Googled: The End of the World as We Know It

PART FOUR Googled

CHAPTER SIXTEEN Where Is the Wave Taking Old Media?

One morning in 2007, Joe Schoendorf was breakfasting at II Fornaio, the Palo Alto restaurant that serves as a Valley canteen. A burly, avuncular man with a prominent mustache, Schoendorf is a principal at the venture capital firm of Accel Partners, a primary backer of Facebook. In his more than forty years in Silicon Valley, Schoendorf has seen companies come and go, but he’s still humbled by the eye-blink speed of change. “If we were having breakfast in 1989, there was no Internet,” he said. “IBM was number one in the computer business. DEC and Ken Olsen were on the cover of BusinessWeek and the cover line was, ‘Can They Overtake IBM?’ If I said to you that DEC would go out of business, you’d think I was crazy.” Today, young associates tell him, “Old media is dead. Television and radio will become dinosaurs. Google is impregnable.” Schoendorf’s experience teaches him to be more cautious. He has witnessed the quick rise and fall of Lycos, Netscape, Excite. He has seen AOL go from Internet darling to a company few would buy. He respects Google’s prowess, but is wary of sweeping prognostications.

Robert Iger, the CEO of Disney, is equally humbled. When he was at ABC, he said, “I put America’s Home Videos on the schedule. It was user-generated content. How come I didn’t envision YouTube?” In fairness to Iger, one could also ask: How come the New York Times or CBS didn’t invent CNN? How come Sports Illustrated didn’t start ESPN? How come AOL, which launched Instant Messenger, didn’t develop Facebook? How come IBM ceded software to Microsoft? No one knows with any certainty where the wave is headed. “Sometimes you have to guess,” said Bill Campbell, who recalled his experience at Intuit. “What you do—as happened at Intuit in 1998—is you say, ‘Let’s get five things and see what works.’ If two work, you have a home run. If three work, you double the stock.”

Was Barry Diller right when he said, “The world is moving towards direct selling—no middleman, no store”? Or is this the wishful thinking of an executive whose online enterprise would benefit if his prediction proved true? Or could one say that Google is itself a middleman because it brings together users and information, Web sites and advertisers? Was Irwin Gotlieb correct that consumers “will happily go along” with trading private information to advertisers in exchange for some free services or reduced charges? Will advertising succeed on social networks and YouTube? Will consumers opt to spend less on software by ceding storage (and control) of their data to Google’s cloud? Will younger generations raised in digital homes read books, and at what length? Is the Internet safe or is it vulnerable to hackers and viruses? Will the deep recession that commenced in 2008 prompt the Obama administration to become more of a digital cop, imposing new regulations, investing in broadband, strengthening or diluting antitrust oversight? And will this choke innovation, or enhance it?

Yossi Vardi, the Israeli entrepreneur whose company invented instant messaging, once spent three years trying to graph the future. The result was a presentation consisting of four hundred slides. He discarded the slides and substituted what he called Vardi’s Law: “If you need four hundred slides to explain it, it really means you don’t have a clue.” In fact, the questions are more apparent than the answers, and a central question that will profoundly shape the future of old and new media is this: Will users who have grown up with the Web pay for content they now get free?

IN THIS BACK-TO-THE-FUTURE moment, online companies ape broadcasters by proclaiming that their services are “free” because advertisers pay for them. This is the answer touted by Wired editor Chris Anderson in his latest book, Free: The Future of a Radical Price. He argues that making information free allows digital content creators to use the Internet as a promotional platform to create alternate money streams, including concerts, selling goods and lectures and premium services. In the digital world, he writes, “Free becomes not just an option but an inevitability Bits want to be free.” In his spirited book What Would Google Do? Jeff Jarvis argues that online news aggregaters like Google are the equivalent of newsstands that help papers boost online circulation and serve as promotional platforms for the newspapers. By increasing their online traffic, Jarvis posits, aggregaters allow papers to charge a steeper price for their online ads. “I believe papers should beg to be aggregated so more readers will discover their content,” he writes. He concludes, “Free is impossible to compete against. The most efficient marketplace is a free marketplace.”

There is no question that links increase the number of newspaper readers. Marissa Mayer said that Google search and Google News generate “more than one billion clicks per month” for newspaper sites. But for “free” to work as Jarvis says it will, news aggregaters like Google or Yahoo would have to be gushing money into newspaper coffers. They are not. While Larry Page, Sergey Brin, and Eric Schmidt insist they want to help newspapers, and AdSense does bequeath ad revenues to newspapers, the three men admit AdSense’s receipts are relatively modest, too meager to restore newspapers to health. Jarvis is correct that free “is impossible to compete against,” but I fear that the consequence will be the opposite of the one he intended. For newspapers, if revenues continue to fall short of costs, free may be a death certificate.

Second, advertising is a wobbly crutch. In economic downturns, ad expenditures are usually among the first to be pared. Indeed, in harmony with the worldwide recession, total U.S. ad spending dropped in 2008, and in 2009 Jack Myers, a respected marketing consultant, projects that total advertising will plunge 12.1 percent. Newspaper ad revenues, according to ZenithOptimedia, will fall from $44 billion in 2008 to $37.4 billion in 2009, or 8 percent; Jack Myers predicted the falloff would be almost three times greater (22 percent). And just as the Internet has disrupted traditional ad sales, it may well disrupt the effectiveness of advertising itself. Consumers now have the tools to easily comparison shop online, to compare prices and performance reviews. The emotional power of a commercial is weakened by the informational power of the Web. Even Wirededitor Chris Anderson, who once more forcefully advocated that free was the perfect model, has changed his position. Blaming the deep recession, Anderson appended a “Coda” chapter at the end of his book in which he amends what he wrote earlier. He writes that he now believes “Free is not enough. It also has to be matched with Paid.”

Third, to rely solely on advertising is to risk becoming dependent on a revenue source whose interests may diverge from those of good journalism. The wall between advertising and news was erected to ensure that news was not at the service of commercial interests. This wall is easier to maintain when newspapers can buttress their ad revenues with subscriptions and newsstand sales. In a February 2009 Time cover story titled “How to Save Your Newspaper,” former Time editor Walter Isaacson quoted Henry Luce, cofounder of the magazine, as saying that to rely solely on advertising was “economically self-defeating.” Luce, Isaacson wrote, “believed that good journalism required that a publication’s primary duty be to its readers, not to its advertisers.” The warning was given life several weeks later when the management of Time Inc. goaded five of its magazines—Time, Fortune, People, Sports Illustrated, and Entertainment Weekly—to prepare major stories on a new 3-D animated movie from DreamWorks, Monsters vs. Aliens. The publications would each receive advertising from three of DreamWorks’ corporate partners on the movie, McDonald‘s, HP, and Intel. Many other media companies have felt compelled to make similar Faustian bargains, potentially trading credibility for dollars. In April 2009, page one of the Los Angeles Times featured an ad for a new NBC show that was laid out to look at first glance like just another news story

It is no surprise that advertisers will always want the most conducive setting for their ads; they want to sell products and have perfectly good business reasons to be concerned with the environment in which their ads appear. The problem is that this impulse leads them to push for more “friendly” news: a senior network news executive said, “I’ve seen increasing incursions by advertisers into morning show content. Can the evening news be far behind?” Of course, network news has in recent years made itself more of an inviting target for advertisers by allowing the morning shows and evening newscasts to become “softer” and more superficial. Likewise, it is as certain as a sunrise that advertisers will want tamer social networks and more predictable YouTube videos to accompany their products. To better target their ads, they also want to extract as much information about their potential customers as they can. But news outlets or Web sites that share users’ private information or allow themselves to be seen as bought and paid for will lose the trust of their customers. An additional revenue source will give them more leverage to resist.

When media companies depend solely on advertising revenues, there is also a real risk to quality. As more people read newspapers online, or watch their favorite TV shows online, or illegally but effortlessly download movies or music, the revenues of traditional content companies will fall. While it is true that too few newspapers do a good job of covering state capitals or city hall, or sustaining investigative reporting or investing resources in international news, those elite papers that do—the New York Times, Wall Street Journal, and Washington Post—are hobbled; that kind of reporting is expensive. Similarly, a television network’s ability to invest in expensive but exemplary programs like Friday Night Lights, 30 Rock, or even the more popular fare—Desperate Housewives, CSI: Miami—will be endangered.

A total reliance on advertising can menace many new media sites as well. Facebook and YouTube and Twitter have an enormous base of users, but they lose money Sites like Facebook and MySpace struggle to devise ad-friendly formats, but have so far stumbled. Robert Pittman, the former president of AOL, thinks he knows why: “Wrestling had bigger audiences than some prime-time shows, yet wrestling never monetized well. Why? Because most advertisers didn’t want to be associated with it. Environment did matter. We had huge audiences on AOL chat rooms. We couldn’t sell it worth a damn. People were communicating. They didn’t want to be interrupted by ads. You start running an ad on Facebook and users will say, ‘I don’t like GAP. Don’t put GAP on my page!’ It will attract some advertising dollars. But I don’t think social networks monetize to the size of the audience they have. The advertiser doesn’t want to be in an environment where they feel they are a big negative.” Social networks might be able to sell more ads if they share more of their users’ private information with advertisers, but when Facebook tried that approach in 2007 with an ad program called Beacon, irate users forced it to install a system that relied on the users’ willingness to participate. Eventually, if these sites cannot devise an ad formula that works, they will once again demonstrate—as AOL chat rooms or Friendster.com did—that advertisers may not always follow the audience.

One begins to hear anxious whispers in Silicon Valley that “free” might not be free. “I think people are getting more willing to pay,” said Marc Andreessen, who cited iTunes and Amazon’s Kindle as successful online pay services. “More and more of what people do, they do online. I think most people like the things they like and are willing to pay for it.” Maybe. Certainly there are products that users are willing to pay for on the Web, most notably the music on iTunes. Google generates 3 percent of its revenues by charging corporations for premium services—tailored searches, special software apps, extra Gmail storage—and expects those numbers to rise. Web companies such as Ning and Linkedin charge corporations for extra tools or premium services—including a fee to have an ad-free environment. Those wanting online access to the full Wall Street Journal, or to the New York Times archives and crossroad puzzle, pay for it. To read the Times on a Kindle one must subscribe. In 2008, each of the 40,000 member groups of Meetup.com paid the social network site fifteen dollars per month to host them online. One-quarter of CBS’s digital revenues comes from fees or subscriptions. The online dating service Match.com has nearly 1.5 million paid subscribers. By mid-2008, China was generating $2.5 billion in online video game revenues.

Mary Meeker predicts, “Ultimately, while advertising will remain the primary revenue driver for Internet content companies, I think we’ll find more and more examples of people paying for content, the way people do to download games on mobile devices. With mobile downloads, where the payment mechanism is integrated, I think you will be able to charge just a little bit a lot of times.” A research report from the market research firm Piper Jaffray projected that consumers would pay $2.8 billion to download applications to their mobile phones in 2009, a number projected to rise to $13 billion by 2012. One alternative is a monthly or annual subscription model. Another is micropayments. The impediment to either a subscription or a micropayment system is that with notable exceptions—mobile phones, Amazon, PayPal, Google Checkout, broadband providers—most Web sites do not have the names and credit card information of their users; new users would have to make a considered decision about whether the service was worth paying for before handing over their billing information. “At Ning,” Andreessen said of the social network site he funded, “we want to get credit card numbers. We’re edging towards it.” With over one million Ning niche networks—female writers have one, fans of Enrique Iglesias have one—the credit cards would stack up.

The cable and telephone companies, already in possession of the credit card or banking information of their customers, are well positioned to benefit from a micropayment or metered payment system. Using their broadband wires, they could offer a range of new pay services. Referring to smart phones as “the stealth device of this planet,” Ivan Seidenberg of Verizon painted a blue sky: “Your phone will replace your credit card, your keys. It will become your personal remote control to life.”

Nevertheless, a chasm yawns between the needs of business and the culture that has grown up around the Internet. Users may love YouTube or Facebook or Google News, but will they pay for them? Schmidt said he is dubious that “social network traffic will ever be as lucrative as business, professional, and educational traffic. When you go to a bar you may buy a drink, but you’re fundamentally there for social interaction.” Advertising, he believes, will become an annoying distraction.

Stanford president John Hennessy surprised me when he said, “We made one really big mistake in the Internet, which is hard to reverse now. We should have made a micropayment system work. Make it very simple, very straightforward. Let’s say I go to Google’s home page or Yahoo’s and I see a story I want to read in the New York Times, and that story is going to cost me a penny I click on it. I pay the penny electronically I have a system up that says, ‘Any story that costs less than a quarter, give it to me instantly If it costs more than a quarter, ask me first.’ I get a monthly bill. It pays automatically against my credit card. We could have done this easily The technology is all there to do it. The question is, how do we get back to something like that? We need some people to go out and say, ‘We need some approaches other than advertising.”’

In September 2008, I related Hennessy’s thinking about micropayments to Eric Schmidt. “A lot of people believe that,” he said. “I’ve been pretty skeptical.” Free is the right model, he believed then. “The benefit of free is that you get 100 percent of the market. And in a world where there’s no physical limits, it’s easy to have so much free. Traditional thinking doesn’t work.” There are businesses that can succeed by charging, he said, “but it’s a one percent opportunity The lesson that Google sort of learned a long time ago is that free is the right answer....”

It is not, I fear, the right answer for many media businesses. Nor was it the answer Schmidt came to seven months later, when we again discussed charging for content on the Internet. “My current view of the world,” he told me in April 2009, “is you end up with advertising and micropayments and big payments based on” the nature of the audience. Each member of the old guard—newspapers, magazines, TV and cable, phone companies—has its own online challenges. None can afford to blithely give away their services, yet neither can they afford to ignore that this is what the public might want.

For newspapers, the trends are clear: circulation and advertising revenues are falling, newspaper readers are aging, debt service and production costs are rising, and stock prices are stuck in the basement. Neither giving away online newspapers nor partnering with Google or Yahoo to sell ads has made an appreciable difference. The bleak headlines did not subside in 2009 as more newspapers shuttered, including the Rocky Mountain News and the print version of the Seattle Post-Intelligencer, and with the threatened closing of many others, the San Francisco Chronicle among them. Declining revenues—newspaper ad dollars fell by nearly one-third between 2005 and 2008—a reflection of new competition. Bloggers increasingly offer a wealth of local information and links that lumbering newsrooms don’t know how to match. The changing competitive landscape is being felt at the Journalism School, Columbia University While the foremost employers of 2008’s graduating class continued to be newspapers and magazines, according to Ernest R. Sotomayor, assistant dean, career services, there has been a profound shift. Many students clamor to take online media courses, he responds via e-mail, and to learn “to shoot/edit video, create audio content, Flash graphics and packages, etc.” And “virtually all those” who went to work for newspapers or magazines are working on their online versions. Increasingly, said Nicholas Lemann, the school’s dean, “many of our students go into ‘print’ or ’broadcast’ jobs that are actually mainly Web jobs.” Web sites have become for them, he said, the new Ellis Island, their point of entry to journalism.

Looking back on the investment mistakes made by newspapers, it is not hard to understand the too-sweeping contempt that people like Jeff Jarvis or Marc Andreessen harbor for them. Take the New York Times Company, which, though rightly proud of its flagship newspaper, has made its economic predicament worse with a series of what-were-they-thinking? business decisions. In 1993, at a time when it should have been clear that newspaper growth would slow, the Times spent $1.1 billion to acquire the Boston Globe. Instead of investing in new media, the Times purchased small television stations, which they have since sold, and spent more than $100 million to acquire a 50 percent stake in the Discovery Civilization digital channel, with an audience so small Nielsen could not measure it, and which was eventually sold back to Discovery in 2006. Instead of making other digital investments or reducing its debt, the company spent $2 billion to buy back its own stock, whose value has plunged; and it spent more than $600 million on a new headquarters building, which has since been leased out to help meet debt payments. The Times did make some smart moves: it made one big digital purchase, About.corn, an online source of information and advice, which has been a modest success; and it invested to expand its national circulation and advertising base, which helped cushion the paper from a local advertising and circulation falloff.

For the past decade, most other newspaper publishers have proclaimed that one answer to their woes was to offer readers more local news coverage, yet too few invested in local newspapers. Even fewer newspapers vied to make their Web sites innovative.

The Internet democratizes knowledge, allowing us to fetch information from most newspapers, magazines, or books anywhere in the world. It provides choices. It is convenient; Google aggregates information so that it’s easy to access. It spreads newspaper stories all over the Web, multiplying the readership. It opens lines of communication to bloggers and readers with valuable information and provocative opinions. And it generates some advertising revenue. But it robs actual newspapers of readers, reduces newspaper advertising and circulation revenue, and makes information in the New York Times equal to information from anywhere. Digital news has another side effect: it allows newspaper owners to quantify which stories appeal to their readers. As Larry Page lamented, “The kinds of stories that generate page views”—a Britney Spears meltdown or a Jessica Simpon weight gain—“are not the kinds of stories reporters want to write,” or that he personally wants to read, “and that kind of makes it worse.”

We are racing through a revolution comparable to the one ushered in by Herr Gutenberg’s printing press in the fifteenth Century. The outcome is as unclear today as it was then. “During the wrenching transition to print, experiments were only revealed in retrospect to be turning points,” NYU professor Clay Shirky wrote on his blog. He continued:

The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn’t apparent at the moment.... When someone demands to know how we are going to replace newspapers, they are really demanding to be told that we are not living through a revolution.... They are demanding to be told that the ancient social bargains aren’t in peril, that core institutions will be spared, that new methods of spreading information will improve previous practice rather than upending it. They are demanding to be lied to.... We’re collectively living through 1500, when it’s easier to see what’s broken than what will replace it.... Society doesn’t need newspapers. What we need is journalism.

Shirky is correct, I believe, that it’s vital to preserve journalism, but wrong about the unimportance of newspapers. By newspapers I don’t necessarily mean the printed papers we are accustomed to. I mean a product that offers readers a variety of news, including news they didn’t expect they would want or need. Maybe it’s a book review, or a recipe, or a description of pension padding by public workers, or the bonuses paid to investment bankers whose institution has received a federal bailout. Maybe it’s a report on the appointment of a finance minister in a country that’s going to be vital next year. A good online or print newspaper should be like a supermarket, with a variety of choices. No one is forcing readers to pull items down from shelves. But they ought to have available to them all the information they need to be well-rounded, informed citizens of a democracy Even a not very good newspaper—and most are not very good—broadens the horizons of its readers.

By newspapers, I also mean something often neglected by those who have a better understanding of technology than of journalism. While good journalism can be practiced by individuals—think Upton Sinclair or I. F. Stone—it is often a collaborative effort, the result of teamwork rather than solitary labor. Story ideas are kicked around in a newsroom. A journalist reports a story and phones the editor, who makes suggestions and prods the reporter to probe various angles and seek different interviews. When the story is completed it is transmitted to the editor, who usually asks: “Are you sure about this fact? Who’s your source for this anonymous quote? Have you got a second source on that? There was a report in X newspaper that drew the opposite conclusion. You buried your lede—the heart of your story is in paragraph ten. Did you talk to Y? This story needs more context.” On a big story, other editors will weigh in. This is not meant to disparage bloggers or other independent voices or experts. It is meant to say that the offhand dismissal of journalistic organizations—which is a cousin of the belief that a computer can assemble news without editors—will diminish the thoughtful journalism a democracy requires.

I asked Marc Andreessen, as I did others, to make believe he was the publisher of a newspaper. “What would you do?” The answer he shot back at me was a common one: “Sell it!” The problem with this strategy, as the Rocky Mountain News and other papers have discovered, is that there are no buyers. And those wealthy buyers who might be tempted to splurge for a newspaper trophy, the way their peers buy sports teams, risk looking like fools, not saviors, like Sam Zell at the now bankrupt Tribune Company.

Pressed further, Andreessen said he’d rush to put the newspaper online and move away from the print edition, as a handful of papers have already done. There are at least two vulnerabilities to this approach, as Andreessen recognized. First, because online newspaper ads today generate no more than 10 percent of what a print ad does, the paper really would be, as Mel Karmazin said, trading dollars for digital dimes. Second, public corporations are dependent on investors, and not many folks will invest in a declining asset. So the market value of newspapers will continue to fall, depriving them of the capital to invest in reporting and, in too many cases, the money to meet debt obligations. It may be true, as Rupert Murdoch’s News Corporation’s newspaper retreat concluded, that in another ten years online news will generate enough income to save the paper. The quandary is how to get through the next ten years. As Murdoch conceded, more than a few papers “will disappear,” either consolidating with others or collapsing. Some of these newspapers are mediocre outposts of former monopolies and will not be mourned. But many are valuable civic institutions that cannot easily be replicated.

Any number of ideas have been advanced to rescue newspapers and journalism. Newspapers are belatedly striving to make online editions more interactive and to better conform to a Web sensibility. Michael Hirschorn wrote a provocative media column for The Atlantic Monthly and took a stab at defining a Web sensibility. He wrote that newspapers should take some of their star reporters—he mentions Kelefa Sanneh, the pop music critic for the Times, and Dana Priest, the national security reporter for the Washington Post-and encourage them to create “an interactive online universe,” inviting others to share their information, views, or news tips. “Gaming this out in the most baldly capitalistic fashion,” he wrote, “the papers then stand a chance of transforming one Sanneh review (one impression) into the organic back-and-forth of social media (1,000 impressions).”

Newspapers are also experimenting with reducing costs by outsourcing functions to online ventures—investigative reporting to former Wall Street Journal managing editor Paul Steiger’s foundation-funded ProPublica; or international reporting to GlobalPost, a privately financed organization whose news operation is supervised by former Boston Globe foreign correspondent Charles Sennott, and which pays seventy correspondents in fifty-three countries one thousand dollars for four dispatches a month and gives them part ownership of the enterprise. Bloomberg has proposed that newspapers could outsource their business coverage to them; dozens of newspapers have ceded much of their national political and government coverage to the hundred reporters who work for Politico. Another form of outsourcing is for papers to share articles and photographs; this approach is being tried by a consortium of the New York Daily News, Buffalo News, Times Union of Albany, and New Jersey’s Star-Ledger and The Record. It has also been proposed that newspapers could be saved by acts of philanthropic generosity similar to the Poynter Institute’s ownership of the St. Petersburg Times; or by injecting new revenues into newspapers (Yahoo has had some success in selling ads for a group of about eight hundred newspapers); or by various governmental actions, from relaxing regulations to tax breaks to advertising subsidies (as France did starting in early 2009) to—a really bad idea—direct subsidies.

While any of these Band-Aids might help slow the bleeding, two things are essential if print or online newspapers are to have a shot at survival. First, newspapers have to stop acting like victims, bemoaning their fate and clinging to the past. To blame Google is to prescribe a cure for the wrong illness. Second, they have to go on the offense by trying new things, including trying to charge for their content.

I was smacked in the face with this realization when my friend Kenneth Lerer, who started the Huffington Post with Arianna Huffington, mentioned in the summer of 2008 that he had hired a single twentysomething employee to launch its local Chicago online edition. The Web site, like Google, was free and offered links to stories in the Chicago Tribune, Chicago Daily Herald, and other local papers and Web sites. Aside from inviting citizens to blog, this local online “newspaper” was little more than a collection of links to work done by others. Lerer said there was promotional value for content providers like the Tribune. True. He said the more page views their content got the more advertising they’d sell. True. He said that “citizen journalists” often provide valuable information. True. But at a time when most newspapers proclaim local news as their potential salvation, these papers were suicidally supplying the Huffington Post with their own murder weapon. By 2009, the Huffington Post was discussing similar local editions in as many as fifty cities.

What to do? Eric Schmidt once told me that he thought “Apple’s iTunes is a great example of compromise” between old and new media and, of course, users pay for their music there. “Google,” Schmidt continued, “has not found the iTunes” model—yet. And unlike music and other forms of entertainment, few will keep replaying a newspaper story on their iPod. Andrew B. Lippman, the associate director and senior research scientist at the Media Lab at MIT, wonders whether the example of ASCAP, the organization that has channeled copyright payments to musicians since 1914, might be a way “for newspaper companies to share revenues.” Newspapers and Google have to keep looking.

Even if they locate the right model, the technical challenge is daunting. “Can you put it behind a wall and charge for access? Yes,” said Andreessen, who despite his criticism of traditional media still subscribes to the print edition of the New York Times and owns some eight thousand books and six thousand CDs. “Can someone still take that content, copy it and mail it to friends? Sure. Can somebody post it on a Web site in Russia and provide it for free? Sure. Can you get the Russian government to crack down on that? You can try. Can somebody put up every copy of the New York Times ever published on BitTorrent and make it available in a single pirated download? Sure. You can’t stop it. It’s bits. If anybody can see it, then there is going to be a way for everybody to see it.”

Today, more than one billion people go online and view these bits. They are accustomed to reading news for free. To suddenly try to get them to pay for it would be an imposing task. To prevent leakage, presumably newspapers would need to act in concert. To do so would require discussions, and such collusion might invite antitrust lawsuits. On the other hand, when the survival of newspapers has been at stake in the past, government has allowed joint operating agreements (JOAs) so that two papers can pool printing facilities or other resources to save money. As there’s little question that newspapers are endangered, our foremost papers—the Times, Journal, and Washington Post—might get together and agree to erect a firewall around their content. Responding to a March 2009 request from House Speaker Nancy Pelosi, Attorney General Eric Holder said he would consider relaxing antitrust regulations to allow newspapers to share costs and merge. In 2009, three longtime media executives—Steven Brill, the founder of Court TV and The American Lawyer; L. Gordon Crovitz, the former publisher of the Wall Street Journal; and business investor Leo Hindery, Jr.—announced that they had formed a company, Journalism Online LLC, in hopes of creating a single automated payment system so that print publications would be paid when their content was viewed.

The rub, of course, is that even if most newspapers agreed to erect a firewall, some would choose not to, probably including wire services like the AP that are now paid by Google for their news. Maybe the Christian Science Monitor, which now relies mostly on an online edition, or the Seattle Post-Intelligencer, which relies solely on its online edition, will achieve success with these and be unwilling to give them up. There would be leakage, as users shared stories. Or as Jack Shafer of Slate observed, an online publication like the Huffington Post or Gawker could subscribe to newspapers and rewrite their stories, as “Henry R. Luce and Britton Hadden started doing in 1923 as they rewrote newspapers on a weekly basis for Time magazine.” On the upside, perhaps online citizens would be better able to distinguish between good reporting and bad. If the online newspaper offers content not readily available elsewhere, along with interactive and video and other features, perhaps customers will pay for it.

In March of 2008, I asked Larry Page how he would save newspapers, and he grew uncharacteristically passionate. “I don’t know how to do it, or I would,” he said. “Or at least try to help.” He said he was spending time thinking about it. This was no abstract puzzle; he knew the question was linked to Google. “I do think that our mission at Google ends up being pretty close to this. We try to produce the best information we can. The success of a Google search is based on the quality of the information—is there a good article about this?” He went on to say, “I’ve been trying to learn more about journalism and trying to understand the issues better. I do think that there is a problem that if you’re primarily doing it for profit, it’s hard to do a really good job. The kinds of things that generate profits and page views are not necessarily the things that generate value for the world. If you look at really good newspapers, they have dual classes of stock. That’s part of our inspiration for doing that.”

Could he imagine Google in the newspaper or journalism business? “We look for high-leveraged things,” he said. “We’re trying to figure out, how does this one employee affect ten million people? I think most content creation companies involve more work. So we naturally steer away from that.”

The next day I asked Eric Schmidt, why not pay a paper like the Times for its content? “We’ve been able with the New York Times to convince them that they make so much money from the traffic that we send them that they want their content available to Google,” he said. “They have the choice of not doing it.” In fact, the Times does generate some income from Google, but digital income from digital operations accounted for just 12 percent of the company’s $2.9 billion revenues in 2008, more than a third of this from About.com. About half of the About Group’s revenues, according to Arthur Sulzberger, Jr., comes from Google’s AdSense, as does “a significant portion” of its online revenues. Might Google try to buy the New York Times? “The official answer is that we have discussed buying the New York Times over the years—and there are many such interesting companies,” Schmidt answered, candidly “In every case, we ultimately decided we don’t want to cross that line”—to become a content provider and risk favoring Google’s own content. “The reason I say we don’t rule anything out is that our strategy is always evolving. We might come up with a different answer in a year or two.”

A year later, in April of 2009, I asked Schmidt if he had come up with a different answer. “It’s the same answer,” he said, before adding that Google was working on a product that is targeted at individuals, that knows the stories that interest people and what they’ve already read and targets text and video to people based on those interests. “In order to do that model we would have to partner with news sources.” He mentioned newspapers like the Times and Washington Post as potential collaborators. Indeed, after leaving Schmidt’s office I bumped into the Times chairman and publisher, Arthur Sulzberger, Jr., and his senior vice president of digital operations, Martin Nisenholtz, grabbing lunch in the cafeteria of Building 43. They were startled to encounter a journalist, no doubt fearful word would spread that they were meeting that afternoon with Schmidt and the founders to discuss a partnership. How they would monetize such a partnership—share ad revenues, create a micropayment system, pay the papers a license fee for their content? Schmidt said he did not yet know the answer. He did know, however, that the new product would not be “a solution to the problems newspapers have today.” But, he added, “the fact that we don’t see a solution today doesn’t mean that it doesn’t exist. This is about invention. One criticism I would make of many industries is that they’ve lost the ability to reinvent themselves.”

In an e-mail exchange afterward, Sulzberger did not portray Google as a villain: “Our industry faces many challenges but I would not lay them at the feet of Google.” A major Silicon Valley figure only blames Google for playing a public relations game by appearing sympathetic to newspapers: “Let’s suppose you’re Google and you fully realize newspapers are screwed ... and there’s not a damn thing you can do about it. Are you better off saying ‘tough noogies’ or ’we carefully considered all kinds of ways that we could possibly help?‘”

NEWSPAPERS—like the more seriously challenged music companies—have seen their decline abetted by the recession but not caused by it. By contrast, the sharp drop-off in magazine advertising that began in 2008 is probably linked to this downturn. Like newspapers, magazines require a robust online strategy And like newspapers, even in a bustling economy some will perish. But magazines are just as portable as newspapers, and their content usually doesn’t have to be read the day they’re published. In weekly and monthly magazines, stories often benefit from the luxury of time denied to most daily journalism. There is more context and opinion. There are vivid pictures and color. The paper is glossy, and clean. The ads are more inviting. As a business, magazines probably have better prospects than newspapers.

Few investors would rush to acquire magazines. Even fewer would buy a book publishing company. Their dominant source of revenue is book sales, and these have been fairly flat. The profit margins are slim, and as with newspapers or magazines, the cost of production and distribution is immense. There are long-term questions about what multitasking and the “quick snacks” available online are doing to attention spans. Is it an accident that the fastest growing book category consists of shorter romance and young adult novels? Technology now permits books to be distributed electronically, and upstart publishers have begun to produce paperless books. In turn, writers have to adjust to new pay formulas that involve less money upfront and more profit participation if their books sell. More books will be self-published. And an entirely new class of books-user-generated serial novels written online—now appear on cell phones in Japan, and will elsewhere. For readers, a digital book, like a digital newspaper or magazine, offers a multimedia dimension: video, music, games, interactivity between author and audience.

Early in 2009, Amazon CEO Jeff Bezos said that of the books that were available both in print and electronically at Amazon, 10 percent of these were downloaded and sold on its portable Kindle device. By May, Amazon said the number of electronic books it sold had soared to 35 percent. This figure had nearly quadrupled in a year. Although electronic books comprised but 1 percent to 2 percent of all books sold, it is clear that paper will continue to be replaced by bits. As with newspapers, this will reduce costs. What gives publishers pause is that Amazon, like Apple with iTunes, gets to set the price for these electronic books, and they worry, as advertisers do with Google, that if there are no potent electronic competitors, Amazon will be able to dictate price and publishing terms. This is a reason that publishers welcomed Google’s 2009 announcement that it would compete with Amazon to sell e-books.

Bezos has been smart about spotting trends, and he said he is optimistic about the future of books. At the Wall Street Journal’s D Conference, he told the audience, “Physical books won’t go away, just as horses won’t go away. But in the future the majority of books will be read electronically.” The reason, he later told me, is convenience: “We humans do more of what is easy for us. The more friction-free something is, the more of it we do.” Bezos was sitting on a Sun Valley patio with dark sunglasses shielding his eyes, and was more expansive. He said devices like the Kindle have the advantage of portability, have big, easy-to-read screens, provide online access to other information, and store many books. Most people, he believes, read more than one book at a time, and thus reading is more “frictionless” on devices like the Kindle or the Sony Reader. “The Kindle is an example of a device that is going to make long-form reading more convenient and less friction filled. As a result, you’re going to get more long-form reading. If you want more reading, make reading easier. That’s what we’re trying to do. If you have a book with you, you’ll read more.”

Broadcast television, like newspapers, suffers from too many choices. In the final two decades of the twentieth century, the new consumer options were cable and then satellite TV In this century, the Internet offers vastly more diversions, while TiVo and DVRs allow ad skipping and snatch the scheduling power away from network programmers. Although Americans still spend more time watching television than on the Internet, the proliferation of choices weakens the business model of many of these choices. This is especially true for broadcasters who, unlike cable, do not receive subscription revenue and rely solely on advertising. How, broadcast executives privately mumble, can they afford to pay three million dollars or more for each episode of a one-hour drama when ratings are falling? How continue to afford expensive nightly news broadcasts on ABC, NBC, and CBS when their nightly audience has plunged from thirty-two million in 2000 to twenty-three million in 2009? Local television stations, once known as cash cows because they generated profit margins of around 50 percent, have seen those margins collapse as viewers flock elsewhere and networks demand compensation for programming. Jack Myers projects that local broadcast station advertising revenues will drop 20 percent in 2009.

The belief embraced by too many television (and movie) executives that they are in the content business—and most digital companies are not—is not just smug but stupid. Content is anything that holds a consumer’s attention. If four million people in China subscribe to online games and play an average of six hours daily, as Activision CEO Bobby Kotick says they do, that audience is lost to television and most any other media. If Facebook or YouTube or Twitter is captivating audiences, the number of eyeballs watching CBS will drop. Internet video is growing twice as fast as television viewing, Nielsen reported in early 2009, and eighteen- to twenty-four-year-olds now spend the same amount of time—five hours a day—watching Internet video as American adults spend watching TV

“To survive,” said Quincy Smith of CBS, “media companies have to get out of a broadcast mentality. All of us—broadcasters, cable networks, Hollywood studios—have to display our content on multiple platforms, be it YouTube, TVcom, Hulu, MySpace, or iTunes. We need to use these platforms to promote our content and drive audiences, particularly younger audiences, to our primary platform.” Network television can no longer think of itself as a lean-back medium. The Internet, Smith emphasized, was more than just a distribution platform: “On the Web, you build communities. And traditional media has to change its DNA to think about that community. Our most trafficked CBS sites are the ones that create community. The Internet is not just a platform. It’s about interactive storytelling.”

By the summer of 2009, however, Quincy Smith decided that it was time to move on. He denied he was frustrated trying to turn the CBS ship around, steaming toward the digital world. He expressed admiration for CBS CEO Les Moonves. He desired to move on because he had accomplished what he set out to do. He had engineered the acquisition of CNET He now presided over CBS Digital’s three thousand employees. CBS Digital was generating one hundred million dollars in annual profits and growing 10 percent each year. The challenge now was “blocking and tackling,” he said—management. This was not his forte. If he won Moonves’s concurrence, he said he wanted to return to what he did best—deal making—and planned to hang his investment banking shingle in Silicon Valley and serve as a digital adviser to old and new media companies. If Smith left, said Moonves, he would want to retain him as a consultant.

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.