Googled (36 page)
Authors: Ken Auletta
Tags: #Industries, #Computer Industry, #Business & Economics
On stage at the Dow Jones
lJournal’s
annual All Things Digital Conference in San Diego in May 2008, Murdoch noted that newspapers had lost 10 to 30 percent of their revenues and almost all were engaged in a frenzy of cost cutting. He said he saw this as an opportunity, and would pour more resources into the
Journal,
aiming to siphon general and business readers from the
Times
and the
Financial Times.
The jury was out as to whether by going after general readers of the Times he would over the long run chase business readers from the
Journal,
but to date his strategy has been a modest success. Comparing the
Journal’s
circulation in the six months ending March 2009 versus the same period ending in March 2008, the Audit Bureau of Circulations reported that the
Journal
was the only one of the top twenty-five newspapers to gain (just under 1 percent) circulation.
lJournal’s
annual All Things Digital Conference in San Diego in May 2008, Murdoch noted that newspapers had lost 10 to 30 percent of their revenues and almost all were engaged in a frenzy of cost cutting. He said he saw this as an opportunity, and would pour more resources into the
Journal,
aiming to siphon general and business readers from the
Times
and the
Financial Times.
The jury was out as to whether by going after general readers of the Times he would over the long run chase business readers from the
Journal,
but to date his strategy has been a modest success. Comparing the
Journal’s
circulation in the six months ending March 2009 versus the same period ending in March 2008, the Audit Bureau of Circulations reported that the
Journal
was the only one of the top twenty-five newspapers to gain (just under 1 percent) circulation.
Murdoch was well aware of the newspaper industry’s plight. Some newspapers, he said, “will disappear.” As more news is aggregated online, it weakens the value of a newspaper brand. “What really is going on underneath this news aggregation,” said Tad Smith, CEO of Reed Business Information, “is that for journalism the return on investment for going out and hiring other journalists is negative. What that means is that Google has created an environment where the way to make money in the media world is with OPC: other people’s content.” Smith experienced firsthand the plight of print publications when his parent company put his division up for sale in 2008 and was unable to find a buyer to pay what it considered a fair price. They took Smith’s division off the market.
Eric Schmidt bridled at the suggestion that Google was somehow the fall guy for an Internet that had inevitably changed the rules of the game. “There is a systematic change going on in how people spend their time,” he said. “I think it’s important that Google understand that we are one of the companies that is making that happen. It’s very important that we be polite about it, and not be arrogant or obnoxious, because there is real damage being done. But also, our rationale is that it’s the end users who are choosing this. This is not a concerted effort by us to do anything other than adapt to the way end users behave. If looked at that way, we have a shared problem. We need newspapers’ content. And it’s critically important that they continue.” When users do a Google search or come to Google News and click on a newspaper story, he said, they are taken to that paper’s Web site, which increases its traffic and its ability to sell more online ads. Schmidt and newspaper proprietors have no illusions that Google can magically restore the economic vitality of newspapers. Google rubbed salt in the wound, however, when after seven years of being ad free, Google News in 2009 for the first time started accepting small text ads, triggering renewed newspaper complaints that Google was enriching itself on their content.
Book publishing “is in so much better shape than the music industry or certainly the newspaper or magazine industry,” said Authors Guild executive director Paul Aiken. He thinks the physical format of a book—and therefore the publishing business model—is not as easily altered. Nor is book publishing dependent on fickle advertisers, as are newspapers and magazines. But when asked if he was an optimist about the future of books, Aiken paused before candidly responding, “Sometimes.”
The reasons to be wary are many. Book sales were relatively flat in 2007, reaching $3.13 billion in the United States, a rise of less than 1 percent from the previous year. And according to a 2007 study by the National Endowment for the Arts (NEA), when adjusted for inflation, money spent to purchase books “has fallen dramatically.” Publishers rarely say aloud what this study suggested: books are losing younger readers. “Nearly half of all Americans ages 18 to 24 read no books for pleasure,” the study found, and the percentage of those 18 to 44 who read books was sliding. It is true that the following year, 2008, the NEA reported a modest increase in reading. But if one asked publishers, or educators, whether they had high hopes for the expansion of book reading, few would say yes. Publishers also fretted about whether Google Books would bring them the same piracy woes that bedevil music and movies; about the disappearance of independent bookstores and the squeeze on their profits from big distributors like Amazon and Barnes & Noble; about publishing houses’ increasing dependence on blockbusters, making it harder for them to justify publishing so-called midlist books that often make editors proud but lose money; about the folks who sign their checks but who often treat publishing as just another business and not an endeavor that can replenish the culture. That one day books would be printed on demand or that online book sellers could reach into the long tail and resuscitate books that were no longer in print was a distant shore to most book publishers in late 2008, when they imposed layoffs akin to those at newspapers. One publisher, Houghton Mifflin Harcourt, followed its round of layoffs by announcing that it would temporarily suspend the acquisition of new books.
Broadcast radio, with the notable exceptions of sports and talk radio, was also losing altitude in 2008; revenues began a steady decline in 2006, which has since accelerated. Les Moonves announced in July 2008 that he was selling fifty of his Infinity Broadcasting’s smaller-market stations. With his CBS stock hammered by investors who saw no growth prospects in the saturated radio market, he said he would sell his entire station group for the proper price, which he cannot get. Similar maladies afflicted satellite radio. Even with nearly twenty million customers and a merger between the two satellite services, Karmazin’s Sirius XM Radio, burdened by huge programming and satellite and debt costs—and by the emergence of new digital competitors that allowed consumers to program playlists for themselves—teetered near insolvency. All of radio is besieged by too many ads and too many choices—from Internet radio to podcasts to iPods to MP3 players—that siphon off listeners because they empower them to become their own disc jockeys.
Traditional advertising companies were growing, but only because they were no longer focused exclusively on creating advertising and selling it. They had merged and morphed into four worldwide marketing conglomerates—the WPP Group, the Omnicom Group, the Interpublic Group, and Publicis—with public relations and marketing and direct mail and polling and research and lobbying and political consulting divisions. Ad spending in the United States grew an average of about 5 percent from 1963 to 2007, peaking at $162.1 billion in 2008, according to Gotlieb’s GroupM. This was about 36 percent of the estimated $445 billion spent globally on advertising. Yet ad spending was less than half of what was spent on what is euphemistically now called “marketing.” A media campaign no longer consisted of buying ads on the three networks and a few other places; now a campaign might combine ads on TV and in magazines, a viral effort online, search ads, in-store sales promotions, telemarketing, polling, public relations—all of which was more expensive. The increased expense, and spending, spurred media buying agencies to merge into su peragencies, such as Irwin Gotlieb’s Group M. These media buyers now had enormous clout, which they exercised over traditional media companies that relied on advertising.
While advertising in most traditional media was declining or growing incrementally, online advertising was soaring. The advantage enjoyed by digital media is transparency. The client (advertiser) knows more about the audience, more about who actually responds to the advertisement. Marketing thus becomes less opaque, robbing ad agencies and sellers of their ability to sell what Mel Karmazin called “the sizzle.” This is a primary reason online advertising jumped 30 percent each year, topping twenty-three billion dollars in 2008. This transparency and the additional supply of media outlets, as well as a suspicion that advertising and media agencies had not sufficiently adjusted their fees downward, shifted leverage to the true buyer, the client.
Seeking to surf the Internet wave, companies like WPP bid aggressively to acquire digital advertising and marketing companies. They and others invested in digital advertising exchanges like Spot Runner, which creates an online dashboard of local media platforms on which small businesses advertise, and offers a roster of prefab commercials that can be cheaply customized. Want to buy a thirty-second TV spot in Santa Barbara? Nick Grouf, the CEO of Spot Runner, said he can reach into “the long tail” of local media and purchase it for a mere twelve dollars. This makes television advertising accessible to small business—pizza parlors, pet stores, hair salons—that would previously have found it unimaginable. “We told local businesses this and their jaws dropped,” said Grouf. “We’re democratizing the business, opening it up to small business.” By selling ad space once seen as undesirable, the digital technologies that allow advertising exchanges, such as Google’s AdWords and AdSense, shake the advertising business to its core.
Technology was the frenemy of all traditional media businesses. According to an Annenberg Center study, the average American family classified as poor spent $180 per month on media services—mobile, broadband, digital TV, satellite TV, iTunes, and the like—that did not exist a generation ago, and the average American household spends $260 per month. (Irwin Gotlieb’s GroupM data pegged the number at $270.) By providing consumers with all these choices, new technology inevitably disrupted traditional habits. The audience that had once belonged to broadcast television moved to cable, to video on demand, to DVDs, to YouTube and Facebook and Guitar Hero. TiVo and DVRs allowed viewers to become their own programmers. This was great for viewers but not so great for the television business. It meant that viewers were often skipping the ads broadcasters relied on for revenue, and programs being watched were not being counted in the Nielsen ratings, weakening ad rates. And networks are soon to be slammed by another disruption: surveys show that those between ages fourteen to twenty-five (called millennials) are watching less television and spending more time on the Internet and with video games. Television executives like to argue that this is really good news for the broadcast networks. Yes, they will say, the live viewing audience for ABC, Fox, CBS, and NBC plunged 10 percent in the year 2008. But, they boast, their ad revenues continued to inch up, because in an age of niche media and fragmented viewership, no other medium delivers a mass audience. If they took a truth serum, though, they would admit that one day their advertisers will also fragment. They would also admit that their investment in local broadcast stations, which once yielded profit margins of 40 to 60 percent, were now a drag on their growth.
The U.S. movie business was growing overseas, but was under attack everywhere else—from Internet piracy to DVD and video sales and rentals that were declining in the face of competition from movie downloads. Equally worrisome, personal video recorders empowered viewers to ignore ads promoting new movies. “We’re not like a car or prescription medicine company where you can build a brand over a long term,” said Michael Lynton, Chairman and CEO of Sony Pictures Entertainment. “You have to build a brand in five weeks. If they skip over your ads, you’re in trouble.” Flat screen TVs, DVDs, and movie downloads drained customers from movie theaters. Video games were stealing the attention of teenagers. And that burgeoning business—now taking in twenty-one billion dollars a year worldwide and expected to double by 2012—was expanding from action games for teens to mass-market Wii games for adults to play with their kids, or with one another. Telephone companies watched their lucrative landline phone business rapidly lose customers to Skype Internet calls and mobile and new cable phone services. Yahoo and Microsoft were tossed in the digital storm. With better search and advertising technology, Google’s search widened its lead. With the promise of cloud computing and free software applications, Google menaced Microsoft’s packaged software business. Everywhere they turned, new technologies were disrupting businesses faster than they could respond.
MORE THAN A QUARTER CENTURY AGO, as the age of cable TV materialized, the three television networks were slow to recognize the seismic shift that cable heralded, missing their chance to own rather than compete with cable networks. They were not alone in disdaining the new. When Robert Pittman cofounded MTV in 1981, Coca-Cola and McDonald’s refused to buy advertising, saying they would not advertise on a television network that did not reach at least 55 percent of the nation. Pittman did persuade Pepsi to place some ads, and for the next several years Pepsi had a de facto exclusive advertising platform that greatly boosted its market share. It took Coca-Cola and McDonald’s four or five years, Pittman recalled, to change their minds. Likewise, most traditional media companies in the Google era concentrated more on defending their turf rather than extending it. Belatedly, most have begun to dip their toes, and in some cases entire feet, into new media efforts, hoping that technology could also be their friend.
In the summer of 2008, CBS became the first full-scale traditional media company to open a Silicon Valley office in Menlo Park. Quincy Smith, who had been promoted to CEO of CBS Interactive, supervised the office and averaged two days a week there. Under his prodding, CBS made a number of digital acquisitions. The biggest was the $1.8 billion CBS spent to acquire CNET, whose online networks generated revenues of $400 million. It was a pricey acquisition—three times what Murdoch spent for MySpace in 2005—but CEO Moonves said he hoped the digital acquisition would add “at least two percentage points” to CBS profits and growth rates. CBS had also become one of YouTube’s biggest suppliers, uploading eight hundred one- and two-minute clips per day from CBS programs. It was also among the first traditional media companies to strike a deal with YouTube to treat pirated video, as Brian Stelter reported in the
New York Times,
“as an advertising opportunity.” Instead of ordering YouTube to remove the content illegally uploaded by citizens, CBS and a few others granted YouTube permission to sell ads off these and to split the revenues. Smith said CBS had about two hundred partners, and was selling digital copies of its shows on Yahoo, iTunes, and Amazon. Smith’s digital group now had 3,300 employees in its various ventures, and Moonves predicted that the group would generate revenues of $600 million for CBS in 2008, with $90 million to $100 million of that as profit.
New York Times,
“as an advertising opportunity.” Instead of ordering YouTube to remove the content illegally uploaded by citizens, CBS and a few others granted YouTube permission to sell ads off these and to split the revenues. Smith said CBS had about two hundred partners, and was selling digital copies of its shows on Yahoo, iTunes, and Amazon. Smith’s digital group now had 3,300 employees in its various ventures, and Moonves predicted that the group would generate revenues of $600 million for CBS in 2008, with $90 million to $100 million of that as profit.
Other books
Gillespie and I by Jane Harris
Prospero's Daughter by Elizabeth Nunez
Drawn Blades by Kelly McCullough
Permissible Limits by Hurley, Graham
Mind Games by Teri Terry
I Hear...Love (A Different Road #2) by Annalisa Nicole
The Royal's American Love by Sophia Lynn
Birthdays of a Princess by Helga Zeiner
Fear Drive My Feet by Peter Ryan
Ragnar the Murderer by Byrne, Lily
