After months of negotiations, traditional media walked away. “They didn’t value our content at a price point we thought was worthwhile,” said NBC/Universal CEO Jeff Zucker. “They built YouTube on the back of our content, and wouldn’t pay us.” NBC, like other television and cable networks, refused to allow their programs to appear on You Tube, though the network has not loudly protested as YouTube clips boosted the ratings of, for example,
Saturday Night Live.
Philippe Daumann, the CEO of Viacom and Sumner Redstone’s longtime legal adviser, complained that it was frustrating to negotiate with Google. “Every time we thought we came down to a certain point, they changed their mind,” he said. “And they changed the people in the negotiations. I learned that Google had an interesting management structure. I talked to their CEO, and then when Eric went down a certain path he had to have a discussion back in Mountain View with his two associates. Often there would be a total change in direction.”
Schmidt countered that Viacom made demands Google could not meet, including an insistence on large up-front license fees. Because YouTube had “no revenue at the time,” he said Google proposed to share advertising revenues rather than pay an up-front fee. We would “give the majority of revenue to them,” said Larry Page, “as long as it’s real revenue.” Viacom and others declined. Asked how he justified locking into an agreement with, say, AOL, to guarantee payments when AOL chose Google as its search engine, Schmidt said, “We had competition at the time.” This suggests that with YouTube, Google was not looking over its shoulder at Microsoft. Google’s position was at least partly shaped by a belief that it had leverage in this negotiation.
The more consequential issue, said Daumann, was not money but copyright protection—protection against what he referred to as “theft.” YouTube was taking Viacom’s content, he continued, “not as an experiment, not con-sensually, but rather they just take it and say, ‘Why don’t you watch what happens!”’ Google said it was the legal responsibility of old media to tell them what should be yanked from YouTube and said it would immediately comply. Old media disputed this interpretation of the law, insisting that the responsibility, and the expense, of policing belonged to YouTube. Jeff Bewkes, the CEO of Time Warner, echoed Daumann’s concern. The problem is that once Time Warner’s content appears on YouTube, he said, “it gets redistributed to five other places—MySpace, Gorilla, whatever. Those people are now the new sources of the thing.” He added that Google maintained they were not responsible if another site lifted Time Warner’s content from YouTube, giving them “deniability in the event of theft.”
The third issue, trust, was in some ways the most vexing. Daumann was insulted when Google tried to assure him of the promotional value of YouTube. “I don’t need somebody else to say, ‘It’s good for you!’ Let me decide what’s good for me. Maybe I’m totally wrong. Maybe I’m totally stupid, and maybe it would be better for me to put all of my shows on YouTube immediately. Maybe I’m just an idiot. But it’s my right to be the idiot. I think YouTube is an effective promotional tool. We put trailers all over the Internet. We don’t run a walled garden here. We have deals with just about everyone—except YouTube.” He held a hardening conviction that Google was a pirate. Google held a hardening conviction that traditional media wanted to halt progress and slip their paws into Google’s pocket.
Bewkes, unlike Daumann, was willing to believe that Google “was well intentioned,” blaming engineers who are thinking not of his copyright concerns but of solving the “engineering problem of getting it out there.” Asked what a company like Time Warner wanted from YouTube, he conceded, “It’s difficult to figure out.” Like his peers, he wants “what we have wanted for seventy-five years, for our copyrights not to be stolen and used by other commercial enterprises who get paid and we don‘t, and they choose the time it is exhibited without ever contacting us.” But in this new world where every media company gropes for a way out of the tunnel, he said, “There is a question of the best way to do that.” Web programmers like Albie Hecht thought old media was stuck in denial. “You either find a way to make your product available to the public in the right way, or they’re going to get it anyway,” he said. “So you can either create another generation of video as opposed to audio pirates, or you can do the smart thing and give it to them,” and figure out a way to monetize it.
The chasm between new and old was as wide as the gap between Mel Karmazin’s view of how to sell advertising and Google’s view. They each spoke of piracy, but old media thinks it is preventable and new media says it wants to try but is dubious that absolute prevention is possible. They each spoke of content, but by content they meant different things. For traditional media companies, it is usually defined as full-length, professionally produced TV programs or movies. For YouTube, it is shorter-form clips, mostly user generated. In many ways, the debate is pointless since both user-generated and slickly produced content commands attention. “Content is where people spend their time,” said Herbert Allen III, the forty-one-year-old investment banker who is president of Allen & Company. “Content is not just what’s on Comedy Central. Content is Facebook too. Content is how the consumer chooses to spend time.”
What is really at stake, Allen suggested, is control of the thriving distribution platform that is the Internet, a platform “of endless choice and immediate fulfillment. Media companies are used to the exact opposite. They have thrived on the pricing power that comes from complete control of distribution. Since the consumer has already voted in favor of the Internet, media companies will have to find a new economic proposition for their content. Media companies have to embrace the fact that the consumer is now firmly in control.”
IRATE AND ANXIOUS as they may have been, as 2006 drew to a close, the TV companies were scrambling to find Internet platforms. Some, like the local broadcast stations that formed the backbone of the networks, were largely bereft of an Internet strategy. Other media companies made a genuine effort not to resign themselves to their fate. Among the most active suitors of the new media was Robert Iger, who became CEO of the Walt Disney Company in 2005. He purchased Pixar, the groundbreaking digital animation studio, from Steve Jobs in early 2006. Iger’s predecessor at Disney, Michael Eisner, was mistrustful of Jobs, and Iger was warned to keep him at arm’s length. Instead, he invited Jobs, now his largest shareholder, to serve on the Disney board. “I figured that if things go well for Disney, they’d go well for him,” Iger said. “If things didn’t go well for Disney, I’d have more than Steve Jobs to worry about. And to have someone like that in the boardroom when we’re discussing technology was great. I love working with him.” Iger felt he was building into the company’s DNA a digital, user-first perspective. He remembered asking Jobs how often he visited Apple’s design lab or technology center, thinking he’d say once a week. Jobs told him he visited three or four times a day. Iger said that now “I try to spend one hour a day surfing the Internet. I just surf and look.”
But at least one inspiration came from old media. “The first thing I did after becoming CEO was read Elisabeth Kübler-Ross,” said Iger, referring to the five stages of grief described in her book
On Death and Dying.
“First came the denial phase. Then the anger phase. Then the bargaining phase. Then depression. Then acceptance. That’s what the music industry did. They listened to a cacophony of voices and let those voices drown out the most critical audience, which was its customers.” Determined not to repeat the mistake of the music companies, he became the first network and studio owner to license his shows and movies on Apple’s iTunes. ABC station managers and movie theaters protested. He was not swayed, insisting that ABC and Disney were in the content business, not the network or movie theater business, and reminding critics that the average age of those who streamed shows on computers or handheld devices was only twenty-nine. To be relevant to young people, he said Disney had to break old habits. In the first year on iTunes, he said, Disney streamed a hundred million shows and movies. Although iTunes represented just 1 percent of Disney’s revenues, it generated $44 million in revenues in 2006, a figure analysts projected would mushroom to over $320 million in 2008.
Murdoch and others made moves. Seeking to bring fresh storytelling to the Web, Murdoch signed seasoned Hollywood producers Marshall Herskovitz and Edward Zwick to create a slickly produced series called Quarterlife, for MySpace. NBC Universal’s corporate parent, General Electric, announced that it was placing $250 million in an equity fund to invest in digital companies with robust growth prospects, including Albie Hecht’s Worldwide Biggies. Comcast, which has more subscribers than any cable company, would launch
Fancast.com
, an ad-supported cable Web site that hoped to attract full-length content from all suppliers. Viacom and CBS joined others in investing $45 million in
Joost.com
, a YouTube rival that chose not to display user-generated content but instead to offer full-length programs from MTV, Comedy Central, and CBS, sharing ad revenues in exchange. The TV giants discussed forming their own Internet platform to compete with YouTube. Although many participated in the discussions, only two initially joined: News Corporation, which as the new owner of MySpace saw YouTube as a direct competitor, and NBC Universal. The new platform was named Hulu, and it would look very much like television on the Internet, with full-length programs from the two networks interrupted by commercials in the old-fashioned way.
Sumner Redstone declined to join Hulu; Viacom’s content, he believed, appealed to younger viewers than Fox’s or NBC‘s, and in any case, he and Daumann wanted control over where their content appeared. CBS, which was split off from Viacom but which did not lose Redstone as its controlling shareholder, came close to a licensing agreement with YouTube, but pulled back. Redstone didn’t want CBS to make such a deal; nor did its network peers. Like Redstone, CEO Les Moonves said CBS would not agree to display its programs exclusively on Hulu. “The issue of the moment is whether Google is going to dominate advertising,” observed private equity investor Steven Rattner, then managing principal of the Quadrangle Group, which invests in media companies. “The airlines always kept McDonnell Douglas in business because they did not want to depend on just Boeing. Everybody wants at least two suppliers.”
Still, CBS established a more cooperative relationship with YouTube and Google. This reflected, at least in part, the different nature of the two businesses. As a cable program and movie supplier, Viacom got the bulk of its revenues not from advertising but from the license fees cable distributors like Comcast and Time Warner paid them. Unless YouTube offered a reasonable license fee, Viacom risked blowing up its cable business model. CBS, a broadcaster reliant on advertising as its sole source of revenue, saw YouTube as a worthwhile experiment to tap into new revenues that might replenish the revenue CBS lost as its audience shrank.
CBS also had a more assertive digital strategy. Les Moonves decided that he would not treat the Internet as a single distribution channel that his network could control; instead he would spread CBS content on over two hundred Web sites. He had to overcome resistance from the traditionalists in CBS. Jeff Fager remembers the contentious 2005 meeting he attended. Fager is the executive producer of 60
Minutes,
the longest running program in evening television history, and he wanted to expand his audience. He had worked out a proposed agreement with Yahoo that would give the Internet site a total of sixteen clips, up to two minutes long, from the CBS show each week. Yahoo would sell advertising against these clips. Fager pitched the deal to a roomful of CBS executives. He assured them CBS News would retain control of the editing process, that he would have a staff of seven to edit these pieces, that Yahoo had agreed to pay half this staff cost and to split the advertising revenues. “I argued that we needed to reach a larger and a younger audience and to find new revenue sources,” he recalled. The average age of his Sunday evening audience was approaching sixty. “The resistance was: ‘Why do we want to give one of our best brands to the competition?’” They would be diluting the exclusivity of a venerable CBS program found nowhere else. CBS executives wrongly thought of the Internet as just another distribution platform, and anyone airing 60
Minutes
should pay big bucks. They did not see the Internet as a transformative medium, a medium with thousands of Web sites that could serve as CBS platforms, an interactive platform, a promotional platform that would lure younger viewers to CBS. “The sentiment in the room was not to do it,” said Fager.
But Les Moonves intervened. “Look at all the new people we can introduce to 60
Minutes,”
Moonves remembers saying. “And since we don’t syndicate 60
Minutes,
we are not cannibalizing it. There is no downside for us.” That was the decision, and soon 150 million Yahoo visitors would view 60
Minutes
clips each year on Yahoo, far more than the 10 million streamed on
CBS.com
. (Of course, one day 60
Minutes
video streams might produce big bucks, but not yet; the experiment was cancelled in 2008, after producing only one million dollars, to be split annually with Yahoo!)
Moonves also announced another partnership, with YouTube, in the fall of 2006. CBS would allow the video service to air short-form clips, usually none longer than three minutes, from its entertainment, news, and sports divisions, with CBS and YouTube sharing any advertising revenues. CBS would also become the first network to agree to test a new YouTube technology that would identify its pirated content on YouTube. “We’re pleased to be the first network to strike a major content deal with what is clearly one of the fastest growing new media platforms out there,” Moonves declared in the joint press release. Redstone blessed the deal, said a CBS executive, because showing clips of CBS long-form shows was a promotional platform to enhance their value, while showing clips of short riffs from such Viacom programs as
The Daily Show With Jon Stewart
would rob them of value. In the not too distant future, CBS would follow Murdoch’s lead with a major digital acquisition, CNET.