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

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.