Part 9 (1/2)
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 partners.h.i.+p. 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 & n.o.ble. 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 partners.h.i.+ps 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 antic.i.p.ated. 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 relations.h.i.+p.”
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 compet.i.tion has world cla.s.s solutions.” Later, Schmidt said that the ”compet.i.tion” Barron referred to was Yahoo and Microsoft and display advertising. But these are not the companies that produce ”world-cla.s.s solutions” to the puzzles of advertising. The true answer is probably that Google's real ”compet.i.tion” is WPP and GroupM and their peers-the biggest players in the business of advertising.
THERE ARE THOSE WHO a.s.sUME 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 t.i.tle of the report, ”Google Version 2.0: The Calculating Predator,” telegraphs Arnold's stark conclusion: a.n.a.lyzing ”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 compet.i.tors and financial a.n.a.lysts 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 alb.u.m 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 Sat.u.r.day Night Live. Sat.u.r.day 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. 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,” ”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.” 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 partners.h.i.+p 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 compet.i.tor. 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 a.s.sure them that Google was not a compet.i.tor, 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 partners.h.i.+ps. 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 partners.h.i.+p 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 s.h.i.+ft” in traditional media's att.i.tude 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 s.h.i.+fted to users. In the digital world, advertising is not locked into a time and s.p.a.ce. 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. publis.h.i.+ng 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 inst.i.tutions 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 t.i.tles 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 s.h.i.+fts 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 a.s.sociated 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 compet.i.tor 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 compet.i.tive 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 publis.h.i.+ng 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 Mys.p.a.ce? 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 Mys.p.a.ce 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 compet.i.tion 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 compet.i.tion 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 alb.u.m sales dropped 14 percent.