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.
CHAPTER SEVENTEEN
Where Is the Wave Taking Google?
G
oogle is surfing a huge wave that seems not to have crested. Eileen Naughton is the director of media platforms for Google and works out of its block-long New York office on West Fifteenth Street. Before joining Google, Naughton spent more than fifteen years at Time Warner, where she held a number of senior positions, including president of
Time
magazine and vice president of investor relations during the merger of AOL and Time Warner, when everyone feared layoffs, turf battles, a stock price drop, and senior management at the joined companies vied to mirror the Ottoman Empire, where the wives of sultans poisoned stepsons. When asked to describe the difference between working at Google and at an old media company, Naughton offered a one-word reply: “Optimism.”