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

While advertising in most traditional media was declining or growing incrementally, online advertising was soaring. The advantage enjoyed by digital media is transparency. The client (advertiser) knows more about the audience, more about who actually responds to the advertisement. Marketing thus becomes less opaque, robbing ad agencies and sellers of their ability to sell what Mel Karmazin called “the sizzle.” This is a primary reason online advertising jumped 30 percent each year, topping twenty-three billion dollars in 2008. This transparency and the additional supply of media outlets, as well as a suspicion that advertising and media agencies had not sufficiently adjusted their fees downward, shifted leverage to the true buyer, the client.

Seeking to surf the Internet wave, companies like WPP bid aggressively to acquire digital advertising and marketing companies. They and others invested in digital advertising exchanges like Spot Runner, which creates an online dashboard of local media platforms on which small businesses advertise, and offers a roster of prefab commercials that can be cheaply customized. Want to buy a thirty-second TV spot in Santa Barbara? Nick Grouf, the CEO of Spot Runner, said he can reach into “the long tail” of local media and purchase it for a mere twelve dollars. This makes television advertising accessible to small business-pizza parlors, pet stores, hair salons-that would previously have found it unimaginable. “We told local businesses this and their jaws dropped,” said Grouf. “We’re democratizing the business, opening it up to small business.” By selling ad space once seen as undesirable, the digital technologies that allow advertising exchanges, such as Google’s AdWords and AdSense, shake the advertising business to its core.

Technology was the frenemy of all traditional media businesses. According to an Annenberg Center study, the average American family classified as poor spent $180 per month on media services-mobile, broadband, digital TV, satellite TV, iTunes, and the like-that did not exist a generation ago, and the average American household spends $260 per month. (Irwin Gotlieb’s GroupM data pegged the number at $270.) By providing consumers with all these choices, new technology inevitably disrupted traditional habits. The audience that had once belonged to broadcast television moved to cable, to video on demand, to DVDs, to YouTube and Facebook and Guitar Hero. TiVo and DVRs allowed viewers to become their own programmers. This was great for viewers but not so great for the television business. It meant that viewers were often skipping the ads broadcasters relied on for revenue, and programs being watched were not being counted in the Nielsen ratings, weakening ad rates. And networks are soon to be slammed by another disruption: surveys show that those between ages fourteen to twenty-five (called millennials) are watching less television and spending more time on the Internet and with video games. Television executives like to argue that this is really good news for the broadcast networks. Yes, they will say, the live viewing audience for ABC, Fox, CBS, and NBC plunged 10 percent in the year 2008. But, they boast, their ad revenues continued to inch up, because in an age of niche media and fragmented viewership, no other medium delivers a mass audience. If they took a truth serum, though, they would admit that one day their advertisers will also fragment. They would also admit that their investment in local broadcast stations, which once yielded profit margins of 40 to 60 percent, were now a drag on their growth.

The U.S. movie business was growing overseas, but was under attack everywhere else-from Internet piracy to DVD and video sales and rentals that were declining in the face of competition from movie downloads. Equally worrisome, personal video recorders empowered viewers to ignore ads promoting new movies. “We’re not like a car or prescription medicine company where you can build a brand over a long term,” said Michael Lynton, Chairman and CEO of Sony Pictures Entertainment. “You have to build a brand in five weeks. If they skip over your ads, you’re in trouble.” Flat screen TVs, DVDs, and movie downloads drained customers from movie theaters. Video games were stealing the attention of teenagers. And that burgeoning business-now taking in twenty-one billion dollars a year worldwide and expected to double by 2012-was expanding from action games for teens to mass-market Wii games for adults to play with their kids, or with one another. Telephone companies watched their lucrative landline phone business rapidly lose customers to Skype Internet calls and mobile and new cable phone services. Yahoo and Microsoft were tossed in the digital storm. With better search and advertising technology, Google’s search widened its lead. With the promise of cloud computing and free software applications, Google menaced Microsoft’s packaged software business. Everywhere they turned, new technologies were disrupting businesses faster than they could respond.

MORE THAN A QUARTER CENTURY AGO, as the age of cable TV materialized, the three television networks were slow to recognize the seismic shift that cable heralded, missing their chance to own rather than compete with cable networks. They were not alone in disdaining the new. When Robert Pittman cofounded MTV in 1981, Coca-Cola and McDonald’s refused to buy advertising, saying they would not advertise on a television network that did not reach at least 55 percent of the nation. Pittman did persuade Pepsi to place some ads, and for the next several years Pepsi had a de facto exclusive advertising platform that greatly boosted its market share. It took Coca-Cola and McDonald’s four or five years, Pittman recalled, to change their minds. Likewise, most traditional media companies in the Google era concentrated more on defending their turf rather than extending it. Belatedly, most have begun to dip their toes, and in some cases entire feet, into new media efforts, hoping that technology could also be their friend.

In the summer of 2008, CBS became the first full-scale traditional media company to open a Silicon Valley office in Menlo Park. Quincy Smith, who had been promoted to CEO of CBS Interactive, supervised the office and averaged two days a week there. Under his prodding, CBS made a number of digital acquisitions. The biggest was the $1.8 billion CBS spent to acquire CNET, whose online networks generated revenues of $400 million. It was a pricey acquisition-three times what Murdoch spent for MySpace in 2005-but CEO Moonves said he hoped the digital acquisition would add “at least two percentage points” to CBS profits and growth rates. CBS had also become one of YouTube’s biggest suppliers, uploading eight hundred one- and two-minute clips per day from CBS programs. It was also among the first traditional media companies to strike a deal with YouTube to treat pirated video, as Brian Stelter reported in the New York Times, “as an advertising opportunity.” Instead of ordering YouTube to remove the content illegally uploaded by citizens, CBS and a few others granted YouTube permission to sell ads off these and to split the revenues. Smith said CBS had about two hundred partners, and was selling digital copies of its shows on Yahoo, iTunes, and Amazon. Smith’s digital group now had 3,300 employees in its various ventures, and Moonves predicted that the group would generate revenues of $600 million for CBS in 2008, with $90 million to $100 million of that as profit.

Almost daily in 2008, old media announced new media efforts. Seeking to extend its programming to other platforms, NBC said in January 2008 that it would customize shorter content that it called promo-tainment and sell ads on nine other platforms, including screens in gyms, subways, and the backseats of taxicabs, on gas pumps, and at supermarket checkout counters. In its competition with YouTube, NBC and News Corporation’s Hulu video site had, by October 2008, signed up Sony and Paramount and other studios. Hulu offered a choice of about a thousand network shows, and reached an estimated 2.6 percent of the online video market-far below You Tube-but in a promising ad-friendly environment that would soon make it the second ranked video site. CBS, which declined to join Hulu, later established its own site, TVcom, to serve as an online platform for its present and past programs and for those of other content creators. Disney sold ABC programs and movies to iTunes, defending Apple’s then policy of a single price for programs, movies, or music on the grounds that it was simple and clear and better served consumers. In April 2009, Disney’s ABC gave a boost to Hulu by joining NBC and Fox as an equity partner. By mid 2009, Hulu-like You Tube-was still not profitable.