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.
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.