Ken Auletta - Googled - The End of the World as We Know It

Much of the rest of old media was also challenged. Book sales were steady, but not robust, and the industry was anxious about the decline of independent bookstores and the new leverage exerted by giants like Barnes amp; Noble and Amazon.com. This anxiety was only inflamed by Google’s thrust into digitizing books. The movie and television and music industries were fretting about piracy. U.S. content and software companies lost an estimated $6.9 billion in revenues to piracy in 2005, and in China about 90 percent of all content and software was pirated. About one billion songs per month were swapped on illegal file-sharing networks. Although digital companies claimed piracy was hard to control, media executives rarely believed this. They believed digital companies were building their own audiences by stealing their content, particularly that of music companies. The lubricant of trust was missing. “I don’t believe they have any incentive to solve it,” said Sony CEO Sir Howard Stringer. With the rise of high-speed Internet connections, Hollywood knew its movies and TV programs were becoming more vulnerable to hackers and illegal downloads.

Television broadcasters were antsy about new user-generated online video companies like YouTube, a site that threatened to steal not just eyeballs from TV but perhaps its content as well. And YouTube was not their foremost threat. New consumer choices drained audiences from traditional media. Three years earlier, in 2002, there was a total of 308 cable and video networks, a number that had tripled from just eight years earlier, and would double over the next four. The radio industry was also squeezed by newer technologies that allowed the iPod and Internet and satellite radio to subvert their traditional ad-supported broadcast model. The phone companies nervously watched their traditional landline business erode, and with the 2005 acquisition by eBay of Skype, a largely free Internet phone/voice service, and Google’s voice-chat software also released that year, the erosion would accelerate. The cable companies were unsettled-as were all existing media-by how new media, from sharing networks like MySpace.com or Meetup.com to video games, captured the attention of their customers. MySpace was only three years old in 2006 but already had seventy million members.

And, of course, there was the advent of online advertising, which alarmed the traditional advertising industry. Google was able to sell advertising with just a few search words. The buy was more efficient because it was cheaper, better targeted, and Google only charged when the consumer actually clicked on an ad. Google could render traditional ad agencies extraneous middlemen to their clients. Irwin Gotlieb, the global CEO of GroupM, the world’s largest media buying and planning agency with a pool of sixty billion in advertising dollars, said that the bigger problem for his business was not Google supplanting his services, but its market power. With the IPO placing a value on Google greater than GroupM’s parent, the WPP group-plus the world’s four other advertising/marketing giants combined-Google had very deep pockets.

The CEO of one media conglomerate describes the media paranoia Google provoked as intense, adding, “It’s where Microsoft was. That paranoia is even greater about Google. The service is free. It’s hard to see how anybody knocks them out when it’s free. The brilliance of its business is that consumers love them. Consumers never loved Microsoft. They never loved the phone company. They don’t love the cable company. Because we have to get money! Advertisers get a better deal than they’ve ever gotten. Consumers get a better search. And it’s all free.” What terrifies media companies, he added, is Google’s ability and appetite to reach into other businesses, from mobile phones to computer operating systems to video and advertising and even banking. “Name a business that they’re not going to disrupt.”

In Google’s 2004 annual report, published in the spring of 2005, the founders gave old media executives more cause for concern. In the report was a letter to their shareholders announcing what they called their 70- 20-10 strategy. “Seventy percent of our effort goes to our core; our web search engine and our advertising network,” Brin wrote on behalf of himself and Page. He went on to say that it was desirable for Google to diversify and that is “why we allocate 20 percent for adjacent areas such as Gmail and Google Desktop Search. The remaining 10 percent is saved for anything else, giving us freedom to innovate.” The letter cited some new products Google invented or acquired: Google Maps, which allowed users to map directions; Google Earth, which provided satellite images of the earth’s nearly sixty million square miles, allowing users to zoom in to search teeming Calcutta streets or war-torn Baghdad; Google Scholar, which allowed researchers to access academic papers and research; Google Video, which allowed users to search television programs; and Gmail. Any media company paying attention saw that Google was not just a search engine.

Even new media was put on notice when, in 2004 and 2005, Google swooped in at the last minute to beat both Microsoft and Yahoo in auctions. The first came in October 2004. Brin and Page were on an overnight flight, heading to a Madrid sales conference on a chartered Boeing 737, when they learned from Omid Kordestani that AOL Europe was close to renewing its European contract with Yahoo. (Although AOL was losing subscribers, it still had more than twenty million worldwide in 2005, making it a valuable platform to generate more searches.) “We told the pilots to head to London,” where AOL’s European headquarters were located, recalled Brin. The founders’ families were aboard to accompany them from Madrid to Rome, where they were to receive an award from the prestigious Marconi Society for their scientific contributions. When they awoke, they were astonished to find that they were not in sunny Madrid but instead at Stansted Airport outside gray London.

Brin and Page drove to AOL’s European offices. Jonathan Miller, the chairman and CEO of AOL at the time, recalled the jolt he felt Monday morning when the head of AOL Europe phoned. Miller thought they had a deal with Yahoo, but now his European executive described the proposal made by Brin, who takes the lead in business negotiations: “He offered a number that was 40 percent higher than Yahoo’s. And he told us we had two weeks to get back to them.” There were, added a still stunned Miller, “no lawyers, no nothing.”

Google won the prize.

The second victory came a year later, in the fall of 2005. Tim Armstrong was attending meetings in Mountain View when Eric Schmidt entered and whispered, “We’re about to lose AOL to Microsoft.” The merger between AOL and Time Warner was not working; the touted synergies had not materialized. Into this chaos stepped Microsoft, determined to catch up in search. Back when Google was still headquartered in a garage, Gates and Microsoft had had it within their grasp to build a powerful search engine when it purchased an online advertising company, LinkExchange. Although the creator of LinkExchange, Ali Partovi, then twenty-six, told Microsoft that his partner, college dropout Scott Banister, had come up with a way to include ads in with search using keywords and that a search auction system would be “the next big thing,” Microsoft spurned the advice and declined to start a search engine. As first reported by Robert A. Guth in the Wall Street Journal, Microsoft believed the pot of gold lay not in tiny search text ads but in portals like their own MSN. But now Microsoft had launched its own search engine, Live Search, and with its deep pockets was seeking to replace Google as AOL’s domestic search engine.

Armstrong and others hammered out a counterproposal and showed it to Schmidt, before Armstrong flew back to New York to meet with Time Warner executives. Microsoft executives were on one floor, Google executives were on another, and Time Warner shuttled between them. At one point, Armstrong said, Microsoft left, “thinking they had the deal done. We stayed.” Schmidt flew to New York, as did Brin. In the end, Google and AOL reached agreement to become worldwide partners, with Google pledging to make more AOL content available to Google users, guarantee minimum annual advertising revenues to AOL, and invest one billion dollars to acquire a 5 percent stake in AOL.