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

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 amp; Gamble. And Seidenberg blithely minimizes the volatile issue of privacy.