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

Local stations scrambled to create Web sites for their news and weather and to lower their ad rates in order to sell inventory to small businesses. A consortium of the six largest cable operators started Canoe Ventures, an effort to forge a single national digital cable platform to sell and target ads and collect the kind of user data Google gathers. HBO experimented by offering some of its programs for free online. Viacom joined with MGM and Lions Gate to create Epix, a premium cable channel with a Web site to stream their library of movies. All the movie studios sought to improve picture quality by offering films shot in high definition and by replacing costly reels of film they sent movie theaters with digital copies. Trying to demonstrate that it was not “a dumb pipe company,” Verizon rolled out its cable video service, called FIOS, and announced plans to spend twenty billion dollars by 2010 to ensure its success; by the summer of 2008, FIOS was available in one million homes. AT amp;T promised to offer video services for mobile phones. Spurred by the success of Apple’s iPhone, mobile phone companies moved to transform their devices into PDAs that were really powerful minicomputers. People who had grown up in the television business, such as Disney’s former CEO, Michael Eisner, or MTV’s Albie Hecht, and Jason Hirschhorn and Herb Scannell, switched careers to become Internet programmers.

And yet all of these efforts failed to answer two lingering questions: would these efforts make money? And would storytelling change on the Web? Eisner said he believed it would not, that though there are many more platforms to display stories, stories need space to be told. He didn’t believe attention spans had shrunk, that multitasking diverted attention, or that interactivity would reshape storytelling. “If the story is really good, they’ll stay with it,” Eisner said. “I don’t think a lot of the rules for storytelling are unique for the Internet.” I think Jason Hirschhorn was closer to the truth when he said that the way storytelling will change is that the audience-as Google’s YouTube demonstrates daily-will “do a lot of snacking.” Everything will speed up, probably including the decline of old media.

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.”