AS QUINCY SMITH AND CBS were reaching out to Google, Google fitfully tried to assuage traditional media’s concerns. Eric Schmidt blamed Google’s lack of outreach on its newness. “When you’re a small company,” he told Time, “you sort of have to do everything yourself, and as you get more established, you begin to realize you’ll never get everything done by yourself.” Google reached an agreement with News Corporation’s MySpace that was similar to the one they had made with AOL. In return for being chosen as MySpace’s search engine, Google guaranteed the social network nine hundred million dollars in revenues over the next several years. YouTube made a series of smaller deals to pull in content from old media, gathering what company officials said at the time was a total of one thousand content partners, including the National Basketball Association, CBS, Sony, The Sundance Channel, and a channel to air the full library of Charlie Rose.
Before 2006 came to an end, Google tried to send a signal to traditional media that its intentions were honorable. It reached an accord with the Associated Press and three other wire services-the Canadian Press Association, AFP (Agence France-Presse), and the UK Press Association-thus eliminating the possibility of lawsuits dating back to 2004. The agreement allowed Google News to host and carry complete or partial stories as well as pictures from these wire services, and for Google search to link to these wire service stories; in return Google agreed to pay an undisclosed license fee. This was an acknowledgment that a wire service like the AP, whose articles are syndicated to countless newspapers, posed particular problems for Google search. Every time a user did a search, a waterfall of the same AP story appeared from different newspapers, clogging the search results. Google called this “duplicate detection,” and announced that the agreement with the wire services “means we’ll be able to display a better variety of sources with less duplication. Instead of 20 ‘different’ articles (which actually use the same content), we’ll show the definitive original copy and give credit to the original journalist.” Google justified paying a license fee to the AP and other wire services-but not to newspapers-by claiming that since these four news agencies “don’t have a consumer website where they publish their content, they have not been able to benefit from the traffic that Google News drives to other publishers.”
Solving one problem created another, though. More than a few newspapers tried to make the same deal and were rebuffed, said a senior executive at Dow Jones, parent company of the Wall Street journal’s Digital Network. “If they’re really about the user, they should want to say, ‘Some sources are better than others.’ We’ve had many conversations with Google. The bottom line from their perspective is that they are not interested. They are about algorithms and links and ‘the wisdom of crowds.’ But is that really best for the user?” And since the journal charges for its online edition and is behind a firewall, Google cannot offer full links to journal stories as they do with other newspapers.
Amid declining sales, the anxiety of newspapers was inflamed. It was not difficult to incite newspaper owners. The average daily circulation of the largest 770 U.S. newspapers fell 2.8 percent in the first six months of 2006, and 2.5 percent the prior six months. Although online traffic for the top 100 newspapers rose 8 percent in the first half of 2006, and online ad dollars grew even faster, the gains did not compensate for the losses. The rule of thumb is that an online ad brings in at most about one-tenth the revenue as the same ad in the newspaper. There are two reasons for this: readers spend much less time reading a paper online than they do a newspaper, and because ad space is not scarce on the Web, advertisers pay lower rates. A regular newspaper reader of the New York Times spends thirty-five minutes each day with the print version, according to Nielsen, while those who read the Times online spend only thirty-seven minutes a month reading it. These figures can be misleading, because they average in the occasional visitors who may spend a minute or less online with those who are online devotees. Nevertheless, there is a wide disparity between online and print newspaper readers. Those who can read the paper online for free help explain the drop in newspaper circulation. And those who spend less time with newspapers have less time to scan the ads, which helps explain the drop in advertising. Advertising in major newspapers, which grew barely 1 percent in 2005, would actually drop 1.7 percent in 2006 and 8 percent in 2007. Coupled with the other dismal facts-the falling value of newspaper stocks and their rising debt load-only added to their agitation.
Inevitably, resentment toward the AP spread among newspapers. The AP is a nonprofit cooperative owned by its fifteen hundred or so newspapers. It employs a staff of about four thousand, and because the AP smartly diversified, a third of its revenues come from selling video and online news to its members. While most of its newspaper constituents struggle, the AP’s revenues grow annually at about 5 percent. The licensing agreement with Google promised to boost these revenues. Unable to share this growth, U.S. newspapers began to petition the AP to lower the fees it charged them. As part of their cost cutting, the Chicago Tribune-owned newspapers, along with about 7 percent of the AP’s U.S. newspapers, announced plans to cancel their relationship, a step that, contractually, takes two years.
In the spring of 2007, Rupert Murdoch summoned all his News Corporation newspaper editors and publishers from around the world to a retreat at his ranch in Carmel, California. There they spent a couple of days wrestling with one terrifying question: What is the future of newspapers? Their conclusions, according to Jeremy Philips, the News Corporation executive vice president who prepared the agenda, were bafflingly mixed. The short-term outlook for newspapers promised more declines in advertising, circulation, and classified ad revenues; the long-term prognosis-if the papers could hold on-promised lower costs for printing, paper, and distribution online. “The headline is a paradox,” said Philips. “The macrotrends underlining these businesses have never been stronger. The consumption of news is greater than ever before. And the cost of delivering news is lower than ever before.” He noted that the online version of The Times of London and the New York Times have ten times the readers as their print editions had. On the other hand, he continued, “The microeconomic trends are problematic. The advertising available has declined because there are more places to advertise. Newspapers have lost control of classified advertising. In addition, the migration to online leads to a revenue gap because the print reader is more valuable today. And young people are reading fewer newspapers. This is a long-term trend.” In a world where online links to content obscure the brand names that produce it, the economic vise tightens faster for small and midsize newspapers as their costs rise and their revenues decline.
THE CONTROVERSIES DID NOT HINDER Google’s growth. At the end of 2006, it had 10,674 full-time employees, about half of them engineers. It had reached $10 billion in revenues, a year ahead of Wall Street analysts’ expectations, and $3.5 billion in profits, meaning that for every dollar collected, a hefty thirty cents was profit. (Amazon, which was sucessfully branching out from selling books to selling other goods, made a profit of about two cents on every dollar; Wal-Mart made almost four cents.) Google pleased many of its partners-from AOL to MySpace to thousands of Web sites-then paying them a total of $3 billion from its AdSense program. In their annual letter to shareholders, the founders spoke of improvements in search and pitched their new products. However, the core of their thirteen-page letter consisted of endorsements from those who benefited from Google, including Quincy Smith of CBS, who was quoted as saying: “YouTube users are clearly being entertained by the CBS programming they’re watching as evidenced by the sheer number of video views. Professional content seeds YouTube and allows an open dialogue between established media players and a new set of viewers.”