CHAPTER
SIXTEEN
Where Is the Wave
Taking Old Media?
One morning in 2007, Joe Schoendorf was breakfasting
at II Fornaio, the Palo Alto restaurant that serves as a Valley
canteen. A burly, avuncular man with a prominent mustache,
Schoendorf is a principal at the venture capital firm of Accel
Partners, a primary backer of Facebook. In his more than forty
years in Silicon Valley, Schoendorf has seen companies come and go,
but he’s still humbled by the eye-blink speed of change. “If we
were having breakfast in 1989, there was no Internet,” he said.
“IBM was number one in the computer business. DEC and Ken Olsen
were on the cover of BusinessWeek and
the cover line was, ‘Can They Overtake IBM?’ If I said to you that
DEC would go out of business, you’d think I was crazy.” Today,
young associates tell him, “Old media is dead. Television and radio
will become dinosaurs. Google is impregnable.” Schoendorf’s
experience teaches him to be more cautious. He has witnessed the
quick rise and fall of Lycos, Netscape, Excite. He has seen AOL go
from Internet darling to a company few would buy. He respects
Google’s prowess, but is wary of sweeping
prognostications.
Robert Iger, the CEO
of Disney, is equally humbled. When he was at ABC, he said, “I put
America’s Home Videos on the schedule.
It was user-generated content. How come I didn’t envision YouTube?”
In fairness to Iger, one could also ask: How come the New York
Times or CBS didn’t invent CNN? How come Sports Illustrated didn’t start ESPN? How come AOL,
which launched Instant Messenger, didn’t develop Facebook? How come
IBM ceded software to Microsoft? No one knows with any certainty
where the wave is headed. “Sometimes you have to guess,” said Bill
Campbell, who recalled his experience at Intuit. “What you do—as
happened at Intuit in 1998—is you say, ‘Let’s get five things and
see what works.’ If two work, you have a home run. If three work,
you double the stock.”
Was Barry Diller
right when he said, “The world is moving towards direct selling—no
middleman, no store”? Or is this the wishful thinking of an
executive whose online enterprise would benefit if his prediction
proved true? Or could one say that Google is itself a middleman
because it brings together users and information, Web sites and
advertisers? Was Irwin Gotlieb correct that consumers “will happily
go along” with trading private information to advertisers in
exchange for some free services or reduced charges? Will
advertising succeed on social networks and YouTube? Will consumers
opt to spend less on software by ceding storage (and control) of
their data to Google’s cloud? Will younger generations raised in
digital homes read books, and at what length? Is the Internet safe
or is it vulnerable to hackers and viruses? Will the deep recession
that commenced in 2008 prompt the Obama administration to become
more of a digital cop, imposing new regulations, investing in
broadband, strengthening or diluting antitrust oversight? And will
this choke innovation, or enhance it?
Yossi Vardi, the
Israeli entrepreneur whose company invented instant messaging, once
spent three years trying to graph the future. The result was a
presentation consisting of four hundred slides. He discarded the
slides and substituted what he called Vardi’s Law: “If you need
four hundred slides to explain it, it really means you don’t have a
clue.” In fact, the questions are more apparent than the answers,
and a central question that will profoundly shape the future of old
and new media is this: Will users who have grown up with the Web
pay for content they now get free?
IN THIS
BACK-TO-THE-FUTURE moment, online companies ape broadcasters by
proclaiming that their services are “free” because advertisers pay
for them. This is the answer touted by Wired editor Chris Anderson in his latest book,
Free: The Future of a Radical Price. He argues that making information
free allows digital content creators to use the Internet as a
promotional platform to create alternate money streams, including
concerts, selling goods and lectures and premium services. In the
digital world, he writes, “Free becomes not just an option but an
inevitability Bits want to be free.” In his spirited book
What Would Google Do? Jeff Jarvis
argues that online news aggregaters like Google are the equivalent
of newsstands that help papers boost online circulation and serve
as promotional platforms for the newspapers. By increasing their
online traffic, Jarvis posits, aggregaters allow papers to charge a
steeper price for their online ads. “I believe papers should beg to
be aggregated so more readers will discover their content,” he
writes. He concludes, “Free is impossible to compete against. The
most efficient marketplace is a free marketplace.”
There is no question
that links increase the number of newspaper readers. Marissa Mayer
said that Google search and Google News generate “more than one
billion clicks per month” for newspaper sites. But for “free” to
work as Jarvis says it will, news aggregaters like Google or Yahoo
would have to be gushing money into newspaper coffers. They are
not. While Larry Page, Sergey Brin, and Eric Schmidt insist they
want to help newspapers, and AdSense does bequeath ad revenues to
newspapers, the three men admit AdSense’s receipts are relatively
modest, too meager to restore newspapers to health. Jarvis is
correct that free “is impossible to compete against,” but I fear
that the consequence will be the opposite of the one he intended.
For newspapers, if revenues continue to fall short of costs, free
may be a death certificate.
Second, advertising
is a wobbly crutch. In economic downturns, ad expenditures are
usually among the first to be pared. Indeed, in harmony with the
worldwide recession, total U.S. ad spending dropped in 2008, and in
2009 Jack Myers, a respected marketing consultant, projects that
total advertising will plunge 12.1 percent. Newspaper ad revenues,
according to ZenithOptimedia, will fall from $44 billion in 2008 to
$37.4 billion in 2009, or 8 percent; Jack Myers predicted the
falloff would be almost three times greater (22 percent). And just
as the Internet has disrupted traditional ad sales, it may well
disrupt the effectiveness of advertising itself. Consumers now have
the tools to easily comparison shop online, to compare prices and
performance reviews. The emotional power of a commercial is
weakened by the informational power of the Web. Even Wired editor Chris Anderson, who once more
forcefully advocated that free was the perfect model, has changed
his position. Blaming the deep recession, Anderson appended a
“Coda” chapter at the end of his book in which he amends what he
wrote earlier. He writes that he now believes “Free is not enough.
It also has to be matched with Paid.”
Third, to rely solely
on advertising is to risk becoming dependent on a revenue source
whose interests may diverge from those of good journalism. The wall
between advertising and news was erected to ensure that news was
not at the service of commercial interests. This wall is easier to
maintain when newspapers can buttress their ad revenues with
subscriptions and newsstand sales. In a February 2009 Time cover story titled “How to Save Your
Newspaper,” former Time editor Walter
Isaacson quoted Henry Luce, cofounder of the magazine, as saying
that to rely solely on advertising was “economically
self-defeating.” Luce, Isaacson wrote, “believed that good
journalism required that a publication’s primary duty be to its
readers, not to its advertisers.” The warning was given life
several weeks later when the management of Time Inc. goaded five of
its magazines—Time, Fortune, People, Sports
Illustrated, and Entertainment
Weekly—to prepare major stories on a new 3-D animated movie
from DreamWorks, Monsters vs. Aliens.
The publications would each receive advertising from three of
DreamWorks’ corporate partners on the movie, McDonald‘s, HP, and
Intel. Many other media companies have felt compelled to make
similar Faustian bargains, potentially trading credibility for
dollars. In April 2009, page one of the Los
Angeles Times featured an ad for a new NBC show that was
laid out to look at first glance like just another news
story
It is no surprise
that advertisers will always want the most conducive setting for
their ads; they want to sell products and have perfectly good
business reasons to be concerned with the environment in which
their ads appear. The problem is that this impulse leads them to
push for more “friendly” news: a senior network news executive
said, “I’ve seen increasing incursions by advertisers into morning
show content. Can the evening news be far behind?” Of course,
network news has in recent years made itself more of an inviting
target for advertisers by allowing the morning shows and evening
newscasts to become “softer” and more superficial. Likewise, it is
as certain as a sunrise that advertisers will want tamer social
networks and more predictable YouTube videos to accompany their
products. To better target their ads, they also want to extract as
much information about their potential customers as they can. But
news outlets or Web sites that share users’ private information or
allow themselves to be seen as bought and paid for will lose the
trust of their customers. An additional revenue source will give
them more leverage to resist.
When media companies
depend solely on advertising revenues, there is also a real risk to
quality. As more people read newspapers online, or watch their
favorite TV shows online, or illegally but effortlessly download
movies or music, the revenues of traditional content companies will
fall. While it is true that too few newspapers do a good job of
covering state capitals or city hall, or sustaining investigative
reporting or investing resources in international news, those elite
papers that do—the New York Times, Wall Street
Journal, and Washington Post—are
hobbled; that kind of reporting is expensive. Similarly, a
television network’s ability to invest in expensive but exemplary
programs like Friday Night Lights, 30
Rock, or even the more popular fare—Desperate
Housewives, CSI: Miami—will be endangered.
A total reliance on
advertising can menace many new media sites as well. Facebook and
YouTube and Twitter have an enormous base of users, but they lose
money Sites like Facebook and MySpace struggle to devise
ad-friendly formats, but have so far stumbled. Robert Pittman, the
former president of AOL, thinks he knows why: “Wrestling had bigger
audiences than some prime-time shows, yet wrestling never monetized
well. Why? Because most advertisers didn’t want to be associated
with it. Environment did matter. We had huge audiences on AOL chat
rooms. We couldn’t sell it worth a damn. People were communicating.
They didn’t want to be interrupted by ads. You start running an ad
on Facebook and users will say, ‘I don’t like GAP. Don’t put GAP on
my page!’ It will attract some advertising dollars. But I don’t
think social networks monetize to the size of the audience they
have. The advertiser doesn’t want to be in an environment where
they feel they are a big negative.” Social networks might be able
to sell more ads if they share more of their users’ private
information with advertisers, but when Facebook tried that approach
in 2007 with an ad program called Beacon, irate users forced it to
install a system that relied on the users’ willingness to
participate. Eventually, if these sites cannot devise an ad formula
that works, they will once again demonstrate—as AOL chat rooms or
Friendster.com
did—that advertisers may not always follow the
audience.
One begins to hear
anxious whispers in Silicon Valley that “free” might not be free.
“I think people are getting more willing to pay,” said Marc
Andreessen, who cited iTunes and Amazon’s Kindle as successful
online pay services. “More and more of what people do, they do
online. I think most people like the things they like and are
willing to pay for it.” Maybe. Certainly there are products that
users are willing to pay for on the Web, most notably the music on
iTunes. Google generates 3 percent of its revenues by charging
corporations for premium services—tailored searches, special
software apps, extra Gmail storage—and expects those numbers to
rise. Web companies such as Ning and Linkedin charge corporations
for extra tools or premium services—including a fee to have an
ad-free environment. Those wanting online access to the full
Wall Street Journal, or to the New
York Times archives and crossroad
puzzle, pay for it. To read the Times
on a Kindle one must subscribe. In 2008, each of the 40,000 member
groups of Meetup.com paid the social network site fifteen
dollars per month to host them online. One-quarter of CBS’s digital
revenues comes from fees or subscriptions. The online dating
service Match.com
has nearly 1.5 million paid subscribers. By mid-2008, China was
generating $2.5 billion in online video game revenues.
Mary Meeker predicts,
“Ultimately, while advertising will remain the primary revenue
driver for Internet content companies, I think we’ll find more and
more examples of people paying for content, the way people do to
download games on mobile devices. With mobile downloads, where the
payment mechanism is integrated, I think you will be able to charge
just a little bit a lot of times.” A research report from the
market research firm Piper Jaffray projected that consumers would
pay $2.8 billion to download applications to their mobile phones in
2009, a number projected to rise to $13 billion by 2012. One
alternative is a monthly or annual subscription model. Another is
micropayments. The impediment to either a subscription or a
micropayment system is that with notable exceptions—mobile phones,
Amazon, PayPal, Google Checkout, broadband providers—most Web sites
do not have the names and credit card information of their users;
new users would have to make a considered decision about whether
the service was worth paying for before handing over their billing
information. “At Ning,” Andreessen said of the social network site
he funded, “we want to get credit card numbers. We’re edging
towards it.” With over one million Ning niche networks—female
writers have one, fans of Enrique Iglesias have one—the credit
cards would stack up.
The cable and
telephone companies, already in possession of the credit card or
banking information of their customers, are well positioned to
benefit from a micropayment or metered payment system. Using their
broadband wires, they could offer a range of new pay services.
Referring to smart phones as “the stealth device of this planet,”
Ivan Seidenberg of Verizon painted a blue sky: “Your phone will
replace your credit card, your keys. It will become your personal
remote control to life.”
Nevertheless, a chasm
yawns between the needs of business and the culture that has grown
up around the Internet. Users may love YouTube or Facebook or
Google News, but will they pay for them? Schmidt said he is dubious
that “social network traffic will ever be as lucrative as business,
professional, and educational traffic. When you go to a bar you may
buy a drink, but you’re fundamentally there for social
interaction.” Advertising, he believes, will become an annoying
distraction.
Stanford president
John Hennessy surprised me when he said, “We made one really big
mistake in the Internet, which is hard to reverse now. We should
have made a micropayment system work. Make it very simple, very
straightforward. Let’s say I go to Google’s home page or Yahoo’s
and I see a story I want to read in the New
York Times, and that story is going to cost me a penny I
click on it. I pay the penny electronically I have a system up that
says, ‘Any story that costs less than a quarter, give it to me
instantly If it costs more than a quarter, ask me first.’ I get a
monthly bill. It pays automatically against my credit card. We
could have done this easily The technology is all there to do it.
The question is, how do we get back to something like that? We need
some people to go out and say, ‘We need some approaches other than
advertising.”’
In September 2008, I
related Hennessy’s thinking about micropayments to Eric Schmidt. “A
lot of people believe that,” he said. “I’ve been pretty skeptical.”
Free is the right model, he believed then. “The benefit of free is
that you get 100 percent of the market. And in a world where
there’s no physical limits, it’s easy to have so much free.
Traditional thinking doesn’t work.” There are businesses that can
succeed by charging, he said, “but it’s a one percent opportunity
The lesson that Google sort of learned a long time ago is that free
is the right answer....”
It is not, I fear,
the right answer for many media businesses. Nor was it the answer
Schmidt came to seven months later, when we again discussed
charging for content on the Internet. “My current view of the
world,” he told me in April 2009, “is you end up with advertising
and micropayments and big payments based on” the nature of the
audience. Each member of the old guard—newspapers, magazines, TV
and cable, phone companies—has its own online challenges. None can
afford to blithely give away their services, yet neither can they
afford to ignore that this is what the public might
want.
For newspapers, the
trends are clear: circulation and advertising revenues are falling,
newspaper readers are aging, debt service and production costs are
rising, and stock prices are stuck in the basement. Neither giving
away online newspapers nor partnering with Google or Yahoo to sell
ads has made an appreciable difference. The bleak headlines did not
subside in 2009 as more newspapers shuttered, including the
Rocky Mountain News and the print
version of the Seattle
Post-Intelligencer, and with the threatened closing of many
others, the San Francisco Chronicle
among them. Declining revenues—newspaper ad dollars fell by nearly
one-third between 2005 and 2008—a reflection of new competition.
Bloggers increasingly offer a wealth of local information and links
that lumbering newsrooms don’t know how to match. The changing
competitive landscape is being felt at the Journalism School,
Columbia University While the foremost employers of 2008’s
graduating class continued to be newspapers and magazines,
according to Ernest R. Sotomayor, assistant dean, career services,
there has been a profound shift. Many students clamor to take
online media courses, he responds via e-mail, and to learn “to
shoot/edit video, create audio content, Flash graphics and
packages, etc.” And “virtually all those” who went to work for
newspapers or magazines are working on their online versions.
Increasingly, said Nicholas Lemann, the school’s dean, “many of our
students go into ‘print’ or ’broadcast’ jobs that are actually
mainly Web jobs.” Web sites have become for them, he said, the new
Ellis Island, their point of entry to journalism.
Looking back on the
investment mistakes made by newspapers, it is not hard to
understand the too-sweeping contempt that people like Jeff Jarvis
or Marc Andreessen harbor for them. Take the New York Times
Company, which, though rightly proud of its flagship newspaper, has
made its economic predicament worse with a series of
what-were-they-thinking? business decisions. In 1993, at a time
when it should have been clear that newspaper growth would slow,
the Times spent $1.1 billion to acquire the Boston Globe. Instead of investing in new media,
the Times purchased small television stations, which they have
since sold, and spent more than $100 million to acquire a 50
percent stake in the Discovery Civilization digital channel, with
an audience so small Nielsen could not measure it, and which was
eventually sold back to Discovery in 2006. Instead of making other
digital investments or reducing its debt, the company spent $2
billion to buy back its own stock, whose value has plunged; and it
spent more than $600 million on a new headquarters building, which
has since been leased out to help meet debt payments. The Times did
make some smart moves: it made one big digital purchase,
About.corn, an online source of information and advice, which has
been a modest success; and it invested to expand its national
circulation and advertising base, which helped cushion the paper
from a local advertising and circulation falloff.
For the past decade,
most other newspaper publishers have proclaimed that one answer to
their woes was to offer readers more local news coverage, yet too
few invested in local newspapers. Even fewer newspapers vied to
make their Web sites innovative.
The Internet
democratizes knowledge, allowing us to fetch information from most
newspapers, magazines, or books anywhere in the world. It provides
choices. It is convenient; Google aggregates information so that
it’s easy to access. It spreads newspaper stories all over the Web,
multiplying the readership. It opens lines of communication to
bloggers and readers with valuable information and provocative
opinions. And it generates some advertising revenue. But it robs
actual newspapers of readers, reduces newspaper advertising and
circulation revenue, and makes information in the New York Times
equal to information from anywhere. Digital news has another side
effect: it allows newspaper owners to quantify which stories appeal
to their readers. As Larry Page lamented, “The kinds of stories
that generate page views”—a Britney Spears meltdown or a Jessica
Simpon weight gain—“are not the kinds of stories reporters want to
write,” or that he personally wants to read, “and that kind of
makes it worse.”
We are racing through
a revolution comparable to the one ushered in by Herr Gutenberg’s
printing press in the fifteenth Century. The outcome is as unclear
today as it was then. “During the wrenching transition to print,
experiments were only revealed in retrospect to be turning points,”
NYU professor Clay Shirky wrote on his blog. He continued:
The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn’t apparent at the moment.... When someone demands to know how we are going to replace newspapers, they are really demanding to be told that we are not living through a revolution.... They are demanding to be told that the ancient social bargains aren’t in peril, that core institutions will be spared, that new methods of spreading information will improve previous practice rather than upending it. They are demanding to be lied to.... We’re collectively living through 1500, when it’s easier to see what’s broken than what will replace it.... Society doesn’t need newspapers. What we need is journalism.
Shirky is correct, I
believe, that it’s vital to preserve journalism, but wrong about
the unimportance of newspapers. By newspapers I don’t necessarily
mean the printed papers we are accustomed to. I mean a product that
offers readers a variety of news, including news they didn’t expect
they would want or need. Maybe it’s a book review, or a recipe, or
a description of pension padding by public workers, or the bonuses
paid to investment bankers whose institution has received a federal
bailout. Maybe it’s a report on the appointment of a finance
minister in a country that’s going to be vital next year. A good
online or print newspaper should be like a supermarket, with a
variety of choices. No one is forcing readers to pull items down
from shelves. But they ought to have available to them all the
information they need to be well-rounded, informed citizens of a
democracy Even a not very good newspaper—and most are not very
good—broadens the horizons of its readers.
By newspapers, I also
mean something often neglected by those who have a better
understanding of technology than of journalism. While good
journalism can be practiced by individuals—think Upton Sinclair or
I. F. Stone—it is often a collaborative effort, the result of
teamwork rather than solitary labor. Story ideas are kicked around
in a newsroom. A journalist reports a story and phones the editor,
who makes suggestions and prods the reporter to probe various
angles and seek different interviews. When the story is completed
it is transmitted to the editor, who usually asks: “Are you sure
about this fact? Who’s your source for this anonymous quote? Have
you got a second source on that? There was a report in X newspaper
that drew the opposite conclusion. You buried your lede—the heart
of your story is in paragraph ten. Did you talk to Y? This story
needs more context.” On a big story, other editors will weigh in.
This is not meant to disparage bloggers or other independent voices
or experts. It is meant to say that the offhand dismissal of
journalistic organizations—which is a cousin of the belief that a
computer can assemble news without editors—will diminish the
thoughtful journalism a democracy requires.
I asked Marc
Andreessen, as I did others, to make believe he was the publisher
of a newspaper. “What would you do?” The answer he shot back at me
was a common one: “Sell it!” The problem with this strategy, as the
Rocky Mountain News and other papers
have discovered, is that there are no buyers. And those wealthy
buyers who might be tempted to splurge for a newspaper trophy, the
way their peers buy sports teams, risk looking like fools, not
saviors, like Sam Zell at the now bankrupt Tribune
Company.
Pressed further,
Andreessen said he’d rush to put the newspaper online and move away
from the print edition, as a handful of papers have already done.
There are at least two vulnerabilities to this approach, as
Andreessen recognized. First, because online newspaper ads today
generate no more than 10 percent of what a print ad does, the paper
really would be, as Mel Karmazin said, trading dollars for digital
dimes. Second, public corporations are dependent on investors, and
not many folks will invest in a declining asset. So the market
value of newspapers will continue to fall, depriving them of the
capital to invest in reporting and, in too many cases, the money to
meet debt obligations. It may be true, as Rupert Murdoch’s News
Corporation’s newspaper retreat concluded, that in another ten
years online news will generate enough income to save the paper.
The quandary is how to get through the next ten years. As Murdoch
conceded, more than a few papers “will disappear,” either
consolidating with others or collapsing. Some of these newspapers
are mediocre outposts of former monopolies and will not be mourned.
But many are valuable civic institutions that cannot easily be
replicated.
Any number of ideas
have been advanced to rescue newspapers and journalism. Newspapers
are belatedly striving to make online editions more interactive and
to better conform to a Web sensibility. Michael Hirschorn wrote a
provocative media column for The Atlantic
Monthly and took a stab at defining a Web sensibility. He
wrote that newspapers should take some of their star reporters—he
mentions Kelefa Sanneh, the pop music critic for the Times, and Dana Priest, the national security
reporter for the Washington Post-and
encourage them to create “an interactive online universe,” inviting
others to share their information, views, or news tips. “Gaming
this out in the most baldly capitalistic fashion,” he wrote, “the
papers then stand a chance of transforming one Sanneh review (one
impression) into the organic back-and-forth of social media (1,000
impressions).”
Newspapers are also
experimenting with reducing costs by outsourcing functions to
online ventures—investigative reporting to former Wall Street Journal managing editor Paul Steiger’s
foundation-funded ProPublica; or international reporting to
GlobalPost, a privately financed
organization whose news operation is supervised by former
Boston Globe foreign correspondent
Charles Sennott, and which pays seventy correspondents in
fifty-three countries one thousand dollars for four dispatches a
month and gives them part ownership of the enterprise. Bloomberg
has proposed that newspapers could outsource their business
coverage to them; dozens of newspapers have ceded much of their
national political and government coverage to the hundred reporters
who work for Politico. Another form of
outsourcing is for papers to share articles and photographs; this
approach is being tried by a consortium of the New York
Daily News, Buffalo News, Times Union
of Albany, and New Jersey’s Star-Ledger
and The Record. It has also been
proposed that newspapers could be saved by acts of philanthropic
generosity similar to the Poynter Institute’s ownership of the
St. Petersburg Times; or by injecting
new revenues into newspapers (Yahoo has had some success in selling
ads for a group of about eight hundred newspapers); or by various
governmental actions, from relaxing regulations to tax breaks to
advertising subsidies (as France did starting in early 2009) to—a
really bad idea—direct subsidies.
While any of these
Band-Aids might help slow the bleeding, two things are essential if
print or online newspapers are to have a shot at survival. First,
newspapers have to stop acting like victims, bemoaning their fate
and clinging to the past. To blame Google is to prescribe a cure
for the wrong illness. Second, they have to go on the offense by
trying new things, including trying to charge for their
content.
I was smacked in the
face with this realization when my friend Kenneth Lerer, who
started the Huffington Post with
Arianna Huffington, mentioned in the summer of 2008 that he had
hired a single twentysomething employee to launch its local Chicago
online edition. The Web site, like Google, was free and offered
links to stories in the Chicago Tribune,
Chicago Daily Herald, and other local papers and Web sites.
Aside from inviting citizens to blog, this local online “newspaper”
was little more than a collection of links to work done by others.
Lerer said there was promotional value for content providers like
the Tribune. True. He said the more
page views their content got the more advertising they’d sell.
True. He said that “citizen journalists” often provide valuable
information. True. But at a time when most newspapers proclaim
local news as their potential salvation, these papers were
suicidally supplying the Huffington
Post with their own murder weapon. By 2009, the Huffington Post was discussing similar local
editions in as many as fifty cities.
What to do? Eric
Schmidt once told me that he thought “Apple’s iTunes is a great
example of compromise” between old and new media and, of course,
users pay for their music there. “Google,” Schmidt continued, “has
not found the iTunes” model—yet. And unlike music and other forms
of entertainment, few will keep replaying a newspaper story on
their iPod. Andrew B. Lippman, the associate director and senior
research scientist at the Media Lab at MIT, wonders whether the
example of ASCAP, the organization that has channeled copyright
payments to musicians since 1914, might be a way “for newspaper
companies to share revenues.” Newspapers and Google have to keep
looking.
Even if they locate
the right model, the technical challenge is daunting. “Can you put
it behind a wall and charge for access? Yes,” said Andreessen, who
despite his criticism of traditional media still subscribes to the
print edition of the New York Times and
owns some eight thousand books and six thousand CDs. “Can someone
still take that content, copy it and mail it to friends? Sure. Can
somebody post it on a Web site in Russia and provide it for free?
Sure. Can you get the Russian government to crack down on that? You
can try. Can somebody put up every copy of the New York Times ever published on BitTorrent and
make it available in a single pirated download? Sure. You can’t
stop it. It’s bits. If anybody can see it, then there is going to
be a way for everybody to see it.”
Today, more than one
billion people go online and view these bits. They are accustomed
to reading news for free. To suddenly try to get them to pay for it
would be an imposing task. To prevent leakage, presumably
newspapers would need to act in concert. To do so would require
discussions, and such collusion might invite antitrust lawsuits. On
the other hand, when the survival of newspapers has been at stake
in the past, government has allowed joint operating agreements
(JOAs) so that two papers can pool printing facilities or other
resources to save money. As there’s little question that newspapers
are endangered, our foremost papers—the Times,
Journal, and Washington
Post—might get together and agree to erect a firewall around
their content. Responding to a March 2009 request from House
Speaker Nancy Pelosi, Attorney General Eric Holder said he would
consider relaxing antitrust regulations to allow newspapers to
share costs and merge. In 2009, three longtime media
executives—Steven Brill, the founder of Court TV and The American Lawyer; L. Gordon Crovitz, the former
publisher of the Wall Street Journal;
and business investor Leo Hindery, Jr.—announced that they had
formed a company, Journalism Online LLC, in hopes of creating a
single automated payment system so that print publications would be
paid when their content was viewed.
The rub, of course,
is that even if most newspapers agreed to erect a firewall, some
would choose not to, probably including wire services like the AP
that are now paid by Google for their news. Maybe the Christian
Science Monitor, which now relies
mostly on an online edition, or the Seattle
Post-Intelligencer, which relies solely on its online
edition, will achieve success with these and be unwilling to give
them up. There would be leakage, as users shared stories. Or as
Jack Shafer of Slate observed, an
online publication like the Huffington
Post or Gawker could subscribe
to newspapers and rewrite their stories, as “Henry R. Luce and
Britton Hadden started doing in 1923 as they rewrote newspapers on
a weekly basis for Time magazine.” On
the upside, perhaps online citizens would be better able to
distinguish between good reporting and bad. If the online newspaper
offers content not readily available elsewhere, along with
interactive and video and other features, perhaps customers will
pay for it.
In March of 2008, I
asked Larry Page how he would save newspapers, and he grew
uncharacteristically passionate. “I don’t know how to do it, or I
would,” he said. “Or at least try to help.” He said he was spending
time thinking about it. This was no abstract puzzle; he knew the
question was linked to Google. “I do think that our mission at
Google ends up being pretty close to this. We try to produce the
best information we can. The success of a Google search is based on
the quality of the information—is there a good article about this?”
He went on to say, “I’ve been trying to learn more about journalism
and trying to understand the issues better. I do think that there
is a problem that if you’re primarily doing it for profit, it’s
hard to do a really good job. The kinds of things that generate
profits and page views are not necessarily the things that generate
value for the world. If you look at really good newspapers, they
have dual classes of stock. That’s part of our inspiration for
doing that.”
Could he imagine
Google in the newspaper or journalism business? “We look for
high-leveraged things,” he said. “We’re trying to figure out, how
does this one employee affect ten million people? I think most
content creation companies involve more work. So we naturally steer
away from that.”
The next day I asked
Eric Schmidt, why not pay a paper like the Times for its content? “We’ve been able with the
New York Times to convince them that
they make so much money from the traffic that we send them that
they want their content available to Google,” he said. “They have
the choice of not doing it.” In fact, the Times does generate some income from Google, but
digital income from digital operations accounted for just 12
percent of the company’s $2.9 billion revenues in 2008, more than a
third of this from About.com. About half of the About Group’s revenues,
according to Arthur Sulzberger, Jr., comes from Google’s AdSense,
as does “a significant portion” of its online revenues. Might
Google try to buy the New York Times?
“The official answer is that we have discussed buying the
New York Times over the years—and there
are many such interesting companies,” Schmidt answered, candidly
“In every case, we ultimately decided we don’t want to cross that
line”—to become a content provider and risk favoring Google’s own
content. “The reason I say we don’t rule anything out is that our
strategy is always evolving. We might come up with a different
answer in a year or two.”
A year later, in
April of 2009, I asked Schmidt if he had come up with a different
answer. “It’s the same answer,” he said, before adding that Google
was working on a product that is targeted at individuals, that
knows the stories that interest people and what they’ve already
read and targets text and video to people based on those interests.
“In order to do that model we would have to partner with news
sources.” He mentioned newspapers like the Times and Washington
Post as potential collaborators. Indeed, after leaving
Schmidt’s office I bumped into the Times chairman and publisher, Arthur Sulzberger,
Jr., and his senior vice president of digital operations, Martin
Nisenholtz, grabbing lunch in the cafeteria of Building 43. They
were startled to encounter a journalist, no doubt fearful word
would spread that they were meeting that afternoon with Schmidt and
the founders to discuss a partnership. How they would monetize such
a partnership—share ad revenues, create a micropayment system, pay
the papers a license fee for their content? Schmidt said he did not
yet know the answer. He did know, however, that the new product
would not be “a solution to the problems newspapers have today.”
But, he added, “the fact that we don’t see a solution today doesn’t
mean that it doesn’t exist. This is about invention. One criticism
I would make of many industries is that they’ve lost the ability to
reinvent themselves.”
In an e-mail exchange
afterward, Sulzberger did not portray Google as a villain: “Our
industry faces many challenges but I would not lay them at the feet
of Google.” A major Silicon Valley figure only blames Google for
playing a public relations game by appearing sympathetic to
newspapers: “Let’s suppose you’re Google and you fully realize
newspapers are screwed ... and there’s not a damn thing you can do
about it. Are you better off saying ‘tough noogies’ or ’we
carefully considered all kinds of ways that we could possibly
help?‘”
NEWSPAPERS—like the
more seriously challenged music companies—have seen their decline
abetted by the recession but not caused by it. By contrast, the
sharp drop-off in magazine advertising that began in 2008 is
probably linked to this downturn. Like newspapers, magazines
require a robust online strategy And like newspapers, even in a
bustling economy some will perish. But magazines are just as
portable as newspapers, and their content usually doesn’t have to
be read the day they’re published. In weekly and monthly magazines,
stories often benefit from the luxury of time denied to most daily
journalism. There is more context and opinion. There are vivid
pictures and color. The paper is glossy, and clean. The ads are
more inviting. As a business, magazines probably have better
prospects than newspapers.
Few investors would
rush to acquire magazines. Even fewer would buy a book publishing
company. Their dominant source of revenue is book sales, and these
have been fairly flat. The profit margins are slim, and as with
newspapers or magazines, the cost of production and distribution is
immense. There are long-term questions about what multitasking and
the “quick snacks” available online are doing to attention spans.
Is it an accident that the fastest growing book category consists
of shorter romance and young adult novels? Technology now permits
books to be distributed electronically, and upstart publishers have
begun to produce paperless books. In turn, writers have to adjust
to new pay formulas that involve less money upfront and more profit
participation if their books sell. More books will be
self-published. And an entirely new class of books-user-generated
serial novels written online—now appear on cell phones in Japan,
and will elsewhere. For readers, a digital book, like a digital
newspaper or magazine, offers a multimedia dimension: video, music,
games, interactivity between author and audience.
Early in 2009, Amazon
CEO Jeff Bezos said that of the books that were available both in
print and electronically at Amazon, 10 percent of these were
downloaded and sold on its portable Kindle device. By May, Amazon
said the number of electronic books it sold had soared to 35
percent. This figure had nearly quadrupled in a year. Although
electronic books comprised but 1 percent to 2 percent of all books
sold, it is clear that paper will continue to be replaced by bits.
As with newspapers, this will reduce costs. What gives publishers
pause is that Amazon, like Apple with iTunes, gets to set the price
for these electronic books, and they worry, as advertisers do with
Google, that if there are no potent electronic competitors, Amazon
will be able to dictate price and publishing terms. This is a
reason that publishers welcomed Google’s 2009 announcement that it
would compete with Amazon to sell e-books.
Bezos has been smart
about spotting trends, and he said he is optimistic about the
future of books. At the Wall Street
Journal’s D Conference, he told the audience, “Physical
books won’t go away, just as horses won’t go away. But in the
future the majority of books will be read electronically.” The
reason, he later told me, is convenience: “We humans do more of
what is easy for us. The more friction-free something is, the more
of it we do.” Bezos was sitting on a Sun Valley patio with dark
sunglasses shielding his eyes, and was more expansive. He said
devices like the Kindle have the advantage of portability, have
big, easy-to-read screens, provide online access to other
information, and store many books. Most people, he believes, read
more than one book at a time, and thus reading is more
“frictionless” on devices like the Kindle or the Sony Reader. “The
Kindle is an example of a device that is going to make long-form
reading more convenient and less friction filled. As a result,
you’re going to get more long-form reading. If you want more
reading, make reading easier. That’s what we’re trying to do. If
you have a book with you, you’ll read more.”
Broadcast television,
like newspapers, suffers from too many choices. In the final two
decades of the twentieth century, the new consumer options were
cable and then satellite TV In this century, the Internet offers
vastly more diversions, while TiVo and DVRs allow ad skipping and
snatch the scheduling power away from network programmers. Although
Americans still spend more time watching television than on the
Internet, the proliferation of choices weakens the business model
of many of these choices. This is especially true for broadcasters
who, unlike cable, do not receive subscription revenue and rely
solely on advertising. How, broadcast executives privately mumble,
can they afford to pay three million dollars or more for each
episode of a one-hour drama when ratings are falling? How continue
to afford expensive nightly news broadcasts on ABC, NBC, and CBS
when their nightly audience has plunged from thirty-two million in
2000 to twenty-three million in 2009? Local television stations,
once known as cash cows because they generated profit margins of
around 50 percent, have seen those margins collapse as viewers
flock elsewhere and networks demand compensation for programming.
Jack Myers projects that local broadcast station advertising
revenues will drop 20 percent in 2009.
The belief embraced
by too many television (and movie) executives that they are in the
content business—and most digital
companies are not—is not just smug but stupid. Content is anything
that holds a consumer’s attention. If four million people in China
subscribe to online games and play an average of six hours daily,
as Activision CEO Bobby Kotick says they do, that audience is lost
to television and most any other media. If Facebook or YouTube or
Twitter is captivating audiences, the number of eyeballs watching
CBS will drop. Internet video is growing twice as fast as
television viewing, Nielsen reported in early 2009, and eighteen-
to twenty-four-year-olds now spend the same amount of time—five
hours a day—watching Internet video as American adults spend
watching TV
“To survive,” said
Quincy Smith of CBS, “media companies have to get out of a
broadcast mentality. All of us—broadcasters, cable networks,
Hollywood studios—have to display our content on multiple
platforms, be it YouTube, TVcom, Hulu, MySpace, or iTunes. We need
to use these platforms to promote our content and drive audiences,
particularly younger audiences, to our primary platform.” Network
television can no longer think of itself as a lean-back medium. The
Internet, Smith emphasized, was more than just a distribution
platform: “On the Web, you build communities. And traditional media
has to change its DNA to think about that community. Our most
trafficked CBS sites are the ones that create community. The
Internet is not just a platform. It’s about interactive
storytelling.”
By the summer of
2009, however, Quincy Smith decided that it was time to move on. He
denied he was frustrated trying to turn the CBS ship around,
steaming toward the digital world. He expressed admiration for CBS
CEO Les Moonves. He desired to move on because he had accomplished
what he set out to do. He had engineered the acquisition of CNET He
now presided over CBS Digital’s three thousand employees. CBS
Digital was generating one hundred million dollars in annual
profits and growing 10 percent each year. The challenge now was
“blocking and tackling,” he said—management. This was not his
forte. If he won Moonves’s concurrence, he said he wanted to return
to what he did best—deal making—and planned to hang his investment
banking shingle in Silicon Valley and serve as a digital adviser to
old and new media companies. If Smith left, said Moonves, he would
want to retain him as a consultant.
The challenge for
Smith’s potential successor, as for all old media, is to create
unique content.
No cable or satellite
or telephone system will pay a hefty price for a network series
that appears for free on YouTube—or is available in a pirated
version. Because Viacom took the extreme (and arguably foolish)
position of suing them, Google and YouTube have made considerable
progress in coming up with a better (if probably still porous)
defense against piracy. And as Google acknowledged in the
negotiations—and in its settlements with the AP and the book
publishing industry—it has accepted the principle of paying for
content. Whether piracy safeguards or deals with YouTube can spare
traditional television from further slippage is doubtful.
Ultimately, the fate of traditional media is to jump off a bridge
without knowing whether there is a net below.
The Hollywood studios
have their own concerns about piracy. The biggest box office movie
of 2008, The Dark Knight, was illegally
downloaded around the world more than seven million times,
according to the New York Times. The
Motion Picture Association of America claims that illegal downloads
and streaming of movies in 2008 accounted for 40 percent of the
industry’s revenue loss due to piracy. The audience for illegal
downloads of Heroes, a studio-produced
NBC series, was equal to one-quarter of the ten million viewers who
watch it each week on NBC. In their efforts to stamp out piracy,
the studios often offend their customers. Sergey Brin described
going on a boat in Europe on his honeymoon and watching a DVD he
and his wife had purchased. “We didn’t finish. So we took it with
us, and of course it wouldn’t work in other DVD players.” The more
he talked, the more exercised he got. He recalled the time he
purchased The Transformers, hoping to
watch this science fiction movie in high definition on his new
Blu-ray player. But his copy wasn’t compatible with Blu-ray. “For a
variety of reasons and some kind of piracy paranoia, they make it
really hard on you.... I kind of feel the studios get in their own
way.”
Squaring the piracy
concerns of studio executives with customers’ urge for convenience
has thus far eluded a solution. The movie business may be
glamorous, but the profit margins are tight. For decades, selling
movies to television proved to be richly rewarding, as did VCR and
then DVD sales and rentals. Now the revenues from all of these are
declining. Downloading movies over the Internet could be the next
profitable platform—if piracy can be solved, and if the Hollywood
studios were not immobilized by fear of offending big retailers,
such as Wal-Mart, which sells their DVDs, and instead partnered to
sell their own movies directly.
The cable business is
more robust. Unlike broadcasters, cable programming chanels like
ESPN or MTV that produce content are not dependent on mass
audiences because they enjoy two revenue streams, advertising and
license fees from cable systems. Cable system owners like Comcast
or Time Warner that own the cable wire and distribute content over
cable systems also derive revenue streams from both ads and monthly
service charges. Digital cable also has this advantage over
broadcasting: it is able to offer interactive features like video
on demand. Cable networks and online advertising are the only two
of the seven media groupings projected to gain ad revenues in 2009,
according to media consultant Jack Myers. However, like
broadcasters, cable systems are dogged by the proliferation of
platforms—YouTube, MySpace, CNET, Verizon’s FIOS, local stations,
two satellite television providers—that weaken their power as
gatekeepers.
By 2009, with cable
networks and broadcasters distributing programs for free to various
online platforms, giant cable system owners like Comcast and Time
Warner were concerned that their programming was being devalued. So
they initiated efforts to offer online access to all of their
programs, but only to their cable subscribers. The hope was that if
cable subscribers could summon any program they wanted when they
wanted it, they’d have less reason to fret about YouTube or Hulu,
and might lure new cable subscribers. Currently, cable system
owners pay much of the thirty billion dollars in license fees
collected annually by the cable networks that produce programs. The
club cable system owners wielded to prevent the ESPNs from putting
their programs online was a warning that they would not continue to
pay these steep license fees for programs cable channels were
giving away cheaply or for free.
But the cable
programmers may hold their own club in the form of new technologies
that could replace cable set-top boxes with wirelessly received
signals that will allow users to integrate all devices—from
streaming video to computers to TV sets to portable devices. In
early 2009, Eric Schmidt saw a demonstration of one such sleek
wireless box made by the Sezmi Corporation and came away thinking
that this new technology posed an imminent danger to both cable and
satellite TV systems. If the wireless system worked, the cable or
statellite wire could become a superfluous middleman. Sezmi was
planning to beta test its system that year and claims that it had
already negotiated deals with cable and broadcast networks. TV
manufacturers like Sony and Samsung are developing sets with
Internet connections, allowing them to bypass the cable
gatekeeper.
The cable system
owners already lacked leverage over broadcast networks because they
do not pay to air the programs of CBS, NBC, ABC, and Fox, all of
which were pushing their own online strategies. If people could
watch 24 on Hulu, its value to cable would be diminished. By
placing their programs on a variety of online outlets—Hulu,
TY.com, YouTube,
Boxee—broadcasters also ran the risk of sabotaging their business.
But if they didn‘t, they ran the risk of passively watching their
business erode. Again, the Innovator’s
Dilemma.
A major challenge
confronting the cable and telephone and other distribution
companies is to demonstrate that they are not just a pipe that
others use to transport their valuable content for a bargain price.
Verizon’s Seidenberg wants to position the phone company as a
disrupter. “We can go directly to Procter and Gamble and they can
reach you without having to go through Google. So the world will
now move in a direction where distribution will have a more
important role.” Verizon was experimenting in late 2008 by
distributing Prince’s music “directly to customers without going
through a middleman”: the music companies. “We can talk directly to
directors and creators of content.”
Seidenberg, who began
his career as a telephone lineman, was seated in a corner booth at
the Regency Hotel, which is a New York power breakfast spot, and he
grew blustery as he talked of what Verizon could do to middlemen.
“We’re going to change ten percent of every relationship. In some
cases, fifty percent. So will there be a need for media buyers?
Maybe one!” He laughed. Because Verizon will own a wealth of data,
he envisioned working directly with advertisers to better target
customers. The telephone companies have a technology known as deep
packet inspection (DPI) that both protects their pipes from
security threats and exposes the web browsing activities of
consumers to the kind of controversial behavioral advertising
practiced by Phorm in England.
“It could be the
broadcast networks” that Verizon siphons ad dollars from,
Seidenberg said. “It could be the cable networks. It could be a lot
of people.” Seidenberg’s words, however, bump against reality.
Having existed for so long as quasimonopolies, the phone companies
and cable companies may not be agile and daring enough to move with
the speed required. It sounds hubristic for Seidenberg to assume,
for instance, that a company like Verizon, with minimal experience
working with Hollywood directors or advertisers, could overnight
develop the skills to work with actors and directors, or with
Procter & Gamble. And Seidenberg blithely minimizes the
volatile issue of privacy.
Irwin Gotlieb also
dismisses anxiety about privacy. He is more focused on the ability
of digital technology to generate more data, which will mean that
“the value of data will escalate dramatically.” The critical
questions to Gotlieb will be: “Who collects the data? Who owns the
data? Who gets to exploit the data? Who’s the gatekeeper? Who’s the
toll collector? These are key strategic issues that need to be
resolved”—between the ad agencies and Google and the cable and
telephone companies, among others. But the data will be crucial
because it will allow advertisers to move from guessing about
“multiple correlations”—income, demographics, television programs
watched—to “intent,” which he described this way: “Today, if I
decide I need to sell a high-end watch, who’s the prospect? I can
identify people with discretionary income. I can identify males or
females fifty or older. But down the road, I will know you’re a
watch collector because I will have that data on you. How? I will
know your purchase behavior. A lot of retailers have loyalty
programs, and they will share this information. If consumers have
searched on Google or eBay to look at watches, all these searches
are data trails. So instead of assuming that because you’re wealthy
you might buy a watch, I can narrow my target to the small
percentage of watch collectors.” And mobile phones offer still more
data. Whether the mining of this data will provoke a public outcry
is an issue Gotlieb does not stress.
To make the sale, he
believes awareness, or brand advertising, will remain vital. He has
a stake in saying this, but he seems to believe it: “I am not a
proponent of the belief that most advertising is wasted. If I don’t
create a predilection in you for a Mercedes when you’re a
fifteen-year-old male, you’re not going to buy a Mercedes when
you’re forty and can afford to. Take disposable diapers. Should you
just market to pregnant women? I would argue that maybe the
grandmother has significant influence. And maybe you could make
little diapers for Barbies, so the eight-year-old girl becomes
aware of your brand. Both of these require you to substantially
expand your target.” And expand the money clients spend on
advertising. It also assumes that the public will accept such hard
sells.
Gotlieb believes only
the agencies possess the skills and experience to engage in such
long-term brand building. He refers to his work not as media buying
but as “media investment management.” Whatever name he chooses,
it’s endangered, which Gotlieb reluctantly admits. “I’m terribly
concerned about getting disintermediated.” It’s why he thinks his
business has to change from middleman to a principal. “I’ve grown
up in a business where the media agency was a pure service
business. I was taught from day one to put my clients’ interests
ahead of my own. It may have been appropriate for the time and
place. But it is no longer appropriate today, because we’re
competing with people who are both vendor and client, as well as
agent. Microsoft is a vendor, but owns a digital ad agency. Google
is a vendor, but deals directly with clients. As a consequence,
unless you’re terribly naive, we have to morph our business from
pure service to a mix of service and nonservice.” He ticked off
several options, including producing and owning content, whether it
be television programs or movies; investing in technologies, as his
parent company has, to try to capture more data and receive not
just fees and commissions but “participate in the
profits.”
What if a client asks
whose interests come first, Gotlieb’s or the clients? “That’s a
really good question,” he responded. “But how many people ask
Google that question? If we remain purely a service business, we
won’t be in business.”
Advertising will look
very different in coming years. New digital middlemen have already
surfaced. Like Google’s AdSense, these advertising networks act as
brokers, putting Web sites and advertisers together. Computerized
ad networks can quickly cobble together Web sites or TV stations
that, together, reach an audience the size of an ESPN but at a
fraction of the cost. This is a threat not just to traditional
media, but to middlemen like Gotlieb. Still another refinement
among agencies like Gotlieb’s is that, increasingly, the media
buyers are beginning to offer to create ads as well. Because the
giant media-buying firms operate under the same corporate umbrella
as the creative agencies, this could produce civil war within
firms.
Gotlieb knows that if
he doesn’t refine his business model, Google or someone else may
grab his clients. Most media (and not a few other industries) are
in a race to avoid becoming superfluous middlemen. No matter how
much popcorn they sell, movie theaters might face this fate when
Hollywood begins to release movie DVDs simultaneously with the
theatrical release. It is the danger faced by local TV stations as
broadcast networks air their programs online and threaten to sell
them directly to cable, and by media buyers like Gotlieb as clients
work directly with Google or perhaps Verizon. The Internet and
digital technology allows people to download movies rather than buy
a DVD, to bypass stores and travel agents and perhaps eliminate
financial or real estate brokers, publishers, bookstores, agents,
music CDs, newspapers, cable or telephone wires, paid classifieds,
packaged software and games, car salesmen, the post office. The Web
allows sellers and buyers to connect directly, as they have done on
eBay. Inevitably, new technologies will cripple many old media
businesses.
One day when I was
questioning Eric Schmidt about the travails of old media, he calmly
asked, “Do you feel bad that the pager business is in trouble? No,
because you use your cell phone as a substitute. When you have a
good substitute, it’s very, very hard to fight against that.”
Unless old media companies want to fight their customers, try to
deny their desire for new choices and new conveniences, they have
no alternative but to figure out how to ride the wave.