2002 he and a team of researchers spent
five years digging into Google’s various patents, algorithms, and
SEC filings. Then, for a hefty but undisclosed fee, he sold his
voluminous report to various media companies. The title of the
report, “Google Version 2.0: The Calculating Predator,” telegraphs
Arnold’s stark conclusion:
Analyzing “the Google” in a deliberate and focused way, we find that while Google may have started out to “do no evil,” it has, to some, morphed from a friendly search engine into something more ominous. Googzilla, fueled by technical prowess, is now on the move.
Where is it moving?
The gruff Arnold, who responded to a phone call but refused to
speak on the record to anyone who was not paying him, in his book
often drops the scientific method in favor of a more fevered tone.
Conjuring a monster, he repeatedly refers to the company as
“Googzilla,” and writes that “Google stalks a market ... then
strikes quickly and in a cold-blooded way.” Behind Google’s free
food and volleyball games he sniffs a public relations scheme to
“misdirect attention. Like a good magician, Google is able to get
its audience of competitors and financial analysts to look one way”
Meanwhile, “Googzilla is voracious, and it will consume companies
presently unaware they are the equivalent of a free-range chicken
burrito....”
Arnold and his
researchers have uncovered enough information from their study of
Google’s patents and algorithms to terrify media companies. As
Wal-Mart reshaped retailing, Google, he believes, aims to become a
digital Wal-Mart, an online shopping powerhouse that allows
consumers to shop for the best price, an essential middleman that
offers efficiency and data to advertisers, and shovels revenues to
Web sites and services to merchants, including back-office
computers that find the quickest and cheapest way to reroute their
delivery trucks.
The world would have
been better served if its leaders had been more paranoid in the
1930s; media companies would be better served if they were less
paranoid and defensive today. If Google is destroying or weakening
old business models, it is because the Internet inevitably destroys
old ways of doing things, spurs “creative destruction.” This does
not mean that Google is not ambitious to grow, and will not grow at
the expense of others.
But the rewards, and
the pain, are unavoidable. When Google Earth started displaying
paintings from the Prado in Madrid, allowing users to zoom in and
see the art as an up-close digital photo, it was giving many people
access to art they would never see, granting them the time to study
paintings that security guards in the bustling museum would never
allow them. This was a wonderful opportunity to extend the public’s
appreciation of great art. But perhaps we’ll learn that it wasn’t
so wonderful for the museum’s box office. Just as the invention of
the telephone crushed the telegraph, so motion pictures crippled
vaudeville, television eclipsed radio, cable weakened broadcasting,
and iTunes shattered CD music album sales. In some cases, new
technologies brought new opportunities. The movie studios, after
huffing about television, belatedly discovered a lucrative new
platform to sell their movies. Exposure on YouTube has broadened
the audience for Saturday Night Live.
If advertisers can sell their ads more cheaply and better target
them through Google, should they fret that they are harming Irwin
Gotlieb’s business? What we don’t know is whether the new digital
distribution systems will generate sufficient revenue to adequately
pay content providers.
David L. Calhoun
spent his career at General Electric, where he rose to vice
chairman. He left to become chairman and CEO of The Nielsen Company
in 2006. When Calhoun joined, Nielsen had long dominated the
audience measurement field but was facing a challenge from digital
technology, including Google’s. He believes media company
executives spend too much time wailing about disintermination. He
prefers the word “reintermediate,”
because it suggests a company more focused on offense than defense.
The companies that “lean in,” he said, are those that embrace
change; those who “lean out,” resist it. Companies that concentrate
on defense “are frozen,” he said. “If Google’s looking at you, you
look like an iceberg. And Google is looking at
everybody.”
He does not impute
sinister motives to Google, though he treats it like a frenemy: “I
genuinely think they just want to empower the consumer. Anything
that gets in the way, that blocks a perfectly efficient market, is
fair game. If there is a moment they can do something to make the
consumer more efficient, they will. And you should know that. But
they don’t lie, they don’t cheat, they don’t give head fakes.”
Calhoun seeks to collaborate with Google as well as compete, and in
2007 he entered into a partnership to work with Google TV Ads to
provide the demographic data that digital set-top boxes do not now
yield.
Of course Google is a
frenemy to most media companies. Like all companies, Google wants
to grow, and growth usually comes from taking a slice of someone
else’s business. Because engineers excel at finding efficiencies in
the digital world, Google can often offer a more cost-effective
solution than companies less focused on engineering. And with 20
percent of their time to concoct new solutions, Google’s engineers
are constantly dreaming up ideas—like the young engineer who
entered Marissa Mayer’s office in the fall of 2008.
Mayer has one of the
most important jobs at Google: to ensure that all Google products
are simple and easy for users. She also has an almost photographic
memory, the absolute trust of the founders, and joined Google when
it was just a year old, so her memory becomes a virtual library of
what has worked and what has not, what the founders would and would
not want. Mayer sets aside regular open office hours to encourage
Google engineers to stop in and describe the 20 percent projects
they are working on; it is where they receive her encouragement, or
discouragement. On that fall day, a young engineer sat beside her
desk and described the device he was working on to search
television digital video recorders. He wanted to know two things.
Should he develop this as open-source software that others outside
Google could tinker with and improve. (Yes.) Second, he needed
clarification about something Larry Page had said when he broached
the idea at an engineering meeting. Page, who like Brin doesn’t
often watch television, expressed impatience with the idea of still
another device in the home. Page told the engineer he was thinking
too narrowly. The only useful device, he said, would be hardware or
software that would allow Google to sell new forms of advertising
on any device in the home, from DVRs to TVs to computers. The
engineer came to Mayer’s office to better understand the thinking
of the founders. The project was code-named Mosaic, and would let
Google partner and share ad revenues with cable or telephone
companies.
In Google’s way of
looking at the world, she explained, any product that simplifies a
task for consumers better delivers “the world’s information” to
them. Which is another way of saying: Google engineers should
imagine that search can be anything that makes a current system
more efficient. Searching for a better way to display ads or a
better advertising rate—or a better alternate energy source to
reduce costs—are forms of search.
The answer is
consonant with the Google culture. Understand this Google bias and
you’ll better understand why it is a wave-generating company that
other media companies ride, crash into, or are submerged
by.
“I think they’re
naive, not evil,” said CBS’s Quincy Smith. He said his friend Marc
Andreessen thinks he’s naive to be so trusting. But Smith doesn’t
subscribe to a conspiracy theory because “I don’t think anybody can
be that smart.” Not that he’d allow Google to take over CBS’s ad
sales function—“That would be letting the fox in the henhouse,” he
said. However, having marinated in Silicon Valley for most of his
professional life, Smith approaches Google as a potential partner,
not adversary. He wants CBS to play offense. Pacing the floor of
his new Menlo Park office, he said that media companies fail to
understand that Google is a platform. “CBS has sixty-five thousand
advertisers, and only fifteen thousand are core advertisers. Google
has millions of advertisers.” By placing two- or three-minute clips
on YouTube, CBS can sell advertising off those clips. Smith doesn’t
believe Google is a content competitor. He does believe that the
more CBS places its content on Internet platforms, “the less chance
there is for piracy”; a two-minute CSI clip on YouTube watched by
two million people is a fantastic way to enlarge CSFs audience. He
is encouraged that CBS CEO Les Moonves wants CBS to play offense.
Smith, however, was mindful that he was now a member of the
broadcast fraternity—and presumably, though he didn’t say it, that
his controlling shareholder was Sumner Redstone. “My objective is
to be a little bit ahead of the pack, not a lot,” he
said.
Eric Schmidt, who
admitted in September 2007 that relations with traditional media
companies were frosty, was more encouraged in September 2008. “The
CBS deal is one” example of detente, he said. “We’ve done a series
of deals. They are slowly happening.” Of course, he added, “it
would be much better if I could point to a billion-dollar new
revenue stream.” To try to calm advertising agency fears, Google
established a forty-person team to visit agencies and assure them
that Google was not a competitor, just another company that had
products their clients would want to use and that could share
valuable customer data with them.
To ease the fears of
content providers, Google turned to David Eun, vice president of
strategic partnerships. A soft-spoken man who displays few rough
edges and who once served as a senior executive at Time Warner and
NBC, Eun today supervises a staff of about two hundred employees
out of New York. He and his partnership team made some deals for
YouTube. HBO and Showtime agreed to run a handful of their full
programs on YouTube, accompanied by ads; MGM licensed some of its
movies, and music companies supplied videos. With a new antipiracy
technology they called the Video Identification System (VID),
YouTube has now archived the reference file numbers for companies’
content and set its computers to scan all uploaded material to
determine whether numbers match. If they do, content companies are
offered three choices: they can have YouTube take the clip down;
let it run and monitor audience reaction; or sell ads against it,
as CBS agreed to do in late 2008. David Eun pushed for the third
option because he believes content companies, in addition to
selling ads off this content, can collect valuable data. “The
audience is telling you what they like,” he said. YouTube can
monitor what content is uploaded and shared with friends, how much
time users watch it, or what they click on. “These are like the
presidents of your fan clubs. Would you arrest the president of
your fan club?
“The headline here,”
said Eun, “is that there has been a dramatic shift” in traditional
media’s attitude toward YouTube. He singled out Quincy Smith as
“one of the few people who seems to truly understand so-called new
media versus traditional media.”
Eun made a larger
point about how very different this new medium really is, how
control has shifted to users. In the digital world, advertising is
not locked into a time and space. Ads are interactive, allowing
users to click to remove them from the screen or to fill the
screen, to treat them as information and go deeper to learn more
and make a purchase, or to forward the ad to a friend. “Traditional
media was about bringing the audience to where you decided the
content was going to be,” said Eun. Media companies would announce
when a movie would open, a DVD would go on sale, a record would be
released, a show would be scheduled on television, a book
published. “It was about control. This is no criticism. That was
the business. They created a huge, multibillion-dollar business. In
this medium, the new media, it is not about bringing the audience
to where the content is. It’s about taking the content to where the
audiences are. And the audiences are all over the Web.” Not just
YouTube but thousands of sites become potential
platforms.
Because this is a
very different model than traditional media is accustomed to, and
because they have legitimate concerns about giving content away
cheaply, “No one wants to be the first to jump into the pool, or be
the last,” said a Google executive. The old media companies “are
all clumped together. And if one breaks out—as Bob Iger did when he
put Disney content on iTunes—then all follow. It is an industry
that follows.”
Google did achieve a
dramatic breakthrough when, in October 2008, it reached an accord
with the U.S. publishing industry. The industry agreed to drop its
lawsuit, subject to approval from the court; and Google agreed to
pay $125 million to settle earlier copyright infringement claims,
to reimburse publishers’ and authors’ legal fees, and to establish
a system that will permit publishers and authors to register their
books and receive a payment when these are used online. Individuals
or institutions will be able to read up to 20 percent of
out-of-print but copyrighted books, and either purchase digital
copies or search them using Google, and publishers and authors will
receive 63 percent of any sales or ad revenues, with Google taking
the rest. Libraries will be able to display these digital copies
for free; colleges and universities will, for a subscription fee,
allow students to retrieve books online. Book titles still in print
would be available to be purchased or searched, but only if
approved by author and publisher. At the time of the agreement,
Google Book Search had already scanned seven million of the
estimated twenty million books that have ever been published. By
winter, Brin said, Google was “able to search the full text of
almost ten million books.”
There are two
potentially momentous shifts here: First, Google had conceded it
must pay for some content. And second, Google was not relying on a
promise of advertising revenues to reach an agreement; rather, it
agreed to an up-front compensation formula of a sort it had refused
to make with other traditional media companies, with the exception
of the Associated Press and some wire services. “It’s a new model
for us,” admitted Google’s chief legal officer, David
Drummond.
This new model was
lavishly praised by authors and publishers, but it raised new
questions. Was Google going to enter the online book-selling
business, competing against an early investor, Amazon’s Jeff Bezos?
With Microsoft dropping its book search project and no other
deep-pocketed competitor jumping in, did the agreement concentrate
too much informational power in the hands of a single company? Did
Google have the right, as it claimed, to sell digital copies of
books whose copyright had expired? If it is true—as the Internet
Archive, a competitive book digitizer, claims—that the settlement
grants Google immunity from copyright infringement, will the courts
permit this? What of so-called orphaned books, those whose
copyright owners can’t be identified—does Google, as it claims, get
to own the digital rights? Will there be any regulation of the
prices Google may charge libraries and colleges for access to
digitized books? What will be the outcome of new lawsuits
challenging this and other aspects of the settlement? And what
impact would the publishing accord have on the Viacom lawsuit and
Google’s dealings with other media companies seeking compensation
for their content?
Viacom was quick to
link the book copyright settlement with its own lawsuit. In a
public statement released the same day, Viacom said: “It is
unfortunate that the publishers had to spend years, and millions of
dollars, for Google to honor that [copyright] principle. We hope
that Google avoids the wasted effort and comes more quickly to
respect movies and television programming.” Drummond insisted that
his company has never favored free content and has not altered its
posture: “There is a difference in wanting to push for access, and
wanting to push for free access. There are some folks on the Web
who think you should get access to copyrighted material for free.
We don’t.” Fair use to Google, he said, was to create a card
catalogue to open new sources of information—“allowing books to be
discovered, not consumed.” The book settlement had no impact on the
Viacom lawsuit, he added. “The litigation is in full
swing.”
Why not offer Viacom
compensation for their content, as Google has now done with
publishers and did earlier with revenue guarantees to AOL and
MySpace? Drummond does not oppose an up-front payment but wouldn’t
agree to the amount Viacom sought. “A lot has to do with how much
they want. They want a lot more, in my perception, than the
monetization potential of the content.” Having guaranteed MySpace a
total of $900 million in ad revenues over several years, and having
fallen short of that guarantee, he said of guarantees, “We don’t do
them as much as we did before.” By the end of 2008, however, Google
acknowledged it had a total of $1.03 billion of “noncancelable”
guaranteed minimum revenue share commitments through 2012. It was
widely expected that Google would cancel, or curb, many of those
agreements when the contract period expires.
Google at first said
it was not in competition with Amazon to sell hard-cover copies,
because most of the books they want to sell online are out of
print. “We are unlocking access to millions and millions of books,”
Drummond said. But of course, they could be in competition with
Amazon—or any distributor—to sell electronic books. (In May 2009,
Google announced it would compete to sell e-books.)
Might the book
settlement apply to newspapers and open a vein of revenue for them?
Drummond didn’t think so: “For news, it’s a little different. News
has to be current. It doesn’t have the same shelf life as a book.
We are thinking deeply about how to help. Now we send newspapers
traffic.” He knows newspapers want more, but he said Google has
found “no silver bullet yet.”
NOR, BY THE END OF
2008, had traditional media companies found the silver bullet. With
some exceptions—the thriving worldwide game business being one—most
media businesses seemed to be falling off a cliff. Their fall
preceded the worldwide recession that struck like a category five
hurricane in the last half of the year. The dismal headlines were
not pretty.
By the end of 2008,
daily newspaper ad revenues dropped 17.7 percent, about double the
9 percent decline of the previous year; average daily newspaper
circulation among 395 dailies dropped 7.1 percent.
Magazine advertising
pages plunged 11.7 percent in 2008, fell 26 percent in the first
quarter of 2009, and were projected to fall 10.9 percent for the
year.
The number of viewers
tuning to prime-time network shows dropped almost 10 percent, and
according to Nielsen, this figure includes viewers who later watch
the shows on DVRs. Broadcast network television advertising fell
3.5 percent.
Broadcast radio
advertising fell 9.4 percent.
Aside from Internet
advertising, whose growth rate dipped in 2008 but still rose 10.6
percent, according to Nielsen the only medium to experience ad
revenue growth in 2008 was cable television, rising 7.8
percent.
Record album sales
dropped 14 percent.
The number of people
going to movie theaters dipped, but thanks to an increase in ticket
prices, box office revenues rose by 2 percent. DVD sales, which had
been a revenue gusher, dipped to their lowest level in five
years.
Book sales of about
three billion books fell 2.8 percent, according to the Association
of American Publishers (1.5 percent, according to the annual report
from Book Industry Trends). And although electronic book sales
climbed 7 percent to $113 million, this was a tiny percentage of
the just over $11 billion generated by adult books.
Advertising spending
in the United States was flat in 2008 at about $162 billion, and
was projected by GroupM to fall by 8 percent in 2009. World wide
advertising spending of about $450 billion grew just 1 percent in
2008 and was projected to fall by almost 7 percent in 2009,
according to ZenithOptimedia, the media-buying arm of Publicis, the
world’s fourth largest advertising/marketing company. Although
estimates of ad spending differ, the other major firms predicted
similar drop-offs. Total marketing spending—direct mail, event
marketing, public relations, etcetera—dropped 1.7 percent in
2008.
In a December 2008
report, Morgan Stanley’s Mary Meeker produced a chart that should
alarm traditional media. Titled “Media Time Spent vs. Ad Spend Out
of Whack,” the chart reveals that advertising expenditures don’t
conform to where consumers spend their time. Newspapers, for
example, consume 8 percent of our time, yet receive 20 percent of
advertising dollars. By comparison, the Internet garners 29 percent
of our time, yet attracts just 8 percent of advertising dollars. At
some point, those ad dollars will shift away from traditional
media, probably dramatically. Whether or not one factors in the
most severe recession to strike the United States since the
thirties, change was slamming into traditional media with new
ferocity. Unlike the fog in Carl Sandburg’s famous poem, it did not
creep in “on little cat feet.”