Googled: The End of the World as We Know It

PART THREE Google Versus the Bears

CHAPTER THIRTEEN Compete or Collaborate?

To achieve a balance of power against Napoleonic France, Prince Metternich of Austria helped organize the weaker European monarchies—Austria, Prussia, Russia—into an alliance. And in the Congress of Vienna, which followed the defeat of Napoleon, he maneuvered to maintain peace in Europe by forging an agreement among these nations to prevent the rise of another superpower. They would achieve a delicate balance of power among European nation-states, with no nation dominant. As in nineteenth-century Europe, today’s traditional media companies must decide how to deal with the new superpower, Google. Do they aggressively compete or do they collaborate? Can they achieve a balance of power? The strategy media companies choose will pivot, as it did in Metternich’s day, on whether they assume they are strong or weak. If executives of old media believe their business model is strong—that content is king—their strategy will likely veer from those who believe they are gravely threatened. If executives feel particularly vulnerable, convinced that they require substantial financial and security guarantees before risking their copyrighted material, they are likely to focus on these fears rather than on their best hopes for the Internet. And if they distrust Google’s intentions, cooperative agreements will be elusive.

Although Google appears less vulnerable than Napoleon turned out to be, many traditional media companies chose to stick out their chests. Viacom filed a lawsuit, as the book publishing industry had. Fox and NBC refused to join Redstone’s lawsuit but teamed up to create Hulu as a rival to YouTube out of fear that YouTube would cannibalize their audience and cheapen the value of their content. “The economics around these digital properties are not yet fully formed—that’s five years away,” NBC Universal CEO Jeff Zucker told a Harvard audience in early 2008. “We can’t trade today’s analog dollars for digital pennies.”

Zucker’s dollars-for-pennies claim is “not the right way to look at it,” said David Rosenblatt, Google’s then president, global display advertising, and the former CEO of DoubleClick. “That implies that the preservation of your existing business is more important than understanding what the new economy will be. My great-grandfather was in the ostrich-feather business. He went out of business in the early part of the twentieth century because ostrich feathers, which women wore attached to their hats and had worked well in carriages, no longer fit into automobiles. He could have said, ‘I need to find smaller feathers to preserve my business.’” Despite these entreaties, Zucker, like many of those in traditional media, viewed Google as a frenemy.

Microsoft, like Viacom, treated Google as an outright enemy. This was never more evident than during the winter of 2008, when it made a Murdoch-like bid of $44.6 billion to acquire Yahoo, a valuation of $31 per share, or 62 percent more than Yahoo’s stock price at the time. The battle that ensued left Microsoft and Yahoo bloodied and embarrassed, each wounded by self-inflicted blows.

There were reasons for Microsoft to pursue Yahoo. On paper, it was a way to increase Microsoft’s then meager 9 percent share of the search market and to boost the $3.2 billion in online advertising Microsoft totaled in 2008, a figure dwarfed by Google’s more than $20 billion; it was a way for Microsoft to piggyback on Yahoo’s lead over Google in display advertising; it was a way for Microsoft to combine its MSN portal and e-mail with Yahoo and achieve a dominant market share; it was a way to shore up Microsoft’s defenses against Google’s cloud computing offensive.

Yahoo clumsily resisted. After initially rejecting the offer, Yahoo CEO Jerry Yang and his board feigned interest; then again said they were not interested; then swallowed a poison pill so costly—saying at first that it would award each of its fourteen thousand employees a two-year window in which, if Microsoft won, they could quit and pocket generous severance benefits—that Yahoo was later compelled to abandon it. Yang and his board then said they’d accept thirty-seven dollars per share; then lowered this to thirty-three dollars; then said they’d consider selling just their search engine and not the rest of Yahoo. Microsoft’s moves were equally maladroit. Steve Ballmer called off discussions, then put them on, then off again; he sought partners to make another run at Yahoo; then threatened to mount a proxy fight to remove the Yahoo board; then said he was no longer interested in Yahoo. By the end of 2008, the general he had placed in charge of Microsoft’s battle plans, a man named Kevin Johnson, had left the company.

This comedy continued at the Dow Jones/Wall Street Journal’s annual D Conference in San Diego. Ballmer and Yang met privately that day, May 27. In the opening session that evening, Ballmer, answering pointed questions from Journal columnists Walt Mossberg and Kara Swisher, insisted, “We are not rebidding for the company.” But he opened the door a crack, saying, “We reserve the right to do so.” The next day on stage, Jerry Yang answered their questions and said the opposite, declaring that Microsoft had slammed the door shut and “was not interested anymore in buying the company.” In November, Ballmer told his annual shareholders’ gathering that Microsoft had “moved on” and was “done with all acquisitions discussions” with Yahoo. In December, he said he was interested in acquiring Yahoo’s search business “sooner than later.”

Yahoo shareholders were bludgeoned by these gyrations. In January 2009, Yahoo’s stock was trading at around $12.00 per share, well below its $19.18 price on the day Microsoft made its initial bid a year earlier. Each company appeared indecisive. As the venture capitalist Roger McNamee observed, “The two biggest forces competing against Google have banged heads and knocked themselves unconscious.”

Microsoft was unaccustomed to losing. The ever-competitive Ballmer, a Microsoft adviser admitted, was filled with “jealousy” and rage that Google was doing what Netscape had done a decade before, not merely challenging but “mooning the giant.” Jealousy and rage are not the sturdiest foundations for rational decision making.

Microsoft seemed to affect Google’s testosterone level as well. Sergey Brin told the Associated Press that Microsoft’s takeover bid was “unnerving.” It would grant Microsoft near-monopoly power, not just over operating systems and browsers but would also “tie up the top Web sites, and could be used to manipulate stuff in various ways.” Eric Schmidt insisted that he believes in sitting down and talking to everyone. But did this include Microsoft? Reflecting a professional lifetime of being on the other side of the Redmond giant, Schmidt said, “If Microsoft wanted to do a business deal with us, we’d do it. You betcha. But we’d bring a tape recorder!”

Jitters aside, Google would find a way to gain advantage from the Yahoo-Microsoft melee, but not without getting bloodied itself. The company’s Executive Committee and Board of Directors held meetings to devise a blocking strategy. They discussed petitioning the Justice Department to obstruct the merger, using the same antitrust arguments Microsoft had employed to try to stop Google from acquiring DoubleClick. They wrestled with whether to make their own bid for Yahoo, but decided it would be difficult to integrate two large companies with different cultures and assumed, in any case, that the government would disallow on antitrust grounds a merger of the two dominant search engines. They reached out to Jerry Yang and in the spring jointly devised a roadblock strategy; they announced that Google would become the selling agent for a large portion of Yahoo’s search ads. “It gives them a tool to avoid being swallowed by Microsoft,” Eric Schmidt said at the time. Asked in September 2008 what was the most important Google event of the previous six months, Schmidt said, “the Yahoo business deal.... It was a setback for Microsoft.”

Google’s effort to have the Justice Department block Microsoft’s bid for Yahoo brought to mind Ralph Waldo Emerson’s delicious observation that “a foolish consistency is the hobgoblin of little minds.” Like other corporations, Google and Microsoft extol the virtues of government’s leaving them unfettered, free to innovate—except when they call on government to intervene in order for them to gain a competitive advantage. But antitrust concerns were a real issue for others. The Association of National Advertisers, which represents major companies such as Procter & Gamble, petitioned Justice to block a Google/Yahoo alliance. The World Association of Newspapers, which represents eighteen thousand newspapers, urged both the Justice Department and the European Union to block the deal. This opposition unnerved Page and Brin. According to a member of Google’s senior management team, the idea that Justice was more concerned about Google’s becoming a monopoly than Microsoft provoked an uncomfortable discussion at a September 2008 executive committee meeting. The founders, this executive said, were “very upset” to be compared with Gates’s “evil empire.” They ranted about how Google was making the Web more accessible, not trying to kill competition. That the government could think they were trying to squelch search competition, or might possess too much leverage over advertisers, baffled them. They could not comprehend the anti-Google sentiment that was building.

This executive committee meeting coincided with the annual Google Zeitgeist press luncheon, and there I asked Brin and Page, “How do you feel when people accuse you of potentially doing evil?”

Not surprisingly, they didn’t really answer my question. “If you look at our products, search being our most popular one,” Brin said, “we don’t lock anyone into search.”

“The value to the world,” said Page, “of having access to everything for free everywhere, all the time, really fast, without degraded service anywhere, has really been a tremendous thing.”

A decade earlier, Bill Gates had felt similarly hurt that the government would call his motives into question by filing charges that Microsoft, which provided 95 percent of PC operating systems in America, was a monopoly. This blind spot to public fears, to emotion, prevented Gates from properly reading people, from anticipating the challenges that would materialize in Washington. Now Page and Brin seemed to have the same blind spot.

This emotional opaqueness was on display on the second day of the 2008 Zeitgeist. Al Gore was to conclude the conference by interviewing Page and Brin. The three men chatted on stage for a few minutes when Page interrupted to say that Brin wanted ten minutes to share something. Brin stepped to a microphone and riveted the audience for about ten minutes with a precise, impersonal account of his mother’s recent diagnosis of Parkinson’s disease. He explained that his wife, Anne Wojcicki, had cofounded 23andMe to study genetics, including the genetics of Parkinson’s. He said the evidence of a genetic link to Parkinson’s was at first slight, but studies had recently unearthed one gene, LRRK2, in particular a mutation known as G2019S, that in some ethnic groups creates a familial link through which the disease travels.

Brin said he had dug deeper, reading genetics journals, searching for pieces of DNA shared with relatives. Ultimately, he learned that he shared with his mother the G2019S mutation. He spoke as if he were talking about someone else. The implications of this finding are imprecisely understood, he said. What was clear was that he had “a markedly higher chance of developing Parkinson’s in my lifetime than the average person.” Sounding like a scientist, he pegged the odds “between 20 percent to 80 percent, depending on the study and how you measure it.” This knowledge left him feeling “fortunate,” he said; the mutation had been discovered early in his life and he could reduce the odds through exercise, certain foods, and by employing his substantial wealth to support further research. With the audience seated in stunned silence, he concluded, “That’s all I wanted to say,” and sat down.

Compared with Steve Jobs, who had declined to discuss his own health and issued opague statements even as he grew visibly ill, Brin was admirably forthcoming. Yet it never seemed to occur to him to turn his attention to introducing to the audience his very pregnant, beaming wife, soon-to-be mother of a child who might very well carry that same gene. Certainly it did not seem to occur to him to display emotion, to allay the concerns his comments would arouse among Google employees or shareholders. What was billed as “a personal statement” was really a science lesson. The way Brin dealt with his DNA mirrored the way Google dealt with Washington, politics, or traditional media: just give us the facts, don’t blur them by discussing your fears or feelings.

The Justice Department did finally intervene against Google, informing the company that if it did not terminate its ad sales partnership with Yahoo, it would be sued for antitrust violations, just as Microsoft had been the previous decade. Three hours before Justice was to file antitrust charges, Google dropped the deal.

Microsoft did not capture its prize, at least not through 2008. However, by the end of that year Microsoft seemed eager to return to the bargaining table, if only to purchase Yahoo’s search business. Gates’s company continued to lose search market share, and emerged from this battle with Yahoo looking feckless and defensive, not the posture one assumes before a foe with Napoleonic power.

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 partnership. 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 & Noble. 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 partnerships 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 anticipated. 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 relationship.”

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 competition has world class solutions.” Later, Schmidt said that the “competition” Barron referred to was Yahoo and Microsoft and display advertising. But these are not the companies that produce “world-class solutions” to the puzzles of advertising. The true answer is probably that Google’s real “competition” is WPP and GroupM and their peers—the biggest players in the business of advertising.

THERE ARE THOSE WHO ASSUME 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 title of the report, “Google Version 2.0: The Calculating Predator,” telegraphs Arnold’s stark conclusion:

Analyzing “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 competitors and financial analysts 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 album 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 Saturday 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.

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,” 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 partnership 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 competitor. 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 assure them that Google was not a competitor, 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 partnerships. 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 partnership 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 shift” in traditional media’s attitude 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 shifted to users. In the digital world, advertising is not locked into a time and space. 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. publishing 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 institutions 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 titles 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 shifts 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 Associated 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 competitor 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 competitive 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 publishing 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 MySpace? 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 MySpace 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 competition 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 competition 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 album sales dropped 14 percent.

The number of people going to movie theaters dipped, but thanks to an increase in ticket prices, box office revenues rose by 2 percent. DVD sales, which had been a revenue gusher, dipped to their lowest level in five years.

Book sales of about three billion books fell 2.8 percent, according to the Association of American Publishers (1.5 percent, according to the annual report from Book Industry Trends). And although electronic book sales climbed 7 percent to $113 million, this was a tiny percentage of the just over $11 billion generated by adult books.

Advertising spending in the United States was flat in 2008 at about $162 billion, and was projected by GroupM to fall by 8 percent in 2009. World wide advertising spending of about $450 billion grew just 1 percent in 2008 and was projected to fall by almost 7 percent in 2009, according to ZenithOptimedia, the media-buying arm of Publicis, the world’s fourth largest advertising/marketing company. Although estimates of ad spending differ, the other major firms predicted similar drop-offs. Total marketing spending—direct mail, event marketing, public relations, etcetera—dropped 1.7 percent in 2008.

In a December 2008 report, Morgan Stanley’s Mary Meeker produced a chart that should alarm traditional media. Titled “Media Time Spent vs. Ad Spend Out of Whack,” the chart reveals that advertising expenditures don’t conform to where consumers spend their time. Newspapers, for example, consume 8 percent of our time, yet receive 20 percent of advertising dollars. By comparison, the Internet garners 29 percent of our time, yet attracts just 8 percent of advertising dollars. At some point, those ad dollars will shift away from traditional media, probably dramatically. Whether or not one factors in the most severe recession to strike the United States since the thirties, change was slamming into traditional media with new ferocity. Unlike the fog in Carl Sandburg’s famous poem, it did not creep in “on little cat feet.”