Googled: The End of the World as We Know It

CHAPTER EIGHT. Chasing the Fox

(2005-2006)

Rupert Murdoch, the audacious and sometimes outrageous media mogul, made another move in July 2005 that unnerved his peers. He was in the habit of doing so. For four decades Murdoch’s News Corporation had been playing bold offense, forcing other media companies to defensively respond. Starting with a single newspaper in Australia, and then England, he build a newspaper empire in both countries, and forced the modernization of newspaper work rules in England. At a time when the audience for the three broadcast networks was aging, he had pioneered the Fox broadcast network, with its youth-oriented programming. He established satellite broadcasting that blanketed much of the globe. He eclipsed the once-dominant CNN in ratings with the Fox cable news network. Journalistically, his impact could be pernicious-spurring tabloid television with his syndicated A Current Affair, fomenting shrill, nineteenth-century press partisanship with Fox News, The Sun in London, and the New York Post. But even as he was disdained in certain quarters, he was always carefully watched. Media companies chase Rupert Murdoch as hounds do a fox.

Murdoch again shocked his peers when he acquired MySpace.com in July 2005 for $580 million. After just two years of existence, the youth-oriented social network and music site had sixteen million monthly visitors; that number would quadruple over the next fourteen months.

Before Murdoch’s announcement, it was expected that Sumner Redstone’s Viacom would lay claim to MySpace. It was a natural fit with Viacom’s MTV, with its own youthful audience of more than eighty million monthly viewers. And it was widely believed that Viacom CEO Tom Freston was close to making the acquisition. But before he could, Murdoch swooped in with a higher offer, which Redstone refused to match. Within months, Redstone had replaced Freston, grousing to associates that had he been more aggressive he could have sealed the MySpace deal. Actually, what happened, according to a Viacom official involved in the negotiations and confirmed by others, was this: “Rupert made a preemptive bid. Sumner told Tom he did not want to get into a bidding war.” The parsimonious Redstone had flashed a red light to Freston.

By acquiring MySpace, Murdoch intended to instill in News Corporation a fresh Web-centric sensibility. By contrast, when Viacom tried to instill its MTV television sensibility online with a music site called MTV Overdrive, it stumbled. In early 2007, MySpace cofounder Tom Anderson announced to the German magazine Der Spiegel, “I think we have replaced MTV MySpace is more convenient. You can search for things, while MTV is just delivering things to you. On MySpace, you can pick your own channel and go where you want. That’s why TV viewership is dropping among the MySpace generation.” MySpace had the traffic and the buzz. MTV had the profits, of course, which MySpace did not have. But Murdoch was nonetheless perceived as once again having set the pace for media companies.

IN THE YEARS SURROUNDING the MySpace deal, Internet visionaries began to dominate discourse in the media, and the prospect of new online challenges attracted some of old media’s most creative minds. New media was invading the entertainment business, becoming a magnet for talent, for those wanting to stretch their muscles or pad their wallets. Believing that new media would define the future, more than a few executives fled old media. Viacom lost one such prominent executive, a man named Albie Hecht. After successfully creating music videos earlier in his career, Hecht oversaw the creation of MTV Network’s Spike TV, which pitches its programming to young adult males, and then was president of Nickelodean Entertainment. But in 2005 Hecht, then fifty-two, suddenly stepped down, saying he wanted to get back to creating products rather than managing them. It was seen as a blow to Viacom. “I left because one of the lessons right now is that the small, fast-moving company with a specific mission can strike. The Viacoms and the rest of them are having a hard time. They take entrepreneurs and make them executives. They take authentic brands and turn them into their brands. And they put bureaucracy into place and reduce the risk taking and speed to market. That’s a killer combination.” Big companies, he said, are too impatient because they can’t explain to public shareholders how they will quickly get a return on start-up investments. He wanted, again, to be a fox.

Hecht, a full-throated enthusiast partial to T-shirts, khakis, and white sneakers, set out on a “vision quest” similar to the one Barry Diller took when he left as CEO of 20th Century Fox in 1991, purchased a PowerBook laptop to explore the new online world, and embarked on a ten-month odyssey to decide where to stake his future. Diller decided that cable would dominate the media’s future. Hecht came to a different conclusion. He had visited studios, directors, writers, producers, digital animation studios, anyone who set out to create programming for the Web. “What kept coming back to me,” he said, “was that the most exciting people, the most exciting work I saw, was all on the Web.” One night as he watched his seventeen-year-old son, his thinking congealed. “He was up in his room,” Hecht said. “He’s on the phone. He’s watching TV He’s playing a video game. He’s IMing. He’s reading-thank God he reads! All at the same time! You look at that and you go, ‘This is a new world with new media and new audience behavior. You have to capture that audience by capturing the way they are engaged.’” His son was not just receiving information or entertainment. He was interacting. This audience wanted different modes of storytelling.

Hecht’s son was typical, according to a 2005 study of media usage among eight- to eighteen-year-olds by the Kaiser Family Foundation. The study reported that young people nationwide spent a daily average of six hours and twenty-one minutes with media; when multitasked activities like reading or listening to music were included, the daily total is eight hours and thirty-three minutes, more than “the equivalent of a full-time job.” Nearly four hours per day was expended watching TV, videos, DVDs, or prerecorded shows, and 40 percent of this time youngsters were multitasking, usually by simultaneously going online. Outside of schoolwork, sixty-two minutes were spent on the computer, forty-nine minutes playing video games, and only forty-three minutes reading. School homework consumed an average of fifty minutes per day. A later study by the market-data firm, Forrester Research, found that Americans between the ages of eighteen and twenty-seven spent nearly thirteen hours per week on the Internet, nearly two and one half more hours than they spent watching TV

When he left Viacom, Hecht established a company, Worldwide Biggies, in a brownstone office not far from Times Square. With venture capital funding of nine million dollars, and a staff of twenty-two, they create interactive Web shows and video games and other multiplatform activities. “I use the word engagement as the new metric, as opposed to viewing,” he said. “Some people call it leaning forward as opposed to leaning back.” In the products they produce, they look for “six levels of engagement.” The audience must be able to (1) watch (on any device); (2) learn (by searching for information about it on the Web); (3) play (games); (4) connect (social networks, IM); (5) collect (microtransactions involving money on the Web); and (6) create (user-generated content). “If we have four of the six, we put it into development. If we get six out of six, we think we have a hit.” He has since created successful Internet games and a popular mockumentary series on Nickelodeon called The Naked Brothers Band.

The new hits will differ from the old ones, he said. Storytelling will have to change. “We’re learning that now. Some of it is that a story isn’t necessarily a story. Facebook is a story. What’s the story? ‘I’m going to look at what Albie is doing now. I’m going to go on my Facebook page and it said that Albie is now doing an interview. And just yesterday Albie posted seven pictures.’ That’s a story.” Hecht, like many a high-concept Hollywood executive, thinks in formulas, but his are broader (in a business sense). He said games are about “experience,” TV about “character,” and movies about “stories.” In the stories Worldwide Biggies is working on, he said, “If we can move someone so they love this character, and they’re moved through a story, and they’re playing a game, and they’re connecting with their friends about that game, and they’re collecting objects in that, and at the end of this experience they have created their own video of this experience, we’ll have moved them into a different type of storytelling.”

He believes the Web is not just a distribution platform. Rather, because of its interactive nature, he believes, “The platform itself is content.” Hecht feels like an entrepreneur again. “It’s all about the new Wild West for me,” he said.

JASON HIRSCHHORN WAS ANOTHER Viacom refugee. He grew up in Manhattan wanting to be a music entrepreneur. When he was fifteen, in 1986, New York City bars were lax about checking the IDs of teenagers, until the “preppy” murder case. A teenager, Jennifer Levin, left an East Side bar with Robert Chambers late one night in 1986. Her body was found that morning in Central Park. Bars cracked down on minors, and kids could not easily congregate.

Borrowing his father’s empty briefcase, Jason approached the owner of the old Fillmore East, where he had been bar mitzvahed, and made this offer: on nights the place was closed he would fill the hall with teenagers, in return for half the gross. No alcohol would be served. The owner agreed to the experiment. Jason called all his private school friends and asked them to call their friends; this extemporaneous network became viral. Seven thousand teenagers showed up. “We grossed seventy thousand dollars the first night,” he said.

When Jason was a senior at New York University, he discovered the wonders of the Internet. “You could ask questions and find things,” he marveled. He started building a music-trading site. From his East Ninety-sixth Street apartment, and with an assist from his sister, he built a site, the CD Club Web Server, that offered users advice on how to work the CD clubs and catalogues to get the most for their money. Consumer Reports described it as a great resource, prompting Columbia House, a music catalogue, to phone to tell him to take down their trademarks.

“Why don’t you just advertise?” he asked, half joking.

Instead, they proposed to pay ten dollars for everyone he signed up. “All of a sudden,” Hirschhorn said, “I’m making thirty thousand dollars a month!” With this money he built Musicstation.com, which linked to other music sites. He created a music search engine that scanned the Web and television to find music, place it in categories, and fashion a music index. Not long after, five media companies got into a bidding war to buy his company. A lifelong MTV fan, he chose Viacom in early 2000. He was twenty-eight and “I was the lone digital guy.” Over the next six years, he was promoted six times, becoming the youngest senior executive at Viacom, the chief digital officer of the MTV Networks. Soon after Viacom pulled back from its bid to buy MySpace, a bid he had instigated, he resigned. While he won’t criticize the failure to acquire MySpace, he was frustrated. “I was an entrepreneur who came into a big company and tried to treat it as a start-up,” he said. “Big companies don’t innovate. They operate. Frankly, I think MTV should have owned the Internet.”

He was thirty-five and opted to take what he said was a 90 percent pay cut and accept equity to become president of the Sling Media Entertainment Group. Sling Media sells a product, the Slingbox, which allows users to watch their home television and DVR on their PC, MAC, or mobile devices. His editors selected what they think of as “the best stuff, putting it on the front page” of a Sling media guide. They plan to make money by selling ads and sharing revenues with their content providers. One day, he hopes, Sling Media will also create its own content. Sling Media aims to become another distribution platform, letting users watch what they want when they want it on various devices, and letting Sling gather data on user preferences which they would share with content partners. Once again, Hirshhorn struck gold. Soon after he joined, Sling Media was sold for $380 million to EchoStar Technologies, the satellite television company. “We’ve built a virtual cable distributor online,” he said. He knew that the Slingbox, like Apple TV, could prove to be a dud, or that he could feel restrained operating under a new corporate owner. But Jason Hirschhorn was very rich and had a sandbox to play in.

For a while at least. Chafing under the constraints he felt working within a traditional media company that he said “did not move fast enough into the digital age,” in late 2008 Hirshhorn did what he had done at Viacom and left in search of another sandbox. He found it in the spring of 2009, when the company he wanted Viacom to buy-MySpace-had slumped and Murdoch brought in new management, including Jason Hirshhorn as chief digital officer.

MARC ANDREESSEN HAS SPENT much of his life working in the digital sandbox, achieving the fame and financial success others seek. A large man with an immense, shaved, egg-shaped head, his restless leg hammers the floor, and he speaks rapidly in a booming voice. His professed motto is, “Often wrong, never in doubt.” A self-made multimillionaire at age thirty-eight, Andreessen has often been right. As a computer science major at the University of Illinois at Urbana-Champaign, he worked at the university’s National Center for Supercomputing Applications. Inspired by Tim Berners-Lee’s vision of open standards for the Internet, in 1992 he and a coworker, Eric Bina, created an easy to use browser called Mosaic. The browser worked on a variety of computers, facilitating the hypertext links that allow Web surfing and Google search, helping users to effortlessly hop from site to site. After graduating in 1993, he moved to California, where he met Jim Clark.

The former founder of Silicon Graphics, Clark shared Andreessen’s conviction that the browser could be a transformative technology, and he had the money to advance that dream. Not long after, Andreessen became cofounder and vice president of technology for the company that would become Netscape Communications.

With Netscape’s IPO in 1995, Andreessen became very prominent in new media circles. He also became very rich, and even richer when Netscape was sold to AOL for $4.2 billion in 1999. After a brief stay as chief technology officer for AOL, Andreessen started Loudcloud, a Web-hosting company that sold software and consulting services. After its own IPO in 2001, Loudcloud was sold to EDS and changed its name to Opsware, with Andreessen remaining for a time as chairman.

He had no interest in being a CEO, though. “I’m a well-trained introvert,” he told me. “Being with people drains me of energy.” He had a wide range of interests, though, and deep pockets, and he wanted to marry both. He chose to become an angel investor. He put money into Digg, a social news site, and Twitter, among others. He joined the board of eBay. He wrote a blog that displayed his eclectic and wide range of interests-in books, TV shows, movies, politics, press criticism, Wall Street, debt to capital ratios.

The investment about which Andreessen is most passionate is Ning, a social network that enables those who join-artists, musicians, students, educators, a fan club for the Jonas Brothers, a snowboard community, etcetera-to create their own communities of interests. The idea came out of his association with Gina Bianchini, who met Andreessen soon after she received a master’s degree from the Stanford Business School and started a company in 2000. When her company was sold in 2004, Bianchini and Andreessen brainstormed her idea of forming a social network among those who seek like-minded communities and his idea of providing a platform on which to build them. They named the site Ning because that was the best name they could agree on that cost no more than $10,000, he said. The site would have two revenue sources: Google’s AdSense to reach advertisers wishing to communicate with each community and those niche channels willing to pay a monthly fee to Ning for a range of services, including $19.95 per month for space to sell their own ads with Google or to forgo ads entirely. By the summer of 2008, Bianchini said, there were 465,000 social networks on Ning, with 10 million registered users, 40 million unique users each month, 5 billion monthly page views, and 116 employees working from a building in Palo Alto. As chairman, Andreessen has an office there, but appeared only a couple of days each week, and rarely in the morning. “I wouldn’t be sitting here without him,” said Bianchini. “He funded Ning and made me CEO. He put up the money, and he took only 50 percent of the equity.”

His closest friend, Ben Horowitz, who worked with him at Netscape and in early 2009 became his partner in starting a $300 million venture capital fund, describes Andreessen as a Renaissance man. “You can talk about the economy, fashion, military strategy, whatever, with Marc. I don’t know anybody else like that who goes across so many domains.”

Andreessen likes to be alone, to stay up most of the night surfing the Web and reading, and rising late and avoiding meetings. He found a kindred spirit in Laura Arrillaga, who teaches at Stanford’s Business School and is the daughter of Silicon Valley ’s wealthiest real estate tycoon and Stanford benefactor, John Arrillaga. “Laura reinforces my hermitlike tendencies,” he said. “We love to be home.” They are, he said, “dream customers” for old and new media. “We have more DVDs. We have Blue-ray Discs. We do downloads. We’re a huge iTunes customer. We’ve got, between the two of us-she still uses her old house as her office-eight or nine Direct TV dishes. We’re about to add Comcast’s Video on Demand, because I want to try that. We’re about to add a Windows’ Media Center PC.” They have a Vudu box, Apple TV, two Tivos, several PVRs and DVRs, and numerous high-speed Internet connections. In all, their monthly subscription bill comes to about $2,500, he said.

Although he consumes old media, Andreessen delights in tossing grenades at it. As late as 2005 and 2006, he said, traditional media was “totally putting their head in the sand. They were in complete denial.” He cited YouTube, the burgeoning video Web site, as exhibit A: “YouTube ends up being this hub for tens of millions of people to watch video. In two years, it’s going to be a direct competitor to TV networks and cable networks. A direct competitor with more users and viewers… All of a sudden, that’s a new hub. It’s like the old joke: ‘Where are they going? I’m their leader and I must find them!”’

He sees the Internet as a medium that will soon have 2.5 billion users worldwide, an audience far larger than any reached by traditional media. And the audience will be composed of those who “want whatever they want when they want it.” They will want to skip commercials and watch movies or TV programs on multiple devices and be able to get DVDs of movies the day they are released in theaters. “When has the music industry and the movie industry and the TV industry ever had a market that big to deal with before?” Andreessen said. “And when has distribution ever been this cheap?” The costs that burden traditional media, from paper to printing and manufacturing to trucks to sharing revenues with movie theaters, could be drastically reduced, he said. “An entrepreneur looks at that and says, ‘Oh, my God, it’s a monster opportunity!’ Somebody who is protecting an existing business says, ‘Oh, my God, I’m going to go out of business!’ Now they’re both right. It depends on whether they radically make the changes they need to make.”

GOOGLE WAS BOLDLY MAKING CHANGES. It outmaneuvered Murdoch, Viacom, and Yahoo and stunned the media world when in October 2006 it purchased YouTube for $1.65 billion. The deal eclipsed any that Google had done before, and the potential impact of YouTube was vast. Since its start in February 2005, YouTube by the fall of 2006 was attracting thirty-four million monthly viewers, or four out of every ten video Web site visitors. And this number was soaring. What visitors viewed on YouTube was mostly “user-generated content,” or short homemade video clips: a pet trick, an artfully told joke, firsthand footage of the devastation from Hurricane Ka trina, Janet Jackson’s “wardrobe malfunction” at the Super Bowl-that users uploaded and sent to YouTube. Increasingly, though, YouTube was expanding its audience with clips from Saturday Night Live and The Daily Show with Jon Stewart, with sports highlights and music videos; these, too, were recorded and shared by users, arousing piracy concerns.

The reason YouTube was persuaded to sell, said cofounder Chad Hurley, then twenty-nine, was simple: They feared the site lacked the resources to cope with its explosive growth. “When we started, we thought one million daily uploads would be great.” Instead, they were getting a hundred times that many. “We thought we’d burn up our bandwidth. We worried our servers would go down.” The marriage to Google, he said, meant more investment capital, more servers and computers, more brainpower, more help finding partners and figuring out how to place advertising on their site. “We needed resources to scale the company. We only had a staff of sixty people dealing with the weight of the world. An option was to raise more money and hire more people and take a long time. But we were visible, unlike the early Google. We had competition. We were challenged by the old media.” He and his cofounder, Steve Chen, were enamored of Google’s focus on users and its emphasis on the long term. “They wanted to give us the freedom not to have to maximize revenues right away.”

YouTube and Google’s ambitions were immense. Hurley described the site as “a democratic platform” for user-generated and “independently produced content.” He vowed that the “creative people who produced content would have more opportunities in the future without answering to a network.” Had network executives heard those words, their paranoia would, no doubt, have been stoked. They would have been even more perturbed to hear Eric Schmidt say that YouTube’s real challenge was to figure out how to sell advertising. “If that works,” he told me, “it will seem like the birth of the CBS network in 1927.”

Because YouTube was making no money, there was a fair amount of sneering from media executives. Like Napster, they said YouTube would be hobbled by copyright lawsuits and would be unable to monetize its enormous traffic. “Right now,” Microsoft CEO Steve Ballmer declared, “there’s no business model for YouTube that would justify $1.6 billion. And what about the rights holders? At the end of the day, a lot of the content that’s up there is owned by somebody else.” That “somebody else,” the broadcast and cable networks believed, was them. YouTube, they asserted, built its success on their backs; thirteen of the twenty most popular videos on the site, the Wall Street Journal reported in early 2007, were professionally made, not user generated. Sumner Redstone, whose Viacom owned The Daily Show With Jon Stewart, told Charlie Rose, “There are some issues with YouTube. They use other people’s products. The only way they avoid litigation now is they stop doing it if you call them.”

To acquire YouTube, Google tapped its enormous market capitalization. The company’s stock value at the time the deal was announced was $132 billion, giving it a competitive advantage over the largest media companies on earth, none of which was worth more than one-third this amount. Those still oblivious to the challenge posed by Google were awakened by the YouTube acquisition. “They can buy anything they want, or lose money on anything they choose to,” said Irwin Gotlieb. “I can only do things that are rational to do for my business.”

Media companies were chasing a new fox. It did not go unnoticed by Gotlieb-or other savvy executives-that Google was expanding its online advertising portfolio to include video. Or that YouTube users would only swell Google’s unmatched database. More ominous for traditional media, Google, despite its denials, was now in the content business. Like the television networks, YouTube publishes content produced by others and sells advertising. The more consumers linger on YouTube, the more pages they view, and the more page views, the more YouTube’s ad rates rise. In search, Google sped users off its site without any particular interest in their destination; with YouTube, it had a stake. The purchase of YouTube represented something else as well. Their Google Video store, announced by Larry Page nine months earlier at the Consumer Electronics Show, was a flop. “YouTube was an admission by Google that they couldn’t just build things,” said Danny Sullivan, longtime editor of Search Engine Land.

WHAT FOLLOWED was a protracted round of negotiations between the broadcast and cable television companies and Google. The discussions revolved around three issues: money, copyright, and trust.

Money was a stumbling block. Traditional media companies sought a version of the system they had long relied upon: an up-front license fee from distributors to air their content. Google agreed to pay something but argued that with a new distribution platform they should not be locked into old and expensive formulas. YouTube, Google argued, was a terrific promotional platform that would expand traditional media’s audience. The networks countered: Show me the money! Cable networks also claimed that if they licensed their content to YouTube for a lower price than they charged distributors, cable systems owners would demand the same discount.

After months of negotiations, traditional media walked away. “They didn’t value our content at a price point we thought was worthwhile,” said NBC/Universal CEO Jeff Zucker. “They built YouTube on the back of our content, and wouldn’t pay us.” NBC, like other television and cable networks, refused to allow their programs to appear on You Tube, though the network has not loudly protested as YouTube clips boosted the ratings of, for example, Saturday Night Live. Philippe Daumann, the CEO of Viacom and Sumner Redstone’s longtime legal adviser, complained that it was frustrating to negotiate with Google. “Every time we thought we came down to a certain point, they changed their mind,” he said. “And they changed the people in the negotiations. I learned that Google had an interesting management structure. I talked to their CEO, and then when Eric went down a certain path he had to have a discussion back in Mountain View with his two associates. Often there would be a total change in direction.”

Schmidt countered that Viacom made demands Google could not meet, including an insistence on large up-front license fees. Because YouTube had “no revenue at the time,” he said Google proposed to share advertising revenues rather than pay an up-front fee. We would “give the majority of revenue to them,” said Larry Page, “as long as it’s real revenue.” Viacom and others declined. Asked how he justified locking into an agreement with, say, AOL, to guarantee payments when AOL chose Google as its search engine, Schmidt said, “We had competition at the time.” This suggests that with YouTube, Google was not looking over its shoulder at Microsoft. Google’s position was at least partly shaped by a belief that it had leverage in this negotiation.

The more consequential issue, said Daumann, was not money but copyright protection-protection against what he referred to as “theft.” YouTube was taking Viacom’s content, he continued, “not as an experiment, not con-sensually, but rather they just take it and say, ‘Why don’t you watch what happens!”’ Google said it was the legal responsibility of old media to tell them what should be yanked from YouTube and said it would immediately comply. Old media disputed this interpretation of the law, insisting that the responsibility, and the expense, of policing belonged to YouTube. Jeff Bewkes, the CEO of Time Warner, echoed Daumann’s concern. The problem is that once Time Warner’s content appears on YouTube, he said, “it gets redistributed to five other places-MySpace, Gorilla, whatever. Those people are now the new sources of the thing.” He added that Google maintained they were not responsible if another site lifted Time Warner’s content from YouTube, giving them “deniability in the event of theft.”

The third issue, trust, was in some ways the most vexing. Daumann was insulted when Google tried to assure him of the promotional value of YouTube. “I don’t need somebody else to say, ‘It’s good for you!’ Let me decide what’s good for me. Maybe I’m totally wrong. Maybe I’m totally stupid, and maybe it would be better for me to put all of my shows on YouTube immediately. Maybe I’m just an idiot. But it’s my right to be the idiot. I think YouTube is an effective promotional tool. We put trailers all over the Internet. We don’t run a walled garden here. We have deals with just about everyone-except YouTube.” He held a hardening conviction that Google was a pirate. Google held a hardening conviction that traditional media wanted to halt progress and slip their paws into Google’s pocket.

Bewkes, unlike Daumann, was willing to believe that Google “was well intentioned,” blaming engineers who are thinking not of his copyright concerns but of solving the “engineering problem of getting it out there.” Asked what a company like Time Warner wanted from YouTube, he conceded, “It’s difficult to figure out.” Like his peers, he wants “what we have wanted for seventy-five years, for our copyrights not to be stolen and used by other commercial enterprises who get paid and we don‘t, and they choose the time it is exhibited without ever contacting us.” But in this new world where every media company gropes for a way out of the tunnel, he said, “There is a question of the best way to do that.” Web programmers like Albie Hecht thought old media was stuck in denial. “You either find a way to make your product available to the public in the right way, or they’re going to get it anyway,” he said. “So you can either create another generation of video as opposed to audio pirates, or you can do the smart thing and give it to them,” and figure out a way to monetize it.

The chasm between new and old was as wide as the gap between Mel Karmazin’s view of how to sell advertising and Google’s view. They each spoke of piracy, but old media thinks it is preventable and new media says it wants to try but is dubious that absolute prevention is possible. They each spoke of content, but by content they meant different things. For traditional media companies, it is usually defined as full-length, professionally produced TV programs or movies. For YouTube, it is shorter-form clips, mostly user generated. In many ways, the debate is pointless since both user-generated and slickly produced content commands attention. “Content is where people spend their time,” said Herbert Allen III, the forty-one-year-old investment banker who is president of Allen amp; Company. “Content is not just what’s on Comedy Central. Content is Facebook too. Content is how the consumer chooses to spend time.”

What is really at stake, Allen suggested, is control of the thriving distribution platform that is the Internet, a platform “of endless choice and immediate fulfillment. Media companies are used to the exact opposite. They have thrived on the pricing power that comes from complete control of distribution. Since the consumer has already voted in favor of the Internet, media companies will have to find a new economic proposition for their content. Media companies have to embrace the fact that the consumer is now firmly in control.”

IRATE AND ANXIOUS as they may have been, as 2006 drew to a close, the TV companies were scrambling to find Internet platforms. Some, like the local broadcast stations that formed the backbone of the networks, were largely bereft of an Internet strategy. Other media companies made a genuine effort not to resign themselves to their fate. Among the most active suitors of the new media was Robert Iger, who became CEO of the Walt Disney Company in 2005. He purchased Pixar, the groundbreaking digital animation studio, from Steve Jobs in early 2006. Iger’s predecessor at Disney, Michael Eisner, was mistrustful of Jobs, and Iger was warned to keep him at arm’s length. Instead, he invited Jobs, now his largest shareholder, to serve on the Disney board. “I figured that if things go well for Disney, they’d go well for him,” Iger said. “If things didn’t go well for Disney, I’d have more than Steve Jobs to worry about. And to have someone like that in the boardroom when we’re discussing technology was great. I love working with him.” Iger felt he was building into the company’s DNA a digital, user-first perspective. He remembered asking Jobs how often he visited Apple’s design lab or technology center, thinking he’d say once a week. Jobs told him he visited three or four times a day. Iger said that now “I try to spend one hour a day surfing the Internet. I just surf and look.”

But at least one inspiration came from old media. “The first thing I did after becoming CEO was read Elisabeth Kübler-Ross,” said Iger, referring to the five stages of grief described in her book On Death and Dying. “First came the denial phase. Then the anger phase. Then the bargaining phase. Then depression. Then acceptance. That’s what the music industry did. They listened to a cacophony of voices and let those voices drown out the most critical audience, which was its customers.” Determined not to repeat the mistake of the music companies, he became the first network and studio owner to license his shows and movies on Apple’s iTunes. ABC station managers and movie theaters protested. He was not swayed, insisting that ABC and Disney were in the content business, not the network or movie theater business, and reminding critics that the average age of those who streamed shows on computers or handheld devices was only twenty-nine. To be relevant to young people, he said Disney had to break old habits. In the first year on iTunes, he said, Disney streamed a hundred million shows and movies. Although iTunes represented just 1 percent of Disney’s revenues, it generated $44 million in revenues in 2006, a figure analysts projected would mushroom to over $320 million in 2008.

Murdoch and others made moves. Seeking to bring fresh storytelling to the Web, Murdoch signed seasoned Hollywood producers Marshall Herskovitz and Edward Zwick to create a slickly produced series called Quarterlife, for MySpace. NBC Universal’s corporate parent, General Electric, announced that it was placing $250 million in an equity fund to invest in digital companies with robust growth prospects, including Albie Hecht’s Worldwide Biggies. Comcast, which has more subscribers than any cable company, would launch Fancast.com, an ad-supported cable Web site that hoped to attract full-length content from all suppliers. Viacom and CBS joined others in investing $45 million in Joost.com, a YouTube rival that chose not to display user-generated content but instead to offer full-length programs from MTV, Comedy Central, and CBS, sharing ad revenues in exchange. The TV giants discussed forming their own Internet platform to compete with YouTube. Although many participated in the discussions, only two initially joined: News Corporation, which as the new owner of MySpace saw YouTube as a direct competitor, and NBC Universal. The new platform was named Hulu, and it would look very much like television on the Internet, with full-length programs from the two networks interrupted by commercials in the old-fashioned way.

Sumner Redstone declined to join Hulu; Viacom’s content, he believed, appealed to younger viewers than Fox’s or NBC‘s, and in any case, he and Daumann wanted control over where their content appeared. CBS, which was split off from Viacom but which did not lose Redstone as its controlling shareholder, came close to a licensing agreement with YouTube, but pulled back. Redstone didn’t want CBS to make such a deal; nor did its network peers. Like Redstone, CEO Les Moonves said CBS would not agree to display its programs exclusively on Hulu. “The issue of the moment is whether Google is going to dominate advertising,” observed private equity investor Steven Rattner, then managing principal of the Quadrangle Group, which invests in media companies. “The airlines always kept McDonnell Douglas in business because they did not want to depend on just Boeing. Everybody wants at least two suppliers.”

Still, CBS established a more cooperative relationship with YouTube and Google. This reflected, at least in part, the different nature of the two businesses. As a cable program and movie supplier, Viacom got the bulk of its revenues not from advertising but from the license fees cable distributors like Comcast and Time Warner paid them. Unless YouTube offered a reasonable license fee, Viacom risked blowing up its cable business model. CBS, a broadcaster reliant on advertising as its sole source of revenue, saw YouTube as a worthwhile experiment to tap into new revenues that might replenish the revenue CBS lost as its audience shrank.

CBS also had a more assertive digital strategy. Les Moonves decided that he would not treat the Internet as a single distribution channel that his network could control; instead he would spread CBS content on over two hundred Web sites. He had to overcome resistance from the traditionalists in CBS. Jeff Fager remembers the contentious 2005 meeting he attended. Fager is the executive producer of 60 Minutes, the longest running program in evening television history, and he wanted to expand his audience. He had worked out a proposed agreement with Yahoo that would give the Internet site a total of sixteen clips, up to two minutes long, from the CBS show each week. Yahoo would sell advertising against these clips. Fager pitched the deal to a roomful of CBS executives. He assured them CBS News would retain control of the editing process, that he would have a staff of seven to edit these pieces, that Yahoo had agreed to pay half this staff cost and to split the advertising revenues. “I argued that we needed to reach a larger and a younger audience and to find new revenue sources,” he recalled. The average age of his Sunday evening audience was approaching sixty. “The resistance was: ‘Why do we want to give one of our best brands to the competition?’” They would be diluting the exclusivity of a venerable CBS program found nowhere else. CBS executives wrongly thought of the Internet as just another distribution platform, and anyone airing 60 Minutes should pay big bucks. They did not see the Internet as a transformative medium, a medium with thousands of Web sites that could serve as CBS platforms, an interactive platform, a promotional platform that would lure younger viewers to CBS. “The sentiment in the room was not to do it,” said Fager.

But Les Moonves intervened. “Look at all the new people we can introduce to 60 Minutes,” Moonves remembers saying. “And since we don’t syndicate 60 Minutes, we are not cannibalizing it. There is no downside for us.” That was the decision, and soon 150 million Yahoo visitors would view 60 Minutes clips each year on Yahoo, far more than the 10 million streamed on CBS.com. (Of course, one day 60 Minutes video streams might produce big bucks, but not yet; the experiment was cancelled in 2008, after producing only one million dollars, to be split annually with Yahoo!)

Moonves also announced another partnership, with YouTube, in the fall of 2006. CBS would allow the video service to air short-form clips, usually none longer than three minutes, from its entertainment, news, and sports divisions, with CBS and YouTube sharing any advertising revenues. CBS would also become the first network to agree to test a new YouTube technology that would identify its pirated content on YouTube. “We’re pleased to be the first network to strike a major content deal with what is clearly one of the fastest growing new media platforms out there,” Moonves declared in the joint press release. Redstone blessed the deal, said a CBS executive, because showing clips of CBS long-form shows was a promotional platform to enhance their value, while showing clips of short riffs from such Viacom programs as The Daily Show With Jon Stewart would rob them of value. In the not too distant future, CBS would follow Murdoch’s lead with a major digital acquisition, CNET.

CBS’s switch to playing offense coincided with the appointment in 2006 of Quincy Smith as president of CBS Interactive. “I think Quincy is one of the most advanced thinkers in this space,” said David Eun, who was a Time Warner executive before becoming Google’s vice president for strategic partnerships; he now works out of Google’s New York office as their principal negotiator with traditional media companies. Smith’s task, in part, he continued, “is to go back and educate his very smart colleagues that this will not kill their business,” because YouTube is not “a destination” that competes with CBS, but rather another platform. The challenge to media companies is to get “their content to where the audience is.” Eun credits Moonves: “What he’s decided is that he has to change. He needed someone and he empowered him.” Of the geekspeak that gushes from Smith’s mouth, Moonves said, “I understand half of what he’s saying, on a good day! But the important thing is, he understands everything.”

SMITH IS PROUD to be called a geek, though this was not what was expected of him when he entered the world. He was born in December 1970 on Manhattan ’s Upper East Side. His father, Jonathan Leslie Smith, became the youngest partner at Lehman Brothers; his mother, Elinor Doolit tle Johnston, was a Bennington College graduate and the editor of Art + Auction Magazine. A computer was Quincy ’s childhood pet.

He enjoyed a privileged childhood-Collegiate, Phillips Exeter, Yale philosophy major-that suggested a life on Wall Street, or the CIA. His ponytail did not. He cut it, though, for his first job as an analyst for Morgan Stanley’s Capital Markets group, in 1994. But computers and technology were what really inspired him. He moved the next year to the technology group in Menlo Park, under Frank Quattrone. He worked on the 1995 Netscape IPO, going on the road with cofounders Marc Andreessen and Jim Clark, and with CEO James Barksdale. In October 1995, he joined Netscape as their chief deal maker and Wall Street liaison. He helplessly watched as Microsoft bundled the free Internet Explorer browser in with its dominant operating system, weakening Netscape.

Andreessen’s company was profitable, but Netscape was sold to AOL for $4.2 billion in 1999, where the browser lives as the open-source Firefox. Smith left and joined the Barksdale Group to invest in Internet start-ups.

It took just part of his time, and Omid Kordestani, whom he had worked with at Netscape, tried to lure Smith to Google in 1999. He had several interviews, including one with Page and Brin, but was rejected. “I didn’t graduate with a Ph.D.! I didn’t even go to business school,” he said. “The coach”-Bill Campbell-“wanted me to join a couple” of the companies he was advising, but Smith stayed with the Barksdale Group until early 2003, when he joined Allen amp; Company. “The day I joined,” remembers Smith, “the coach stopped talking to me. He said, ‘I have no respect for investment bankers.’”

For the next three and a half years Smith labored on a number of big deals, including the Google IPO. He was introduced by Andreessen to his future wife, Kat Hantas, who coowned a small Hollywood production company with the woman who was then dating Andreessen. In the summer of 2006, Les Moonves called and Smith began to do advisory work for CBS. Moonves said he wanted to hire a new digital executive to move more au daciously into the digital space. Smith funneled people in to see Moonves. After each interview, he said, “I felt the harpoon.” Moonves wasn’t satisfied with the candidates. He entreated Smith to take the job. The clinching argument came, Smith said, when Moonves told him: “You know, I used to be an actor. One night I was going to a premiere and my agent called and said, ‘Good luck. We’re all in this together.’”

“No we’re not!” Moonves told the agent.

“That’s the line that got me,” said Smith. This was an opportunity to be an actor, not an adviser. “The day I joined CBS,” Smith said, “I got an e-mail from Bill Campbell: ‘Welcome back to work. Now don’t fuck up the quarter!”’

In a sedate company partial to charcoal suits or blazers, Smith called people dude, wore his wavy black hair long and his sideburns down to the bottom of his earlobes, favored loud purple shirts and chinos and shiny Adidas JAM’s that were popular in the hip-hop world. He wanted to move fast, yet knew he had to help bring traditional CBS along gradually, Sumner Redstone included. When CBS budget executives questioned him about how much his proposed digital schemes would cost, he tried to instruct them that they should refer to these not as costs but as “investments.” He recognized the differences between his old friends in the Valley and his new friends at CBS. He said, “Every win in my external world is a loss inside.” He wanted to quarterback a digital offense, yet knew he also had to play defense for the network. “When you’re Google or Facebook you’re all offense,” he said. But he understood that traditional companies have legacies to protect. “In our world you have sixteen reasons not to move too fast.” He credits Moonves for pushing change. “They are letting me do a lot. Are there certain things I’d like to do more? Yes.” He won’t identify these, but he was acutely aware that he had to persuade, not just act.

When he acted he would do so based on a bedrock belief that “the Web is not simply a more efficient video distribution system. The bigger opportunity for the Web is as a new media.” He didn’t believe CBS would ever make “a material amount of our broadcasting dollars from rebroadcasting full episodes” of its programs online. He believed the Web would require CBS to devise fresh forms of programming, to create new and shorter ways of telling stories. He could proudly point to the fact that in its first month as a channel on YouTube, CBS clips got twenty-nine million views, making it the single most watched content on the site. It offered, he thought, great promotional value.

He described his job by recalling a conversation he had with a friend before accepting Moonves’s offer. He repeated the friend’s analysis as if it were his own: “‘Your problem is that traditional media is sitting in a castle. If you ask them to run outside in the middle of the rain of arrows and go down a river and cross a bog to go up a hill to get to what we don’t know is over there, we can’t assure them it is out of arrow range. No promises. Facing that option, traditional media is going to stay in the castle. And what’s going to happen to the castle? Those arrows are going to turn into catapults. You have to do something to escape.’” Smith adds his own coda, a kind of halftime talk to stir his new team: “You can be good in television and radio. But you’re a media guy. Don’t you want to be good online? It’s a new medium. And aren’t you better than those geeks in Mountain View? Right now they’re kicking your ass!”

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.”

There was much in the annual letter to sharpen traditional media’s concern about Google’s intent. User-generated content was “central” to the site’s success, the letter said, and these users would “become the broadcasters of tomorrow.” Page and Brin spoke of their new efforts to sell radio and newspaper advertising, declaring, “Our goal is to create a single and complete advertising system.” This system, they added, was one in which Google was “helping advertisers of all sizes buy and place offline ads more effectively”

A rain of arrows would soon be aimed at Google. Quincy Smith thought this was a mistake. “I’ve never seen a company so loved on Wall Street and by advertisers, yet so despised by media companies,” he said. “Media companies don’t understand that the platform is the business. Google is a platform. They help you monetize your content.” For many media companies, however, this was a risk they were unwilling or unable to take.

CHAPTER NINE. War on Multiple Fronts

(2007)

Once you get to a certain size, you have to figure out new ways of growing,“ said Ivan Seidenberg, CEO of Verizon. ”And then you start leaking on everyone else’s industry. And when you do that, you sort of wake up the bears, and the bears come out of the woods and start beating the shit out of you.“ Seidenberg was speaking of Google, with whom he started jostling in 2007 to prevent Google from entering his mobile phone business. The Verizon bear was now awake to the perceived Google menace, as was Viacom.

Of the two, Sumner Redstone was the more openly belligerent. In late 2006 and early 2007, he demanded that YouTube immediately remove one hundred thousand clips of Viacom’s copyrighted content. Viacom CEO Philippe Daumann became convinced that Google was “very lackadaisical” about the content that appeared on YouTube. He cited Al Gore’s movie, An Inconvenient Truth, which Paramount released and which appeared on YouTube in its entirety. “We got frustrated. We told them to take our content down.” How come, he asked, YouTube could successfully block spam and pornography and hate speech from appearing, yet said it couldn’t block copyrighted Viacom content from being displayed? Redstone, who had long championed the idea that content was king, was furious. He and Daumann resented having to pay what they claimed to be one hundred thousand dollars a month to monitor what appeared on YouTube.

Google countered that only the copyright holder knows what content is under copyright, said Eric Schmidt, citing the Digital Millennium Copyright Act, which makes monitoring a shared responsibility. “The law basically said that the copyright owner monitors, and then we expeditiously remove, and we’ve done that,” he told Wired magazine. “And it’s well documented, because Viacom told everybody that they gave us one hundred thousand video takedowns, which we did very, very quickly. And what was interesting was that our traffic to YouTube has grown very strongly since then. So one of the arguments that they made was that somehow YouTube was built on stolen content, which is clearly false.” He said Google was testing various technologies but had yet to solve the piracy puzzle. Viacom did not believe a technology company could fail to find a remedy-unless it lacked the will.

In March, Viacom filed a lawsuit in federal court charging Google and YouTube with “massive intentional copyright infringement” and asking for $1 billion in damages. Viacom said YouTube effectively stole almost 160,000 clips of its programming and allowed these to be shown more than 1.5 billion times. YouTube’s Chad Hurley doesn’t deny there were copyright infringements, but he insisted they were not deliberate. His argument was twofold: First, YouTube is just “a clip site. We don’t want full programs.” And second, Web videos are so new that “everybody’s still trying to figure it out.” Viacom, he believed, sought clear answers when there were none. Hurley, like top executives at Google, believed the litigious Redstone was using the lawsuit as leverage to negotiate a better deal. Schmidt grows uncharacteristically agitated when Viacom’s suit is mentioned. At a 2008 conference at which Philippe Daumann spoke and castigated Google for stealing copyrighted materials, Schmidt sought me out and growled, “Everything Philippe said was a lie. And you can quote me!”

There were those who recognized Viacom’s concerns yet thought Redstone was wrong. Esther Dyson, an early and prominent investor in digital media, said, “As a business, I think they are behaving foolishly-like the music companies. They are fighting their customers. What they should do is use YouTube as a platform and share in all the revenues.” Those who agree that YouTube is a platform, not a content competitor-including some who work for Redstone but dare not be quoted-think the lawsuit is a declaration of war when what is needed is an agreement that encourages more trial and error.

Many media bears sympathized with Viacom even if they didn’t join the lawsuit. “If we’re putting up programming for free, why should cable or DirecTV pay us for content?” asked Mel Karmazin. And if consumers can get the content online or on iTunes, he said, unless the digital company pays a substantial licensing fee “you’re trading analog dollars for digital dimes.” Moreover, once a copy is made, it is easily duplicated and shared.

Anxiety about piracy was not peculiar to television. On the eve of Viacom’s lawsuit, all the major Hollywood film studios jointly protested that Google was selling keywords such as bootleg movie download or pirated for two Web sites it knew to be illegally downloading their movies. Google assured the studios it would prevent a recurrence. But although those keywords can be blocked, there will be others. Even the company that a decade earlier aroused the same fears Google now did, Microsoft, publicly accused Google of a “cavalier” approach to copyright, charging that Google was making “money solely on the backs of other people’s content.”

Undeterred, Google vowed to take the case all the way to the Supreme Court. Because Google was already warring in the courts with publishers and the Authors Guild, this battle with Viacom opened a second front in the war with old media. And soon there would be other skirmishes, including those with new media companies like Facebook, the fastest growing social network. With more than forty million active users in the summer of 2007, Facebook “doubles in size every six months,” said founder Mark Zuckerberg. Then twenty-two, Zuckerberg is a Harvard dropout who in the early days of his company’s life slept on a mattress on the floor of a Palo Alto apartment he rented near his office, allowing him to move effortlessly between work and sleep. His baby face is framed with curly hair, and because he is thin, with a relatively long torso, one is surprised that he stands only five feet eight inches tall.

He arrived for dinner at an outdoor Thai restaurant in Palo Alto sock-less, wearing Adidas sandals and a green T-shirt, and ordered lemonade that he sipped through a straw. He was on guard to avoid saying anything boastful about Facebook, or intemperate about rivals. He said he did not feel competent to discuss almost anything but Facebook. He lacked Brin’s unguarded zest or Page’s quiet confidence. But his long pauses when asked about Google, and the way he shifted uncomfortably in his chair, suggest the tension between the two companies. He was somewhat less circumspect about MySpace, his main competitor among social networking sites: “What they’re doing is very much different from us. On a fundamental level, what they’re doing is not mapping out real connections. They’re helping people meet new people. Rather than using the social graph and the connections people have in order to facilitate decentralized communication, they’re using it as a platform to pump and push media out to people. They call themselves a next-generation media company. We don’t even think we’re a media company. We’re a technology company.”

Facebook is not a content company, he said, just as a telephone company is not. In fact, in some ways Facebook is like a telephone conversation, with all your friends on the same call. But on this call, your friends can share photographs, text, political summons to action, video, and music, or can click to make purchases. “There is a big misconception around what social networks are,” Zuckerberg said. “People think there are communities, or media sites, where people are going to meet new people or make new connections or consume a lot of media. But what they really are is a completely different paradigm for people sharing information. The traditional media models are all centralized. What we’re enabling here is decentralized individual communication. When that happens with a certain level of efficiency, it starts to become easier for people to communicate and get a lot more of their information through this network than through a lot of the centralized approaches they used before.”

This is precisely why Google, starting in 2007, began to worry about Facebook. If Facebook’s community of users got more of their information through this network, their Internet search engine and navigator might become Facebook, not Google. As media companies agonized that Google and YouTube were capturing more eyeball time, Google began to have the same concerns about Facebook. What if Facebook became the equivalent of AOL’s former walled garden, the home page, the place its users went not to roam but to comfortably nest? Google depends on more and more people surfing the Web. Relations were further strained when Microsoft outbid Google in October of 2007, laying claim to 1.6 percent ownership of Facebook and establishing Microsoft as Facebook’s advertising sales agent.

There was another reason Google fretted about Facebook. The social networking site operated on a different business model than Google’s. Like Flickr (Yahoo’s photo-sharing site), Twitter, or Linux, they are part of what Lawrence Lessig, in his book Remix: Making Art and Commerce Thrive in the Hybrid Economy, refers to as hybrids-companies that take the shared efforts of many and build communities that help create commercial value. They are not strictly part of a “commercial economy,” as Google, Amazon, and Netflix are, according to Lessig, nor are they strictly part of the not-for-profit “sharing economy,” as Wikipedia and the open-source Linux operating system are. The hybrids, wrote Lessig, are those that combine making money with sharing-as Red Hat did by offering Linux for free but selling consultant services to corporations; as Craigslist does by offering 99 percent of its listings for free; as YouTube does by allowing users to freely share videos; and as community-building sites like Facebook do. Google was free, but it was not building a community.

While Google warily watched Facebook, a real skirmish broke out between Google and the bear that is the advertising industry. Ad executives had been uneasy for some time that Google would displace media-buying agencies. But there were additional concerns. How many more ad dollars would Google siphon from traditional media companies? Would Google disintermediate the sales forces of these companies? Might Google bypass advertising agencies and develop a direct relationship with advertisers? If Google’s automated auction system brought the cost efficiencies Larry Page touted, would it not inevitably lower old media’s advertising rates as well as the fees ad agencies charged clients? Perhaps the overriding concern was the one identified by Herbert Allen III, who said of Google: “They want to be the digital advertising network for all forms of advertising. They want to be the advertising operating system, sitting in the middle of all advertising.” Google was indeed “fucking with the magic.”

Concern turned to fright in April 2007 when Google paid $3.1 billion to purchase DoubleClick, outbidding Microsoft and Yahoo. “There’s no way Google would have acquired DoubleClick if not for their fear of Microsoft,” said a DoubleClick executive close to the negotiations. The executive said that because Microsoft and Google were bidding against each other, DoubleClick was able to inflate its sales price by about $1 billion.

In the world of online advertising and marketing, DoubleClick was as dominant in its arena-placing display advertising-as Google was in placing text ads. DoubleClick provides the digital platform that allows sites like MySpace to sell online ads and advertisers and ad agencies to buy them, with DoubleClick culling from its database the information that targets the ads. The acquisition gave Google “an opportunity to be the infrastructure backbone for all ad-serving on the Internet,” said a worried Wenda Harris Millard, then Yahoo’s chief sales officer. In addition to potentially controlling the plumbing, DoubleClick offered rich new data-mining possibilities. By combining DoubleClick’s data with its own, Google would house an unrivaled trove of data. As Randall Rothenberg, the CEO of the Interactive Advertising Bureau, said the day the deal was announced, “You can dive deep into that data and say, who were those people, where do they live, what were they doing when they looked at those ads?”

DoubleClick’s promotional materials boast that they “track more than 100 metrics,” including which ads users download, how long they view them, where they scroll, what links they click on, if they view an ad and later visit the site, what products interest them, what ads “resonate the most,” what they buy and choose not to buy, and how much they spend. According to then CEO David Rosenblatt, the company delivered as many as twenty billion online ads each day. For the “sell side” (the content providers, who in the online world are called publishers), DoubleClick provides tools that help them evaluate the inventory they have to sell and where to target it, delivers the ads, and reports the results. For “the buy side” (advertisers), it provides the same service.

Google’s purchase of DoubleClick triggered a flurry of digital advertising acquisitions. Within months, Yahoo, AOL, Microsoft, and the WPP advertising/marketing colossus each swallowed online marketing agencies that compete with DoubleClick, with Microsoft spending six billion dollars, twice what Google had paid, to buy aQuantive. Why the rush to acquire digital ad agencies? And why was DoubleClick sold?

Since DoubleClick and Google share the same one-square-block building on West Fifteenth Street in Manhattan, CEO Rosenblatt joked that the free food was an enticement. But the main reason was that he saw the sell side changing. DoubleClick had promised to transform the business of selling remnant ads, the roughly 30 percent of an ad seller’s inventory that is hardest to sell: the least read part of the magazine, the least watched TV shows, the least listened to radio programs. Selling these remnant ads was becoming more expensive for DoubleClick, and Rosenblatt feared that a Google or a Yahoo would come along and offer to sell these for free in exchange for an opportunity to sell more of a client’s premium advertising, luring away his customers. DoubleClick needed to widen its scope. “We were selling transmissions. We were not in a position to sell cars,” he said. In Google, Rosenblatt saw not just “the single best monetization engine on the Web,” and a company with a base of over one million advertisers, but more vitally, a fellow and necessary “middleman” who did not compete with clients by entering the content business.

DoubleClick offered Google a way to pool the two databases and their networks of advertisers. But DoubleClick also brought something Google lacked: a dominant online position in display advertising (banner and video ads), which meshed nicely with YouTube’s video offerings and Google’s narrower text-based expertise. Tim Armstrong, Google’s president, advertising and commerce, North America, envisioned three advantages for Google: better measurement of all online advertising, from text ads on search results to display ads on YouTube; better targeting of ads, which pleases both consumers and advertisers; and finally, higher fees for these better targeted, better measured, ads. Google’s game plan, said Richard Holden, its product management director, is simple: “We’d like to create one-stop shopping for advertisers.”

With reason, the advertising bears translated “one-stop shopping” to only-stop shopping, provoking dread about market domination. Rosenblatt, a bald, cheerful man of forty-one with a bright smile that provides cover for the technologist within, rises and goes to the whiteboard in his office to draw what he envisions as the future of advertising. Between “buyer” and “seller” he elongates an “ad exchange,” a clearinghouse for all online inventory to be sold. There could be many of these, but Rosenblatt, who would become Google’s president, display advertising, makes clear he hopes the Google/DoubleClick exchange will be dominant. This new approach can be much more efficient, he thinks, likening it to how online trading siphoned business from brokerage houses. Imagine, he said, that “instead of just selling remnant advertising to the exchange, the seller said, ‘We’ll expose all of our inventory onto this ad exchange. Maybe we’ll carve out a small percent-maybe ten percent-of the really premium stuff and our sales force will sell that directly. But this other stuff”-he acknowledged that the distinction between remnant and premium ads can be arbitrary-“’I don’t know where the line goes. I don’t want to figure out where it goes. Instead, I want the ad network to bid.”‘

Why shouldn’t a media buying agency, such as Irwin Gotlieb’s GroupM, conclude that DoubleClick/Google might gobble his piece of the advertising pie by offering to charge, say, 2 percent rather than his 4 or 5 percent? And by promising better data about what ads worked? Irwin Gotlieb did see DoubleClick and its ad exchange as a potential disrupter. He was uncomfortable with the wealth of data that Google would now possess, and could one day refuse to share with advertisers. He was uncomfortable with Google’s dominant market share. He was wary of its deals with EchoStar satellite television and Clear Channel radio and some newspapers, allowing Google to serve as the media-buying middleman for their online ads. He was rightly concerned that Google could be trying to usurp his role.

If that was Google’s intention, Gotlieb did not believe they would succeed. He welcomed Google reaching into the long tail to match advertisers with smaller Web sites. But he did not think Google/DoubleClick could make inroads with brand advertisers, in part because these clients want to be serviced, to have relationships with media agencies they can consult. And he also expressed skepticism that Google would loom as large in the future as it now does. “If you and I were talking about this in 1998, we would have been talking about AOL,” he said. “Two years later we would have been talking about Ask Jeeves.”

IN THE ADVERTISING WORLD, if you say “Irwin,” insiders instantly know whom you mean, just as people in Hollywood know who Warren and Bar bra are without hearing their surnames. In four decades in the advertising business, Irwin Gotlieb has seen fads come and go, though he hasn’t changed his hairstyle (his bouffant, graying mane sits flat atop his head, like the deck of an aircraft carrier) or his attire (dark suits and ties). He is confident that with the largest worldwide market share of media buying-estimated to be 19 percent-GroupM is secure. He disputes the notion that there is a sharp definitional difference between new and old media. “As all media moves to digital delivery,” he said, “the distinction between media types is going to become less relevant, or perhaps irrelevant. Hypothetically, if I’m reading my newspaper on an electronic display and I see a photograph of a touchdown in the Super Bowl and I click on it and get to see a sixty-second video of that touchdown play, am I now reading a newspaper or watching television? Or does the distinction cease to be relevant?” And whether the consumer is leaning forward over a PC, or leaning back to watch TV, or a combination of the two with a mobile device, he believes each medium will be “addressable,” which means his agency will know a lot about that consumer, and each medium will allow the user to click a button for additional information or to make purchases.

Irwin Gotlieb approaches life with the air of a knowing skeptic, one who is conversant in nine languages, including Japanese, Russian, Polish, and Hebrew, and has lived all over the world. He believes Google, like most businesses he has observed in his sixty-one years, is a great company that does one thing brilliantly, but “will probably be leapfrogged by something that two Ph.D.’s in China are working on.”

Irwin Gotlieb knows China, and much of the rest of the world. He was born in Shanghai in 1949 to Jacob Gotlieb and Genya Diatlovitzky, who were second cousins and Belarusian émigrés; when he was a year old, the family left for the newly forming Israel. His father, Irwin said, bribed an official to allow them to exit with valuables, including small antiques and precious metals. Because Jews could not pass through the Suez Canal, the refugee boat took six months to arrive. A year later his father flew alone to Japan -Irwin does not know why-and several weeks later the family flew to join him. In Japan, his father suddenly had a new career as an exporter of pearls and an importer of diamonds. Irwin knew his father wasn’t a trained jeweler, and he knew Asian currencies “were not worth the paper they were printed on,” but he did not know how his father came to that business, or who funded it.

Irwin lived in Japan until he was fifteen and was a precocious student. His parents encouraged him to attend college in the United States and he was accepted by New York University, arriving alone at fifteen with a stipend of cash from his parents. He rented an apartment, learned to speak English, and served as his father’s U.S. representative, working with Japanese and Chinese diamond dealers. In keeping with the many secrets held by the Gotlieb family, he never told his parents that he dropped out of college ten days after entering. “They were teaching me stuff I already knew,” he said.

He met Elizabeth Billick, a paralegal, in 1968, when he was nineteen. They eloped the following year, fearful that his father, who at the time was not speaking to Irwin, might try to block their marriage. Irwin displayed the stealth of his father. “My mom and dad went to their graves,” he said, “not knowing that I didn’t go to school and that I eloped.”

He had a friend in advertising and it sounded like “a fun business,” so Irwin, at age twenty, sent a resume to various agencies. Over the next five years he worked for two of them, amassing a quiverful of skills: cash and barter syndication, spot buying, research, planning, network TV negotiations. He was recruited by Benton amp; Bowles in 1977 to run their national broadcast group; over the next twenty-two years he helped build their overseas business and also supervised the production of prime-time shows and made-for-TV movies. Throughout, he dabbled in computer software, creating the first application to measure the audience that ads attracted, and building software to manage ad inventory. “I wrote my first full-blown software system in 1973,” he said. In 1979, he built “the first Monster system-eventually two million lines of code,” he said, which became the standard yield management software that determined prices, modeled the national marketplace, and allocated ads. His last job at Benton amp; Bowles was CEO of MediaVest, their media buying and planning agency. In 1999, Sir Martin Sorrell, the CEO of the WPP Group, who was knighted in 2000, recruited him to become global chairman and CEO of Mindshare, a MediaVest competitor. Sorrell acquired other media-buying and planning agencies, and in 2003 Gotlieb was elevated to run them all under the rubric of GroupM. Today, 73 percent of his company’s revenues come from outside North America.

Gotlieb’s background well served GroupM’s global expansion. “The fact that I didn’t grow up in the United States was incredibly helpful as the business began to morph globally,” he said. His techie background better prepared him to understand and compete against the Googles and Double-Clicks. His friend Michael Kassan, who had a successful advertising career and founded and is the CEO of Media Link LLC, which serves as a consultant to Microsoft and AT amp;T, among others, remembers the time he and his wife visited the Gotliebs’ Westchester home and watched a movie in his screening room. “In Hollywood, a screening room is a show-off room,” he said. “At Irwin‘s, he takes you behind the wall and shows you the wiring and how he does it himself.”

Gotlieb tries to stay a step ahead. When digital recorders allowed viewers to dodge TV ads, he pushed to place his clients’ products in programs, establishing a production arm of the agency to do it. He grew his digital staff, which now numbers more than two thousand employees. He invested in various companies with technologies that gather consumer data. Invidi, one of those investments, is a software system that resides in a cable box and monitors viewer behavior. It collects data on what we watch, what we like, and how much time we spend watching ads, and can correlate reams of television-watching data with other data collected from motor vehicle records, credit cards, purchase cards, and other credit-rating services and databases. The technology allows the advertiser to show different ads to different potential customers watching the same program.

Gotlieb doesn’t think Google, outside of its search advertising, can rival GroupM because most advertising was “not in the sweet spot of their capabilities.” Like Mel Karmazin, he believes that engineers cannot replicate what his sales force can do. They can’t do product placement, an increasingly popular form of advertising requiring subtle judgment to avoid offending viewers. They miss the “art” part of selling ads, the judgment required to build a brand, the relationships that seller and client forge and that spark ideas. “As complex as the Google processes are, as robust as they are,” Gotlieb said, “there is an inherent oversimplification because it is purely quantitative.”

ASSUMING THAT GOTLIEB is truly undaunted by Google as a competitor, his would have been a lonely voice in the advertising community. Sorrell, the CEO of the WPP Group, worried that DoubleClick would allow Google to “take our client data.” He began to refer to Google as a “frenemy,” not quite a friend or enemy but a rival power to guard against. With mounting anxiety, executives noted that Google TV Ads was selling advertising for EchoStar’s fourteen million set-top boxes and for Astound Cable, a small cable company. Google’s sales pitch was that it could find new local advertisers and help advertisers better locate their targeted audiences. The way it works, according to Keval Desai, the product manager and director for the project, is that Google finds the advertisers through ad agencies or by dealing directly with companies that advertise and brings them to one of one hundred satellite channels. Once the ad airs, Google has software in the set-top box that collects data and analyzes the results. Among the things they learned, he said, turning to a series of slides to make his point, is that when grouped together the shows that have “less than a half of one percent audience share can have a share equal to ESPN.” Unlike the Nielsen ratings, which make an estimate of the audience’s size by extrapolating from a relatively small sample, Google takes a digital measurement of actual homes. Desai said they learned that advertisers were spending half their dollars on the twelve largest cable networks when they could be reaching audiences of comparable size by grouping smaller networks together. Because the ESPN and other large cable network spots are much more expensive, Google is saving advertisers money, removing the “inefficiencies,” as Google had told Mel Karmazin they would. Or as Desai now said, “This slide fucks with the magic!” Through a digital box “we can measure second by second” what ads and programs viewers are watching or turning off, and share this information with advertisers within a day.

As Google’s director of media platforms, Eileen Naughton, said, “It is absolutely our intention to be in every cable box.” To accomplish this, she knew, would require the cooperation of the cable companies that own the box. And that cooperation depended on trust. Naughton said, “Google aims to improve the advertising quality in traditional media.” If traditional media trusts her word, then Google is servicing them, not supplanting them. If they mistrust Google, they will never allow its software to invade the cable box. A decade ago, when Bill Gates tried to persuade the cable companies to trust Microsoft to be the operating system for digital cable boxes, he didn’t get past first base.

Television executives had reason to be paranoid about the seventy billion dollars spent each year on TV advertising, as did advertising agencies. Not only was Google telling its customers they could do a better job of targeting ads and telling them which spots worked, but it was also extolling its array of other products. Among them were Google Print Ads, which by early 2008 was selling ads for seven hundred newspapers and allowing them to use an “ad creation tool” to craft inexpensive advertisements; Google Audio Ads, which was hoping to build on the deal it had made with Clear Channel Communications, the largest radio station owner in the United States, to sell 5 percent of ad inventory; and Google TV Ads, which on the Google Web site is described as “a searchable directory of specialists” to create television commercials. Was Sorrell right? Was Google intent on taking over the media buying function? “Yes, he’s right,” said Terry Semel, the former Yahoo CEO. “Google and Yahoo are always working on platforms to sell ads. All [of the new Google programs] at the end of the day will have the capability to sell ads in any medium.”

So why would a company like Procter amp; Gamble need a middleman media buyer like Irwin Gotlieb’s GroupM? Smita Hashim, the group product manager for Google Print Ads, said “that’s a good question,” and conceded that, “the roles will start shifting.” But Hashim, like Desai and others at the company, quickly assert that Google requires the “expertise” of ad agencies. With passion, Desai insisted that Google is engaged in a “win-win” game. If these programs succeed, the advertising revenues of traditional media as well as Google’s will rise. This is a familiar Google refrain, one that relies on what might be called Google “magic”: everyone wins. If old media gets with the program, makes a push to be more Internet-centric and share with Google, there will be no losers, no zero-sum games in this brave new digital world.

But these claims did not allay the anxiety of Sorrell, who feared Google would vie to obviate his creative teams as well as his sales and media-planning teams. The wellspring of this concern was not the Google TV Ads program, which does not generate the kind of slickly produced commercials his agencies create. He was troubled by Google’s hiring of Andy Berndt, who was copresident of one of Sorrell’s ad agencies, Ogilvy amp; Mather. Berndt was recruited in 2007 to run a new Google unit, the Creative Lab. Google denied that this was an attempt to enter the advertising business, and Berndt said his job is to focus on the Google brand, “to remind people why they love Google,” and to create ads only for his new employer. His staff consisted of just twenty people, he said, and would expand to only thirty-five. He said “the short version” of why he joined Google is simple: “When the spaceship lands in your backyard and the door opens, you just get in the spaceship.”

To most consumers, Google remained an iconic brand, a force for good, a company that made search easy and fast and free; a company that retained its bold, entrepreneurial spirit and was both a beneficent employer and a benefactor to shareholders.

To most media industries, Google was becoming a dreaded disrupter. The engineering efficiencies touted by Google were also perceived as threats to the sales forces of the television and radio and print industies. Weeks after the DoubleClick purchase, Beth Comstock, then the president, integrated media, for NBC Universal, and now the chief marketing officer for its parent, General Electric, said, “If Google could introduce us to tens of thousands or even a thousand advertisers we currently can’t have, that would be a great thing. But when they start moving up the pyramid and they think you can put a self-serve model to what we know of as a very highly customized, high touch, more intuitive kind of business-it’s a content co-creation in some cases-you can’t do that with self-service and algorithms.” In her dealings with Google, she said, “There is this undertone of: Is that all they’re looking for? Why are they into television advertising?” Are they intent on replacing NBC’s sales force? She would have gladly outsourced the selling of remnant advertising to Google; what she wanted to retain control of was the selling of premium advertising. Like Karmazin, she wanted her salesperson in on the process, persuading clients to spend more.

Days after the DoubleClick transaction, Microsoft and AT amp;T publicly called on federal regulators to block the deal, saying it would reduce competition and give Google access to too much private data. Sorrell called on regulators to review the acquisition, declaring, “It raises issues as to whether we are happy to let Google have our clients’ data and our own data, which Google could use for its own purposes.” A senior executive at Time Warner, who did not want to be identified because its AOL division is a Google partner, told me at the time, “You always have to worry when someone gets so much more powerful than all the competition out there. This is why I come down to this: I hope the government starts understanding this power sooner rather than later.”

Tim Wu, a professor of law at Columbia University and a former Supreme Court clerk, looks at the issue from a different angle. He said he’s not “worried about Google becoming large.” One can make the argument, for example, that size brings standardization, he said. “I’m less concerned how they’re behaving in their own market than what a company does to other markets.” Will Google use its power to unfairly dominate other markets, as Microsoft used its operating system dominance to cripple the Netscape browser? “If Google remains true to its mission of being an ‘honest broker,’ I’m pleased. If they have an agenda, that’s when I become fearful.” He wasn’t sure Google had an agenda, but was plainly worried: “If they’re willing to block sites to placate China, are they willing to block sites to placate powerful advertisers?”

Here the issue of privacy becomes entwined with the issue of power. Together, Google and DoubleClick amass a mountain of consumer data. The more “personalized” this data, as Eric Schmidt said, the better the search answers. “When I decide to go to the movies,” said Schmidt, “I’d like to rely on the recommendations of friends. How do we capture that? The more we know who you are, the more we can tailor the search results.”

Of course, when a company retains as much data as Google does and also proclaims, “We are in the advertising business,” as Eric Schmidt does, this arouses more privacy concerns. And since Google believes advertising is information users want if it is“relevant,” it follows that sharing data serves users, which exacerbates these fears. Or as Sergey Brin told Wall Street analysts during Google’s third-quarter conference call in October 2007, “I am really excited to tell you today what we have done over the past quarter in ads and apps. As you all know, for advertising our real philosophy is to create a win-win between advertisers and customers by presenting users with really relevant information which is interesting to them, but is likely to cause a transaction to commence.” With technology making inroads toward improving how users’ real desires are gauged and finding patterns of behavior, the data-mining discipline Sergey Brin studied at Stanford enters a new age. The pressures on Google-and all sellers of advertising-to share more data will intensify.

Privacy fears escalate when Google executives express peculiar ideas about privacy-ideas that suggest they don’t grasp the reasons people are fearful. Each fall, Google hosts a two-day Zeitgeist Conference on its Mountain View campus, inviting a cross section of people from various fields. Much of the conference is moderated by journalist James Fallows, and a cavalcade of prominent scientists, musicians, artists, public officials, and others make presentations or appear on panels. The last event of Google’s Zeitgeist is when Brin and Page come on stage-in jeans, of course-to answer Fallows’s and the audience’s questions. At the 2007 conference, Randall Rothenberg of the Interactive Advertising Bureau rose to ask Brin to access the importance of privacy.

Brin declared that “the number one” privacy issue was “stuff that is untrue about people on the Web.” Because information “travels so fast” online, and because “anyone can publish anything,” these untruths gain currency. The number two privacy issue, he said, was the “hijacking of credit cards.” He dismissed concern about the information collected on cookies “as more of the Big Brother type”-in other words, fantasies. “Do they [users] trust what you’re doing? That’s not so much a privacy issue.” By this logic, if we trust Google, there is little reason to fear they will misuse our data. Afterward, at a small press lunch with the founders and Schmidt, Page signaled his agreement with Brin. “Sergey is just saying there are practical privacy issues that are different than the ones debated.” As was true when the founders pushed to add a delete button and allow Google’s Gmail scanning technology to more aggressively deliver ads when users typed certain keywords and to forgo a delete button-a mistake Brin told me showed “we just weren’t good” at anticipating fears, but “I think we’ve now learned”-once again, Brin and Page displayed an inability to imagine why anyone would question their motives and a deafness to fears that can’t easily be quantified.

CHAPTER TEN. Waking the Government Bear

While a full chorus of incensed media-advertising agencies, publishers, newspapers, television and telephone companies, and tech companies like Microsoft-complained about the growing power of Google, the Bush administration, steadfast in its belief that a free market provides its own regulation, was silent. Stepping into this breach was Brooklyn-born public interest advocate Jeffrey Chester, executive director of the Center for Digital Democracy in Washington, D.C. Chester founded this two-person organization with an annual budget of two hundred thousand dollars in 2001. He has mounted a ferocious campaign to induce the world’s governments to handcuff Google. Its first petition was filed before the FTC in the fall of 2006, prodding them to investigate how online marketing encroaches on privacy. In the spring of 2007, Chester, then sixty-two, began to press for an antitrust investigation of the rapid consolidation of the online advertising sector, and urged the FTC to reject Google’s proposed merger with DoubleClick. He petitioned the European Commission to do the same.

A voracious reader of trade publications, Chester became obsessed by what he saw as the pernicious power of the Internet to compile data on consumers. Chester is difficult to ignore. His Brooklyn-accented voice is loud and piercing. He hounds people. He speaks passionately and rapidly, leaping in midsentence from privacy to monopoly to a conversation he had that morning with an FTC staffer. He wears horn-rims and short-sleeved shirts with the neck open and the pockets bristling with pens. His tiny office on Connecticut Avenue is adorned with movie posters that assail McCarthyism and corporate power. He has little regard for the advertising industry, but knows that if he railed against commercialism and consumerism it would open him up to attack as a left-wing former social worker, which, of course, he is. So he sticks to the privacy issue. “The basic model for interactive advertising,” he said, “combines this very powerful data-collection business designed to know your interests in a daily, updated way that is then utilized to create very powerful multimedia to get you to behave in some fashion, whether it’s buying a product or liking a brand.”

Marc Rotenberg, the executive director of the Electronic Privacy Information Center, rents a single office to Chester ’s organization and works just down the hall. He is in nearly all ways Chester ’s opposite. He wears charcoal business suits and has degrees in law and computer science; no pens can be found in his shirt pockets. But he and Chester work closely together to advance privacy protection measures. Rotenberg believes the central question should not be, Is Google invading people’s privacy? Rather, it should be, Why does Google need to collect all of this information?

GOOGLE’S SERVERS NOW CONTAIN a tremendous amount of data about its users, and this database grows exponentially as search and a variety of Google services multiply. With the latest techniques to discern what really motivates consumers-often categorized as “behavioral targeting”-companies and advertisers will know even more. Some forms of such targeting are widely seen as helpful, such as when Amazon extrapolates from the browsing and purchase histories of a customer to recommend books. Other forms might be alarming to the lay consumer. New technology will allow cameras built into television set-top boxes to be armed with algorithmic models that read our facial expressions and tell advertisers what we do and don’t like; Nielsen is investing in brain reading-called NeuroFocus-which is meant to take the guessing out of why consumers react to what they see on a screen or read or listen to.

New smart phones collect enormous amounts of data. Mobile telephone companies gather and store digital data on calls made and received and how long each lasted. In addition, the chips in the phone’s GPS track a user’s location, the length of stay, and other mobile users she is in touch with. Tapping this sort of data is known as reality mining, and is a cousin to Brin’s data mining. Although telephone companies don’t share the names of customers, they have begun to sell this data to companies seeking to market products. Phorm, an American company with offices around the world, proposed to go one step further, approaching telephone and broadband Internet service providers with software that tracks each consumer’s online activities, so that a nameless portrait of each consumer can be created. In return for supplying the data, the telephone and cable companies can open a new revenue spigot. By late 2007, Phorm had done three deals in England that yielded data on two-thirds of Britain ’s broadband households.

Publicity about Phorm aroused the ire of Tim Berners-Lee, a senior researcher at MIT and the inventor of the World Wide Web. Because Berners-Lee refused to patent his invention, to cash in financially, or to become a talk-show celebrity, his opinion carries heft. In a rare interview with the BBC, Berners-Lee expressed outrage: “I want to know if I look up a whole lot of books about some form of cancer that that’s not going to get to my insurance company and I’m going to find my insurance premium is going to go up by 5 percent because they’ve figured I’m looking at those books.”

The data did not belong to Phorm or the telephone or cable company, he said. “It’s mine-you can’t have it. If you want to use it for something, then you have to negotiate with me. I have to agree.” This seemed to be the view of many European Union officials, for they were gathering evidence to determine whether to impose restrictions on this practice.

Because the financial rewards will be so huge if corporations can capture and use this data, pressure to do so will increase. Describing the effort to track the identity of an online user, Irwin Gotlieb invokes an imaginary user searching for an SUV: “If you’re searching for an SUV and you price out a couple of them and you go to a site that requires you to register, I now have your name. If you want pricing, dealer costs, you’ve got to give me your name, your e-mail address. Now as soon as you do that, we’ve got more on you. There are lots of ways we can track you. If I’ve identified you with your address, I can go to DMV records and see what cars you own. I can then go to Experian and see what your credit history is. And if I find out you’re in the last month of a thirty-six-month lease on a Land Rover…” He doesn’t finish the sentence but smiles, as if he’s trapped his prey. “I can’t do that today. In a few years I can.”

There’s no question that new technologies spur ways to improve services, and also to quietly redefine privacy. A home becomes less of a castle. Google’s Street View has cameras on city streets that reveal street activity and traffic-and also license plate numbers and the faces of a passersby. If you know the address of a celebrity (or an old girlfriend), it allows close-ups. Similar closed-circuit television cameras on streets and in stores help police solve crimes, but might also catch an old paramour or celebrity smooching. Cell phones help parents track the location of their children, but can track much more. Part of YouTube’s appeal is that it shares private moments. Facebook is a glass house, a complaint sometimes voiced by parents of teenagers who share their sexual exploits. Marketing companies create ads that annoyingly pop up when people are online, offering a premium-free telephone calls-in exchange for permission to monitor your activities.

Google’s Web site acknowledges that it collects information about its users, but not names or other personally identifying information. It does, however, collect the names, credit card information, telephone number, and purchasing and credit history of those who sign up for such features as Google Checkout, a service that enables customers to make online purchases. In its five-page Checkout privacy policy, Google said that it may also “obtain information about you from third parties to verify the information you provide.” Google said it “will not sell or rent your personal information to companies or individuals outside Google”-unless individuals give their “opt in consent.” But even if consumers choose not to opt in, Google still retains a wealth of personal information, which it is free to use to better target search or YouTube advertising. This data, mingled with its search data and the data gathered by DoubleClick, induces privacy anxiety. Companies like eBay and Amazon.com, among others, also retain credit card and other personal information, but there is a difference: Google uses this data to assist advertisers, and eBay and Amazon do not have advertisers to assist.

This is where the specter of Big Brother enters the discussion. “In 1984, Winston Smith knew where the telescreen was,” observed Lawrence Lessig. “In the Internet, you have no idea who is being watched by whom. In a world where everything is surveilled, how to protect privacy?”

Big Brother comes in different guises. Under the federal Patriot Act rushed to passage after 9/11, the executive branch can, without a warrant or users’ knowledge, gain access to what Americans e-mail, search, read, say on the telephone, watch on YouTube, network with on Facebook, or purchase online. There are tens of millions of surveillance cameras on our streets and in buildings. Candidates for public office can be harmed by damaging leaks to reporters of the most private information, as nearly happened to Supreme Court nominee Clarence Thomas when his in-store video rentals were leaked, suggesting he was partial to pornographic films. Advertisers can pay Google and other companies to access better targeting data. Telephone or cable companies can offer free services in exchange for a record of a consumer’s every click, encoding the knowledge of every song they listen to, product they buy, ad they like. In recent years, AOL (among other companies) was publicly embarrassed when it extracted and shared the names of some users from the Internet protocol address found on every browser on every computer.

Google may be viewed with suspicion by many media industries, but it enjoys a well-deserved reputation for earning the trust of users. In its 2007 annual ranking of the world’s most powerful brands, the Financial Times and the consulting firm Millward Brown awarded Google a number one rating. Still it is hard to imagine an issue that could imperil the trust Google has achieved as quickly as could privacy. One Google executive whispers, “Privacy is an atomic bomb. Our success is based on trust.” The Interactive Advertising Bureau’s Randall Rothenberg employs a different image: “Privacy is one of those third rails with unknown amounts of electricity in it. People think about advertising and worry. That’s part of America ’s don’t tread on me attitude.” Yet Rothenberg is unsure about the amount of electricity in the privacy issue because he is acutely aware that Americans hold contradictory attitudes toward privacy; they tend to distrust governments, businesses, or advertisers that can spy on them, yet “if they really cared enough about privacy they’d never have credit cards. They’d never subscribe to cable TV” They wouldn’t parade their most private thoughts on Facebook. So how does a company like Google locate and not step on the third rail?

To find that third rail requires a degree of sensitivity not always found in engineers. Yet Google has at times been sensitive. When, in 2006, the Justice Department subpoenaed a number of Internet companies to turn over all child pornography search queries, Google, opposing the request as a “fishing expedition,” took the U.S. government to court and won. (The judge ruled that Google had to turn over fifty thousand suspicious URLs, but none of its user’s names.) “Unfortunately,” said Schmidt, “our competitors”-including Time Warner, Yahoo, and Microsoft-“did not hold the same position, and complied.” He is outspokenly critical of the Patriot Act, which he believes violates privacy and grants the president too much power. Schmidt implicitly agrees that privacy is a do-not-step-on third rail: “If we violate the privacy of our users, then we’ll be hosed.”

Trust is essential to Google, as it is to much of modern commerce. If we didn’t trust waiters or Amazon, we couldn’t use credit cards. If banks didn’t trust that we’d pay back loans, they would not grant mortgages. Sergey Brin notes that users don’t like intrusive ads or junk mail, and Google deserves credit for siding with users against these, even sacrificing revenues to do so. From a user’s perspective, Google is not wrong when it says the more information it has about our search histories, the better the search results will be because it can anticipate a user’s intent. And it is also undeniably true that many users search the ads to comparison shop. “We think of the ad as content,” said Google’s vice president of engineering, Jeff Huber. The portrayal of Google as Big Brother frustrates people who work there. “It’s a fear of the possibility rather than the reality,” said Huber.

FEAR OF “THE POSSIBILITY” was enough to motivate privacy advocates. In May 2007, the Bush administration decided that the Federal Trade Commission (FTC), not the Justice Department, would look at whether the merger might violate antitrust laws, and the commission quietly began a preliminary investigation. Chester pushed for the FTC to broaden its probe to include privacy, and the agency scheduled a town hall meeting in November to explore those issues. “I got the hearing,” Chester boasted. “There’s nobody watching the store.”

Chester is not the stereotypical lobbyist, the ingratiator, the affable fund-raiser, the guy you’d join for a drink or a steak dinner at the Palm. Chester annoys people, concedes a senior FTC staffer, “but he is responsible for the hearing.” Chester helped persuade Democratic senators on the Judiciary Committee to conduct a one-day hearing in September 2007 focused on the merger and online advertising. Knowing that European governments have more stringent privacy protections, he urged the EU to hold up the merger until Google better explained its privacy policies. Chester stayed in touch with government regulators elsewhere. He filed additional complaints with the FTC. He had no expectation that the FTC would reject the merger. His best hope was that the FTC would compel Google to admit that its warehouse of data required more stringent privacy safeguards. Chester and Rotenberg were more hopeful that the European Union would reject the merger; and privately, Google officials conceded that an EU rejection would scuttle the deal.

By the end of 2007, it was apparent that privacy issues were gaining traction, spurred by a crescendo of news stories about real or potential invasions of privacy. Many were chilled when President Bush declared that under the Patriot Act he did not need judicial or congressional approval to wiretap the phones of anyone the executive branch suspected of consorting with, or knowing, alleged terrorists. It was revealed that telephone companies, at the request of the Bush administration but without court approval, turned over oceans of data concerning the phone calls and e-mails of individuals.

There is often an inherent conflict between privacy and Google’s belief that data is virtuous. Eric Schmidt, as we’ve seen, said that the more Google knows about a user, the better the search results. His and the founders’ ideal? For Google to know enough to be able to anticipate the user’s true intent in a search query, eventually getting to the point where Google could improve the user’s experience by supplying a single answer to a question. Better targeted ads, Google believes, serve the consumer as well as the advertiser. In an October conference call with analysts to discuss Google’s third quarter and its new products, Schmidt said, “We’re working on expanding our breadth of ads, offering all sorts of new types of ads-gadget ads, video ads, others coming. And each of these initiatives gives advertisers new and interesting ways to build relationships with their customers. So by building these deeper ad solutions, we really can deliver more value.” More “types of ads” equals more data, which equals more assistance to advertisers, which can be a service to consumers, but also an invitation to nibble at privacy constraints. Schmidt insists Google would never risk violating user privacy because Google’s success pivots on user trust. Rotenberg counters, “If people knew what Google was doing, they’d lose trust.”

In a voice as steady as a dial tone, Schmidt said Google users can click to “opt out” of allowing Google to track its cookies by clicking on the Privacy choice on the Google home page and following the instructions, a feature most users are probably not aware of or have a difficult time finding. Rotenberg, Chester, and others say that instead, Google should allow users to opt in, meaning that they would have to actively volunteer their cookies. That would be a mistake, Schmidt said, because the quality of a Google search would be inferior if it stored none of the cookie data; that’s what helps Google better answer a search question. Without information about the user, Google would not be able to narrow search results based on prior searches. Without a cookie, an American living in Paris would receive search results in French, not English. Schmidt disputes the notion that advertisers have become as important to Google as the user, reciting the company’s official first two principles: One is “the quality of the search as seen by the end user. The second one is the quality of the ads as seen by the end users, not by the advertisers.”

When asked why consumers should trust that Google would not abuse the private data it collects, Sergey Brin in 2007 told me that the fears people have are tied to a distaste for advertising and to a fear of Big Brother, which is sometimes “irrational.” He wondered: “How many people yesterday do you think had embarrassing information about them exposed as the result of some cookie? Zero. It never happens. Yet I’m sure thousands of people had their mail stolen yesterday… I do think it boils down to irrational fears that all of a sudden we’d do evil things.”

Irrational or not, Google was assailed from many sides and compelled to play an unaccustomed role: defense. Nick Grouf, CEO of Spot Runner, an advertising/marketing agency that counted among its investors Martin Sorrell’s WPP Group, believed Google was engaged in too many battles. He said that traditional media woke up to the Google threat not when the company did its IPO or was sued by book publishers, but when it bought YouTube. “When you pay $1.6 billion for a site that is on the cover of every newspaper and magazine, and is the centerpiece of the zeitgeist as the future of media”-suddenly Google was widely perceived as a media company. By 2006 and into 2007, Grouf said, Google was battling with television and newspapers and book publishers and Microsoft and eBay and advertising agencies. “It’s hard to compete on all fronts. And people start to whisper: ‘These guys have gargantuan ambitions.’”

IN NOVEMBER, the FTC held a two-day town hall meeting on privacy, a series of tame panel discussions that became more a seminar than an inquisition, disappointing Jeff Chester. The commission decided that the often-baffling issue of privacy would be excluded from the decision of whether to approve Google’s acquisition of DoubleClick. The focus, instead, was on whether the marriage was anticompetitive. It was difficult to argue that the merger harmed competition when, within months, companies such as Microsoft and Yahoo and AOL and the WPP all acquired digital advertising companies of their own. The FTC prefers “to wait for a violation before we act,” an agency official said on the eve of the approval of the merger. The EU did compel Google to make concessions and to tighten its privacy policies, but it, too, would approve the merger.

By mid 2007, Google was worried about the many restive bears it had provoked. It began to reach out to Washington. To allay privacy concerns, the company announced that it would reduce from two years to eighteen months the information it keeps in its database about the Web search histories of its users. Claiming that privacy laws were out of date, Google put out a press release proposing uniform international privacy rules and perhaps laws that recognized how the Internet and technology posed new privacy challenges. Instead of one “uber cookie” that permanently tracks a user, Google said it was experimenting with “crumbled cookies” that would disappear over time.

The public battles probably made Google’s executives somewhat wiser. Google was only guilty, they believed, of naivete, not arrogance. “The product brand was very strong,” said Alan Davidson, Google’s senior director of government relations and public policy, who is a computer scientist as well as a lawyer and who oversees Google’s Washington office. “The political brand was very weak. Because we were not here to define it, it was being defined by our enemies.” He paused a moment, and added, “Enemy is a strong word. It was being defined by our competitors.” Gigi Sohn, the president and cofounder of Public Knowledge, a nonprofit organization that lobbies for both an open Internet and more balanced copyright laws, said that like many Silicon Valley companies, Google chose to have a smaller presence in the nation’s capital. But Google was more extreme, she said. “They were almost alone among Silicon Valley companies in failing to recognize that you have to play in the sandbox. If you want progressive spectrum policies, the free market does not ensure that.”

Google’s one-man operation in Washington expanded in 2007 to include twenty-two staffers. Among them were Jane Horvath, a former senior privacy attorney in the Bush administration’s Justice Department; Johanna Shelton, former senior counsel to Democrat John Dingell, then chairman of the House Energy and Commerce Committee; Robert Boorstin, a former speechwriter for President Bill Clinton; and Pablo Chavez, former chief counsel to Republican senator John McCain. To advance its Washington agenda, Google had established its own PAC (NETPAC), and soon hired three outside firms to lobby on its behalf: the mostly Democratic Podesta Group; King amp; Spalding, where Google relied on former Republican senators Connie Mack and Dan Coats; and Brownstein Hyatt Farber Schreck, which had recently hired Makan Delrahim, a former deputy assistant attorney general who’d been in charge of the Antitrust Division in the administration of George W Bush. “We’ve been under the radar, if you will, with government and certain industries,” observed David Drummond, the Google senior vice president who oversees all of the company’s legal affairs and policy interaction with governments. “As we’ve grown, we’re engaging a lot more.”

The most immediate concerns of Google’s Washington office were the privacy issues raised by the acquisition of DoubleClick. By the end of 2007, Google was battling the image that it was the Microsoft of 2000. “No question that people here regularly discuss Microsoft’s experience and use that as a cautionary tale,” said Elliot Schrage, the vice president of global communications and public affairs. On the subject of Microsoft, Brin said, “Microsoft is a bit of an unusual company. They don’t seem to like any of us being successful in the technology space.”

So Google sought to demonstrate that it was reaching out to media companies as well as to Washington. To preserve copyrights, YouTube announced that it was testing new antipiracy software to block unauthorized content from being uploaded and viewed. In an ecumenical spirit, the word partnership was constantly invoked by Google executives. Repeatedly, they celebrated its “more than 100,000 partners,” the more than three billion dollars it then distributed annually to Web sites and mostly small business partners in its AdSense program. As 2007 progressed, said General Electric’s Beth Comstock, relations with Google thawed and by summer, G.E.’s NBC negotiated for Google to sell some of the network’s remnant ads. “In the end, I was less concerned that Google was out to replace our entire sales force,” she said.

Google, however, was still clear-eyed about the inevitable gap between its engineers and traditional media. Google’s engineering prowess would, inevitably, make the consumption of media and the selling of advertising more efficient, Larry Page told me one afternoon as we sat in the small, bare-walled conference room steps from his office. So was it inevitable, I asked, that “Google would sometimes bump into traditional media?”

Without hesitation, he corrected me. “I would say, always,” he said in his deep baritone, emitting a subdued chuckle. His was not a boast; rather, it was a candid recognition of reality. He believes Google’s engineers can eradicate most inefficiencies if given the time and resources.

Page had reasons to feel confident. Google had a great year in 2007. Measured by growth, it was Google’s best year, with revenues soaring 60 percent to $16.6 billion, with international revenues contributing nearly half the total, and with profits climbing to $4.2 billion. Google ended the year with 16,805 full-time employees, offices in twenty countries, and the search engine available in 117 languages. And the year had been a personally happy one for Page and Brin. Page married Lucy Southworth, a former model who earned her Ph.D. in bioinformatics in January 2009 from Stanford; they married seven months after Brin wed Anne Wojcicki.

But Sheryl Sandberg was worried. She had held a ranking job in the Clinton administration before, joining Google in 2001, where she supervised all online sales for AdWords and AdSense, and was regularly hailed by Fortune magazine as one of the fifty most powerful female executives in America. Sandberg came to believe Google’s vice was the flip side of its virtue. “We’re an engineering company in that products come first,” she said. “A lot of the reason we’re winning is because our engineering is better.” Reminded that she once was quoted as saying Google made a mistake in not speaking to publishers and answering their questions before announcing plans to digitize all books, she added, “Sometimes we make mistakes here because we move too quickly”

Eric Schmidt would, inadvertently, prove her point. In August 2007, he piloted his Gulfstream G550 to Aspen, Colorado, to give the keynote speech at a dinner held by the free-market oriented Progress and Freedom Foundation. In the speech, he described four “basic principles,” as he referred to them, that he believes are vital for media and tech companies to embrace: freedom of speech, universal broadband access, net neutrality, and transparency. Missing from his prepared remarks were thoughts about privacy and copyright-and how far Google might push the permissible boundaries. (When, for instance, does anticipating a user’s wants become an intrusion? When does fair use become copyright infringement?)

A few weeks later, seated in his tiny conference room on the Mountain View campus, I discussed that speech with Schmidt. Why, I asked, didn’t he mention privacy in his Aspen talk?

There was a long pause before he said, “No particular reason. It’s sort of a given. If we violate the privacy of our users, they’ll leave us.”

And why no mention of copyright?

“Maybe it was the altitude! I was just chatting away.” Besides, he said, copyright “was not an absolute right” and had to be balanced by fair use.

Isn’t it true that Google wants to push the envelope on privacy and copyright?

“That’s probably correct,” Schmidt conceded. “If there’s a legal case, we’re going to favor the legal one that favors users.”

“Google, if it were a person, has all the flaws and all of the virtues of a classic Silicon Valley geek,” said Columbia ’s Tim Wu, who between jobs teaching law worked for a spell in the Valley. “In some ways, they are very principled.” He cited Google’s 20 percent time, saying that few “money-crazed companies would allow” such a thing. “But they have this total deaf ear to certain types of issues. One of them is privacy.” Why? Because, he said, “They just love that data because they can do neat things with it.”

CHAPTER ELEVEN. Google Enters Adolescence

(2007-2008)

For all its democratic ethos, its belief in “the wisdom of crowds,” at Google the engineer is king, held above the crowd. The vaunted 20 percent time that is parceled out selectively by management to nonengineers is given universally to the half of Google employees who are technically trained. Salaries for engineers are relatively modest-a beginning engineer starts at around $100,000 (versus about $50,000 for nonengineers), and rises to about $300,000, including a bonus-but stock rewards are extravagant. Google rewarded its employees with $868.6 million in stock in 2007, a one-year increase of more than 90 percent.

The importance the company attaches to engineers is spotlighted by the time Google’s founders and CEO Schmidt devote to meetings with them. Their Tuesday, Wednesday, and Friday afternoons are crammed with Google Product Strategy (GPS) reviews. Teams made up mostly of engineers meet in a long, dimly lit, low-ceilinged conference room named Mar rakesh, on the second floor of Building 43, next to the office that Page and Brin share. Industrial gray carpet covers the floor and melts into the gray walls. A massive, pale oak custom-made rectangular table stretches almost the full length of the room; at one end are billowy red-velvet couches, and at the other, large, flat LCD screens. Whiteboards line the walls. There are two projectors, so time is not wasted unloading and reloading projectors during multiple presentations, and all cables and wires are color coded to minimize time locating the right connections for laptops and other electronic devices.

Meetings last from fifteen minutes to two hours, and are scheduled one after another, like airport takeoffs and landings. “If you want to talk to Larry or Sergey, you can at one of these meetings,” said Vice President Megan Smith. “If you work at another company, can you get to the CEO within seven days? Probably not.” Often at these meetings, said Tim Armstrong, “Larry is going to take one side of the argument and Sergey is going to take the exact opposite side, and what you’re going to see is that everyone is going to argue in the middle and at some point it is going to be clear what the answer is.” This is a process that allows Page and Brin to learn, he said, “who comes to the meeting prepared” and who has the passion and guts to challenge them.

A meeting on October 9, 2007, did not quite follow this pattern. Brin and Page were to meet with an engineering team to review their proposal for an upgrade of AdWords 1.0. Since its introduction in early 2002, some parts of AdWords had been substantially upgraded while others had not. Small businesses complained that the system was too complicated. Larger customers, such as eBay or Amazon, complained that they wanted new features, including an ability to organize their accounts by products and to break out expenditures by country. To make these functions work, Google needed to enlarge its computers that retained data and enhance the speed of the advertising auctions. To demonstrate their commitment to a new architecture, the founders decided to skip 2.0 and christened this effort AdWords 3.0. The purpose of this session was to receive, and review, the new product teams’ recommendations.

Everyone around the conference table sat on gray-mesh ergonomic swivel chairs. Page was wearing his usual jeans, and a gray T-shirt under a black sports jacket; he sat in the middle of the table, a coffee cup in hand. Brin arrived a few minutes late in jeans and a black crewneck sweater, and plopped in the seat beside Page. More nattily attired in a blue V-necked sweater over a light blue dress shirt and gray slacks, Schmidt sat at the head of the table with a translucent container of salad and a Diet Coke. Schmidt opened the meeting by calling on the team leader, vice president of engineering Sridhar Ramaswamy, to describe the teams’ recommendations.

The upgraded system they proposed, said Ramaswamy, would be less complicated for advertisers, would produce search results faster, and would be “scalable” in that it would allow for the retention of more data. But, he cautioned, it was not quite the gut renovation that had been requested; it would be too expensive and require diverting too many engineers to both speed up AdWords, as Page had urged them to, and to make the sweeping computer changes needed to accommodate Page’s database growth projections.

To a nonengineer, the hour-long discussion was often incomprehensible-“three-tier architecture,” “middle-tier API,” “UI tier,” “end-to-end solutions,” “no latency,” “Java script bindings for third parties,” “10 percent CTR,” “SQL base.” But no translator was required to observe that Page and Brin were unhappy. At first, the founders were stonily silent, sliding lower in their chairs, and occasionally leaning over to whisper to each other. Intermittently, Page looked away from the engineers; Brin, appearing alternately distracted and irritated, would rise and stretch his legs on the empty chair beside his. Schmidt began with technical questions to the product team, but then he switched roles and tried to draw out Page and Brin, saying, “Larry, say what’s really bugging you.”

The room was quiet for perhaps ten seconds before Page responded. When he did, he scolded the engineers, saying they were not ambitious enough. Brin concurred, adding that the proposal was “muddled” and un-Google-like in its caution. “I named this 3.0 for a reason,” Page interjected. “We wanted something big. Instead, you proposed something small. Why are you so resistant?”

The engineering team leader held his ground. Ramaswamy said that his entire team concurred that the founders’ proposed changes would be too costly in money, time, and engineering manpower. Page countered that a significantly improved AdWords would make it easier for advertisers and result in greater revenues. “You are polishing up the program. I wanted to have a redesign.”

Schmidt stepped in to summarize their differences. He noted that Brin and Page were focused on the outcome, while the product team focused first on the process, and concluded that the engineering improvements would prove too “disruptive” to achieve the goal.

Brin said that neither he nor Page wanted to add patches to the system, something Microsoft has been criticized for when they stuff more code into their already bloated operating system. “I’m just worried that we designed the wrong thing,” Brin said. “And you’re telling me you’re not designing the optimum system. I think that’s a mistake… I’m trying to give you permission to be bolder.”

Schmidt achieved a cease-fire by asking the product team to make its slide presentation. It demonstrated how the new product would actually work for advertisers, allowing them to manage their accounts. The discussion now went round and round with Schmidt finally stepping in to summarize the technical changes that would be made, the engineering challenges, the different approaches proposed by the team and by the founders. As he spoke, I kept wondering: When Terry Semel was CEO of Yahoo, or John Sculley CEO of Apple, could either of those nonengineers understand what their engineers were saying? Could they challenge them? (I would ask this question of Semel, who said the Yahoo founders, Jerry Yang and David Filo, both engineers, often accompanied him to similar meetings. Besides, he said, “I’d make people describe things in English!”) Semel brought good judgment and people skills to Yahoo when he arrived in 2000, but the question begs to be asked: Did Yahoo slip technologically because the CEO could not wrap his brain around the technology? Was that why Apple slipped technologically after Steve Jobs had been fired? (While Jobs does not possess an engineering degree, he seems not to need a translator.)

Schmidt, sensing that a resolution was not possible at this Google meeting, told the product team to report back with a detailed design “which is responsive to Larry and Sergey’s criticism,” one that laid out “what it takes to build a good product,” and what it would cost in time and money. He took care to balance this rebuke with praise: “But this is very well done. I love it when people show me the flaws in our products.”

Neither founder was happy after the meeting. “I hope they try to do something a little more ambitious,” Brin said two days later. He compared the project to renovating a house. “Once you get into it, you know it’s going to take some time and effort, so you may as well do as good a job as you can. We prefer not to do too many small things when we know where we’d like to get to.” Page was disappointed in what he described as the engineering team’s “self-imposed, bureaucratic response.” He sounded harsh, and a few seconds later he softened his words: “It’s hard when you’re so focused to see the big picture. It’s sort of easy for us. We just say, ‘If you’re going to make changes at that rate, we’re going to go out of business. It’s just not OK. It’s all of our revenue. We’re obviously doing some things wrong. We need some sort of reasonable plan to fix these things in our lifetime. Our lifetime means years, not multiple years.’” Ultimately, Ramaswamy and his team came back with an AdWords 3.0 proposal that went more than halfway toward the one proposed by the founders; Google has been rolling out the new system in stages.

THE MEETING DEMONSTRATED that the ethos that had launched the Google rocket-to shoot for the moon, not the tops of trees-was intact, no matter how much the company had grown. Page and Brin’s passion for technology was apparent, as was the way they push engineers to act boldly. At meetings they feed off each other, punishing engineers and product managers who think they have devised a “new” solution when, the founders say, they have merely devised a “cute” solution, not a fundamental one. Or as Schmidt said, “They think about what should be, and they assume it is possible.”

Page describes his and Brin’s role as supplying the “big picture,” and by way of illustrating what he sees as a management rather than a technological innovation, he cites the work of Gordon Moore at Intel and his Moore ’s law. “People think it’s this wild statement about how the universe is, but it’s actually a management innovation. Moore ’s law was a statement saying, ‘We’re going to double the performance [of integrated circuits or computer chips] every eighteen months, and let’s get organized to do it.’ They spent billions of dollars doing that. If you didn’t have Moore ’s law, you wouldn’t have that advancement. It’s actually causal in another way.” The management pressure to double performance helps assure it.

IN SPITE OF GOOGLE’S RAPID GROWTH, or because of it, by 2007 the company had become a target for lawsuits and sneers. Leading the chorus was Microsoft CEO Steve Ballmer. In 2007, he had labeled Google “a one-trick pony,” and had derided the company at nearly every public opportunity since, telling reporters, “they have one product that makes all their money, and it hasn’t changed in five years… Search makes ninety-eight percent of all their money.” Irwin Gotlieb, who is not in Ballmer’s adversarial camp, nevertheless shared the view that Google’s attempt to broaden its reach had been a failure. “Google is extremely good with search,” he said. “They are good with AdSense. They are not as good with display advertising. I believe they’ve lost a fortune on selling radio ads, they’ve lost a fortune on selling print ads, and they are now losing a fortune on selling television ads.” Tad Smith, the CEO of Reed Business Information, which produces eighty publications and Web sites, asked, “Where is the new pony? Apple came up with a new pony, the iPod and iPhone. Microsoft came up with Office. Google is throwing a lot of things against the wall, and so far only one has stuck to the wall. And Google’s search growth will slow.”

Eric Schmidt had a ready rejoinder to Ballmer: “I like the trick!” And justifiably so: the trick yielded more than sixteen billion dollars in revenues and four billion dollars in profit in 2007. Schmidt went on, “The Google model is one-trick to the extent that you believe targeted advertising is one-trick.” Google now had about 150 products available, and he believed the other efforts-You Tube; DoubleClick; mobile phone products; cloud computing; selling TV, radio, and newspaper ads-could sell targeted advertising. Yet with almost all of its revenues pumping from only one of 150 wells, the question-can Google find another gusher?-was “a legitimate question,” as top Google executives like Elliot Schrage conceded at the time.

At the start of 2008 there was evidence that the gusher was tapering off. Search advertising was slowing. In January and February, comScore, a research firm that tracks online activity, reported that Google searchers were clicking on fewer text ads. Wall Street analysts predicted Google’s revenue rise would stall, and the stock price dropped; from its pinnacle of $742 on November 6, 2007, it had plunged 40 percent by March 2008. The press, lusting for a new narrative, fixed on this one: the Google rocket was crashing. “Goodbye, Google,” read the headline in Forbes.com. Reporters buzzed, incessantly, about dire days ahead. Google was spinning them, they believed, when people like Tim Armstrong explained that the company was trying to make the ads “more relevant” and had deliberately reduced the number of ads appearing with search results to reduce clutter and produce better information. Google said clicks without purchases meant the ads were not useful to the user, so they were eliminated. Reporters were deeply skeptical when chief economist Hal Varian in early 2008 cautioned, “The clicks are not what is relevant. The revenue is.”

But events would demonstrate that the press and Wall Street analysts are often handicapped by two imperatives: don’t be late with bad news, and don’t be the lone blackbird left on the pole. In April 2008, when the company released its first-quarter results, the narrative changed. Google’s revenues had surged 42 percent compared to the first quarter of 2007; its profits had jumped 30 percent, and as Varian had suggested, its ad clicks had risen 20 percent. “Google Inc’s Go-Go Era Apparently Isn’t Over,” said a report in the Wall Street Journal. The Times headline was: “Google Defies the Economy and Reports a Profit Surge.” As the report showed, Google hogged three quarters of all U.S. search advertising dollars, compared to only 5 percent for Steve Ballmer’s Microsoft.

Yet Ballmer had a point. Google had not figured out how to make money on its surfeit of products. YouTube accounted for one of every three videos viewed online, three billion of the nine billion viewed in January 2008. The impact of this new medium would forever change the way politics are conducted. Seven of the sixteen candidates who ran for president in 2008 announced their candidacies on YouTube, and more people saw a taped version of the July 2007 Democratic presidential debate there than live on CNN. YouTube succeeded in democratizing information. It became a viral hub where a candidate’s flubs or fibs were exposed by a video. When Mitt Romney became a born-again crusader against abortion, videos were posted of the former governor of Massachusetts championing a woman’s right to an abortion. Overseas, when Venezuelan strongman Hugo Chavez shut down El Observador, an opposition newspaper, it began broadcasting on YouTube.

However, YouTube made no money. Its bandwidth and computer costs were steep, and it paid for some of its content. Three senior Google executives with knowledge of these figures said at the time that YouTube would lose money in 2008, and these losses would grow in 2009, with revenues initially projected at about $250 million and losses totaling about $500 million. There were those, like Gotlieb, who believed “they’ll never make money on YouTube.” He thought online display ads would annoy viewers, and that most advertisers sought predictably ad-friendly settings for their ads, something a site dominated by user-generated content could not ensure. Like many Valley start-up founders, Chad Hurley and Steve Chen believed, as Google’s did when they launched, that if they first built traffic, money would follow. By February 2008, Schmidt said he had summoned teams from YouTube and Google to “start working on monetizing it.”

“You didn’t tell us to work on it,” a surprised Hurley said, recalled Schmidt.

“Well, times have changed,” said Schmidt.

Schmidt was not unhappy with YouTube or its founders. He believed YouTube was becoming nearly as ubiquitous a Web activity as e-mail. But Schmidt wanted a business plan; he announced that his “highest priority” in 2008 was to figure out a way for YouTube “to make money.” He knew that online video ads had to be different from television ads. Ads that appeared before a video started would be annoying. Internet users wanted to see the video as soon as they clicked on it. Thirty-second ads anywhere in an online setting were too long. The ads couldn’t feel like an interruption, certainly not a long interruption. Schmidt’s joint teams came up with several novel advertising schemes. Schmidt said he didn’t know if they’d work, but “if any of them hit, it is a billion-dollar business. Of course, it’s now zero.” To minimize insecurity at YouTube’s headquarters in San Bruno, he dispatched Coach Campbell to visit regularly and to calm the troops and help coax a monetization plan.

There was another potential cash cow to pursue. In 2007, Google began to aggressively move to claim a slice of the mobile phone business, which then counted three billion users worldwide-three times the PC market-a number Schmidt expected to grow by another billion in four years. The success of Apple’s revolutionary iPhone, with its easy access to the Internet, was an eye-opener: the iPhone delivered fifty times more search queries, Google found, than the typical so-called smartphone. A mobile device was no longer just a telephone or a PDA, and portable access to the Internet advanced Google’s interests; the more people went online, the more Google benefited.

But Google was frustrated that many of its programs functioned poorly on mobile phones. They were frustrated that telephone companies, not consumers, decided which applications would appear on their mobile phones. “As compared to the Internet model, where we’ve been able to make software that basically is able to run everything and works for people pretty well, it’s been very difficult to do that on phones,” Page said. Google’s mobile quarterback was Andy Rubin. A former Microsoft employee, Rubin had left to cofound a mobile software company called Android, which Google had acquired in 2005. As the senior director of mobile platforms for Google, Rubin set out to make Android an open-source operating system-open to improvements from any software designer because the source code was visible, not proprietary, and peers could collaborate to offer and improve different software applications. This was a direct assault on the telephone companies, which policed what software applications could be displayed for consumers.

Rubin likened the current mobile market to what happened in the early eighties to PCs. Original hardware makers, such as Wang or DEC, were supplanted by IBM, which in turn was supplanted by the manufacturers of clones. As the hardware became commoditized, the price of the PC dropped. At the same time, the cost of the software rose, because a single company, Microsoft, controlled it. “Unless there is a vendor-independent software solution,” said Rubin, expressing the ethos not just of Google but of the Valley culture at large, “the consumer isn’t going to be well served. What I mean by ‘vendor-independent’ is you can’t have a single source. Microsoft was a single source. What Android is doing is trying to avoid what happened in the PC business, which was to create a monopoly.” That is why, he said, Android is an open-source system that “no single entity can own.” He is openly disdainful of phone companies like Verizon and AT amp;T, though he doesn’t name them, and obviously feels the same way about Apple’s closed iPhone system. “The thing I carry around in my pocket every day,” he said, gripping his yet to be released Android phone manufactured by T-Mobile, “is as powerful as the PC was five years ago. So how can I take advantage of that and make it do what I want it to? I’m the one who paid for it! Just because I have a service plan with some whacky wireless carrier doesn’t mean they get to dictate what I do with my product that I paid for. Another thing: It shouldn’t cost four hundred dollars. That’s absurd. If you add up all the components, somebody is making a lot of money.”

For Google, Android represented a perfect storm-its idealistic desire to promote an open, more democratic system meshed with its business interests. The more people who had access to the Internet, the more Google searches or Google Maps would be used, and the more data collected. And those using the Android operating system for mobile phones might also use it for their laptops, allowing Google to charge for this software or share in the mobile ad revenues.

There was another issue to be addressed with mobile phones: spectrum space. All radio frequencies-whether for cell phone calls, broadcast television or radio signals, or other wireless devices-travel over spectrum space that is assigned and regulated by the Federal Communications Commission. Google lobbied to ensure that the new wireless space would be open and not controlled by just a few telephone giants. Ivan Seidenberg, the CEO of Verizon, disputed Google’s contention that his was a closed system: “Since we think we have the most reliable network, we’ll publish standards and let people connect to any device they want to.” The FCC sided with Google, and in July 2007 ruled that the telephone companies could not control what applications were used on this new spectrum. Soon after the FCC announcement, Google raised the stakes by threatening to bid in the January 2008 spectrum auction, establishing itself as a telephone company.

Google had no intention of providing telephone service or producing hardware for a Google phone. They would not say this publicly, however, because by fanning speculation-and the speculation was incendiary-they kept people guessing and increased their leverage over the wireless telephone companies. They also brought themselves closer to achieving three objectives: to make Google programs, including such new features as voice search, work on wireless devices; to reduce the cost of mobile phone service and Internet connections by allowing advertisers to subsidize them; and to extend to mobile devices the company’s dominance in online advertising. Google believes that ads on mobile devices could fetch premium prices. With GPS positioning married to Google’s immense database, an advertiser could know who purchased cashmere sweaters or golf clubs and if a consumer was outside a store that had a special sale on, an alert could appear on the mobile screen informing her. Because this would be what advertisers and Google excitedly describe as “a service” or “information” rather than a traditional ad, the hope was that consumers wouldn’t be annoyed by these intrusions. In November 2007, Google announced that it was working with thirty-three corporate partners, including T-Mobile, Samsung, Intel, and eBay, to launch Android as a free operating system.

In the auction, few companies could match the financial bids made by the giant telephone companies. Google could, though, and to enter the mobile phone business and ensure that Android would work seamlessly, they needed to. But Google didn’t want to become a telephone company. So it made a let‘s-hope-we-lose floor bid of $4.6 billion for a block of wireless spectrum, conditioned on the FCC’s agreement to guarantee that the winner of the auction open its hardware and services to third parties.

Of course, Google’s mobile phone ambitions would collide with powerful telephone companies and with Nokia, the world’s number one mobile phone manufacturer. They were allied in fear that their business model was under assault. They worried that their dominance would be diminished. Who would receive the advertising revenues? Who would claim ownership of the valuable data generated? Would their own hardware be cloned, like PCs? “Now that they want to dominate the planet on phone calls,” Seidenberg said of Google, “they’ve provoked the bear.”

Neither Seidenberg nor representatives from AT amp;T or Nokia joined in Google’s November announcement of the first truly open mobile operating system. A traditional Google corporate ally, Steve Jobs, also did not join because Apple’s iPhone provides a mobile operating system, one less open than Google’s. This was a little clumsy, because half of Apple’s eight directors serve as Google directors or advisers, among them Eric Schmidt, Bill Campbell, and Al Gore. At Apple board meetings, Schmidt told me he now recused himself from mobile phone discussions.

In the auction, that commenced in January, all bidders were instructed not to reveal their bids. When it was over, Verizon and AT amp;T had won, paying a total of $16.2 billion for two wide swatches of spectrum. In an April “all hands” meeting with Google employees, either attending or on a video hookup, Schmidt confessed, “We had the very good fortune of entering the spectrum auction for $4.6 billion, and not winning. We sweated it out!” Both Verizon and AT amp;T would pledge to open their networks. AT amp;T announced that it would sell phones with Google’s Android system, and Verizon announced that it was open to consider any Android prototype. (By the summer of 2009, Verizon had yet to submit an Android application; nor had any phone company, save T-Mobile.) One former federal official was cynical about what he called Google’s “fake bid.” He believed Google had a sweetheart deal with Verizon, that the telephone company knew all along Google would not make escalating bids and that all Google really wanted was assurance that Verizon would open its system to Android. He was dubious that Verizon’s system would be open for anyone but Google.

BY THE SPRING OF 2008, Google was buoyant. Rejecting the one-trick pony charge, Schmidt said that with mobile phones, plus search, plus its array of software products, and YouTube, he explained why it was conceivable that Google could become the first media company to generate one hundred billion dollars in revenues. He described to me “a planning process where we said, is it mathematically possible for Google to become a hundred-billion-dollar corporation? And not over any particular period of time, just, is it possible, are the markets big enough?” He estimated the annual worldwide advertising market as “somewhere between seven hundred billion and a trillion dollars. Is it possible for Google to become ten percent of that? And the answer is yes, over a long enough period of time.”

How?

“First place, you’re not going to get there with small little advertising deals. You need these big initiatives… the number one big one right in front of us is television. Big market, well monetized, easily automatable. Second one is… mobile.” The third was “enterprise,” by which he meant web-based services-“cloud computing”-offering various software applications and IT services for corporate customers, organizations, and individual consumers.

Brave words, but throughout 2008 Schmidt’s company made no money from its mobile or YouTube or cloud-computing efforts. Google did not let up. It was still talking to cable companies, Schmidt said, about partnering to target advertising for cable’s digital set-top boxes, and for Android to become the operating system for cable mobile phones-should cable decide to enter the thriving wireless market. Google joined with cable companies, Intel, and wireless providers, such as Sprint Nextel Corporation, to invest a total of $3.2 billion in WiMAX, a technology promising faster wireless connections to the Internet than those offered by Verizon and AT amp;T.

Jeffrey L. Bewkes, the CEO of Time Warner, acknowledged his company’s discussions with Google and laid out the reasons they had not yet been resolved and might not be. On the one hand, he said, unabashedly, if the cable companies could get together they would have “a Google-type ability to do targeted digital advertising.” Google, he said, “has the search data and the cookies through its searches. But the cable companies not only have that, they have everything that you do on your cable broadband connection, they’ve got everything you’ve signed on and saw. And they have everything you watched on television. And they’ve got their customer’s name and credit card information.” On the other hand, he sighed, the cable companies have a difficult time acting in concert, and the data is useful only if they aggregate it. That’s where Google has the advantage. It is willing to organize cable companies’ data, combine it with its own, and extend it to all mobile devices. Which begs another question, he said: Who owns the data, the cable company or Google? And if the cable companies let Google in the door and grant them access to its data, “you can never build an alternative because Google’s will always be that much more efficient.”

Cloud computing was another new Google initiative. Like other corporate giants with massive data centers and servers-IBM, Amazon, Oracle-Google was intent on launching its “cloud” of servers. The cloud would allow a user to access data stored in the Google server from anywhere; it would reduce corporate costs because companies could outsource their data centers; and it would subvert more expensive boxed software sold by Microsoft and spur the development of inexpensive netbooks whose applications are stored in the cloud. Because all these software applications can function on a browser, escaping the dominance of Microsoft’s operating system, in the future, said Christophe Bisciglia, the twenty-eight-year-old chief of cloud computing, “The browser becomes the operating system. Applications have outpaced browsers, which is why we did it”-introduced a Google browser in 2008.

While cloud computing offered consumers portability, it potentially offered them less control. Just as a consumer loses access to the Internet every time a broadband connection is down-for instance, when YouTube was silenced for several hours on February 24, 2008, when the government of Pakistan tried to block a YouTube video critical of Islam and wound up shutting down the worldwide video service, or when Gmail’s one hundred million users were disrupted for just over three hours exactly one year later, on February 24, 2009, or when Google search and Gmail went dark for an hour on May 14, 2009. “We’re sometimes going to have problems,” Bisciglia admitted, “just as we do when our hard drive crashes.”

And what is the business plan?

“The more people on the Internet, the more clicks our ads get,” Bisciglia said.

While these aggressive Google efforts resemble those of other corporations’ always angling to continually grow profits, they were also reminders of the “Don’t be evil” idealism that animated the company. In its annual letter to shareholders released on the last day of 2007, Google announced it was entering the energy sector, investing tens of millions of dollars in new technologies with the goal of making renewable energy cheaper than coal-fired plants. “If we are successful,” the founders declared, “we will not only help the world, but also make substantial profits.” Their profits would rise because the energy costs to operate Google’s data centers would fall. They acknowledged that solar power is “more expensive,” yet vow to use it to power a third of the Googleplex and to subsidize it for seven years. Consistent with their fervor to spare the environment, Page and Brin made personal investments in Tesla Motors, a Valley company intent on producing an electric sports car.

They established a philanthropic arm, Google.org, and recruited an esteemed epidemiologist and world health expert, Dr. Larry Brilliant, to run it. They pledged to divert to this foundation one percent of Google’s profits, with three goals: to ascertain the quality of water and health care and other services country by country; to gather enough information to try to predict and prevent catastrophes, whether these be forces of nature or disease; and to make energy-renewable investments. Page and Brin sound more like social workers than hardheaded businessmen when they extol Google Earth as a vehicle to spot imminent disasters and offer to make “a gift” of this technology to disaster relief organizations. Google put up thirty million dollars to fund the X Prize Foundation’s Google Lunar X Prize, which would be awarded to the private team that designs the best robotic rover to traverse the moon’s surface and send high definition video images back to earth.

Google also launched Google Health, an effort much like the one announced by Microsoft and by AOL cofounder Steve Case’s Revolution Health Group LLC. Each aimed to give citizens a safe place to store health records online and share them with doctors, and search for the best medical advice online. Google recruited Dr. Roni Zeiger, a primary care physician who returned to Stanford for an advanced degree in medical informatics, hoping to devise ways to democratize medical information. He joined Google in January 2006, after a typically rigorous interview. “They asked for my high school grades!” Zeiger laughed. He was dead serious about his mission. “Google gets more health questions than anyone on the planet,” he said. Zeiger realized that “Google’s skills could help people organize their own health information.” He vowed, “We’ll never sell anyone’s health records.” And in a March 2008 speech, Eric Schmidt promised to keep the site free of all advertising.

There is a shared, and perhaps blinding, belief on the Google campus that Google was altruistic, an attitude reflected in “Don’t be evil.” On a stage he shared with Page at the Global Philanthropy Forum after Google embraced the slogan, Brin declared that ‘“don’t be evil’ serves as a reminder to our employees,” but it “was a mistake. It should really say, ’Be Good.‘”

One can interpret Brin’s remarks as a reflection of his idealism, or his naïveté-or both. To simply say a corporation should be good ignores the range of choices a company is compelled to make in conducting its business. How “good” was Google when it complied with German laws not to disseminate Nazi literature? Google’s searches were following German law, which is good. It was censoring search results, which is bad. When in 2008 Google closed its Phoenix office and laid off a handful of employees because the company did not believe the office was essential, it was being good to shareholders. But those employees most certainly did not see Google’s action as good.

BUT THE SPEED OF GOOGLE’S ascent and its expansive commercial ambitions came to overshadow its noble ambitions. Google grew up very fast. In their first annual letter to shareholders, in 2004, Page and Brin wrote of Google: “If it were a person, it would have started elementary school late last summer, and today it would have just finished the first grade.” Three years later, Search Engine Land ’s Danny Sullivan thought Google had prematurely entered its awkward teenage years. “The story of Google today is perhaps the adolescent period they are going through. How do they deal with the challenges of the growth they are going through? You are going to go through this wave of people leaving Google. They don’t need to work there anymore. And it’s not going to be fun, which will change the culture.”

“Google’s become a big company,” said Paul Buchheit, who left Google in 2006 to start Friendfeed.com. “It’s a very different environment.” As with most big companies, he said “priorities become based more on what looks good internally. You become distant from the users. When you get bigger, some engineer comes up with this crazy project, but he’s four or five layers from Larry. These layers in between are going to serve up all sorts of weird barriers.” There’s little incentive, he said, for individuals to innovate because the bureaucracy becomes cautious, overwhelmed with a terror “not to look dumb.” Asked for a more concrete example, the engineer who distilled Google into a powerfully simple slogan retreats to this sweeping analogy: “It’s an entire system. Think about the Soviet Union. They had lots of brilliant people. But there was an economic system there that encouraged certain kinds of behavior. They failed to innovate because the system was wrong.” Buchheit’s critique is echoed by Scott Heiferman, CEO and cofounder of the social network site Meetup.com, who has hired some former Googlers who left the company because it got too big. “Google did not invent YouTube. They tried and failed with Google Video. Google did not invent Facebook. They tried and failed with Orkut.” Aside from search, Heiferman said, “Google has actually failed at most things.”

Ask Google executives to describe their biggest future concern, and more often than not they say size. Growing too big and losing focus is Omid Kordestani’s foremost worry. At Netscape, he said, the company drifted away from founder Jim Clark’s vision of it as a company whose browser enabled Internet communication. “Suddenly we became more of an enterprise company than a Web company, even though we started the browser.” When Netscape rushed too quickly to issue an IPO in 1995, he said, pressure was on to generate more revenues, to perform on a very public stage for the press, to “focus on quarter to quarter” performance.

“For the last year my biggest worry was scaling the business,” Schmidt said in May 2007. “The problem is we’re growing so quickly. When you bring in people so quickly there’s always the possibility you’ll lose the formula. How do you manage engineering teams that are not on one campus? How do you manage across time zones? How do you keep the culture?”

IN ADDITION TO the natural concerns with rapid growth, critics both inside and outside Google believe the company has real management weaknesses. Paul Buchheit believes Google has succumbed to the disease of bigness that he says afflicts “every big company” and has become bureaucratic. There are many bottlenecks at Google. A former Google executive criticizes “micro management at the top,” and said a prime example is that the founders and Schmidt, or their designees, “have to sign off on each hire. That’s OK when you are hiring five new employees.” In 2007 and early 2008, Google was hiring 150 people per week. Because most decisions about new employees, deals, or policy “have to go to the top,” the process is slowed. Echoing a common thought, an executive who is a Google corporate ally and works closely with them said, “In many ways, it’s a very disorganized company. It looks to me like they are caught in this interesting conflict between a company that is overmanaged and undermanaged. They have a control mechanism at the top that has inordinate control. And at the same time, there is too much freedom.” He lists two complaints: “You can’t get answers out of Google when you want to schedule something,” so there are long waits. And “they are structured to allow way too many people to participate,” which results in endless meetings.

The founders get diverted by issues that should not require their attention. Eric Schmidt described a Monday management committee meeting in March 2008 during which they discussed how, under California labor laws, a review was necessary to determine whether their many massage therapists should become full-time employees. The significant plus was that they would receive full benefits. The significant minus was that tipping would be prohibited. The issue had first been raised at the TGIF meeting the previous Friday. The founders, massage regulars, were agitated. Schmidt, who said he has “never had a massage at Google, and never will,” was impatient, and blurted, “You guys are in charge of this.”

“‘We’re on it!’” they said.

That afternoon, Page and Brin scheduled another meeting to resolve the issue. “This is where the team really works well,” Schmidt explained. “I knew what I wanted, which was to get the hell out of the meeting! Larry and Sergey knew they had to get involved in an employee issue.” The founders resolved the issue by making them “variable part-time employees” and allowing tipping to be continued as long as it was reported. This incident can be viewed as an example of teamwork; it can also be seen as an example of micromanagement.

The founders’ zeal for efficiencies extends to the unusual way they manage their time. They used to share three assistants. No longer. They share an office on the second floor of Building 43 without secretaries or assistants to guard the entrance, keep them on schedule, or answer phones (which don’t ring anyway). A staircase whose banister is festooned with a large green kite leads from their regular office on the main level to a glassed loft where they work on desktop computers with oversized screens, circled by unpacked cartons on the floor, a large massage chair, and gym equipment so that Brin can stretch his cranky back. A helmeted spacesuit with the name Sergey Brin on a breast pouch is splayed on a hanging stand facing the offices below. (Brin has applied and left a $5 million deposit for one of the six seats on Space Adventures’ Soyuz spacecraft’s 2012 orbital trip.) Another staircase allows them to slip out of the building and to the parking lot where they daily leave their commuting vehicles, including two Priuses, two $109,000 Tesla Roadster electric sports cars from the company they’ve each invested in, and a couple of bicycles.

Asked why they have no assistants, Page gave a revealing answer. They do have an assistant “from time to time,” he said, but “the amount of time it takes me to actually schedule is not very high because of Google Calendar. Occasionally, I have to go back and forth with somebody, but usually they’ll meet when I want to meet anyway. It’s not like I have to negotiate very much.” He laughed, gently. “I’m not sure it would work for everybody, but for me it’s worked pretty well. Also, it’s actually allowed me to have more time. People are willing to ask an assistant: ‘Will Larry come and talk at this thing?’ But if they actually have to e-mail me about it, they think twice. It’s not that anybody in the company can’t e-mail me. It’s that they realize they shouldn’t be using my time that way. So the number of requests I’ve gotten has gone down, which is kind of nice.”

What isn’t so nice for Google executives is that they often don’t know where the founders are, or if they will attend meetings. Page and Brin resist being tied to someone else’s schedule. With no assistant to contact, the way executives learn if one or both founders will attend a meeting is if they see that Page or Brin has placed the meeting on his online Google Calendar, which senior Google executives share. Sometimes, Schmidt said, the founders show up unscheduled for the wrong meetings. Sometimes they disappear-Larry suddenly to tour a cafeteria to make sure it seats no more than one hundred and fifty, which he insists is the maximum size to inspire a team culture; Sergey or Larry to disappear from the office (if the wind has picked up) to pursue their kite-surfing hobby, which relies on a small surfboard and wind to propel the kite and skim across the water.

Schmidt defends management chaos, or at least a degree of it, as a style that fits the founders, and he offered an illustration. For months he tried to get the founders to craft a corporate strategy memo for the future, believing their “brilliance” produces unique insights. He couldn’t pin them down. Finally, on a business trip to Seville, he opened his e-mail and up popped a draft from Brin. “Perfect,” he thought, and shared it with Page, who was on the trip. Page made his edits, then Schmidt did some edits and circulated the draft to Google’s management with a “What’s missing?” note. “Why couldn’t I get them to write this in a normal way?” Schmidt asked. “That’s not the way their minds work. Their ideas are much better than mine. I can’t write the memo, and in that you see why they are the founders.”

Whatever their brilliance, each member of the troika running Google has the same liability, said an industry insider who knows them well. “None is an inspirational leader, a great salesman, or a great speaker.” Their brilliance and success move people, but not their words or the symbols they evoke. They are not Steve Jobs, not gifted salesmen or evangelical leaders.

Page and Brin differ from Jobs in another significant way. Al Gore, who has had a ringside seat at the management of both Apple and Google, said that he deeply admires the founders of each company, but “a genius like Steve comes along only once in several generations.” Jobs has demonstrated his genius over a longer period of time than Page and Brin, he believes, and also has benefited from something the Google founders lack: “Steve has the great if painful experience of failing, and coming back.” The wisdom that comes from failure has not yet punched Page and Brin.

It was time in the spring of 2008 for executives to make tough choices among the 150 products Google produced. Why 150 products? “That can be stated as criticism, but it can also be stated as strategy,” Schmidt responded. “The goal of the company is customer satisfaction. You should think of Google as one product”: customer satisfaction. This response summons memories of Yahoo’s famous Peanut Butter Manifesto. Composed in November 2006 as an internal memo by Yahoo senior vice president Brad Garlinghouse, it was leaked and caused a stir in the Valley. Garlinghouse wrote:

We lack a focused, cohesive vision for our company. We want to do everything and be everything-to everyone… I’ve heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular.

Search gives Google more of a focus than a self-proclaimed “media company” like Yahoo might have. Yet a departed Google executive, who like many who voice criticism of Google’s management chooses to do so anonymously, said, “Google could do fewer products and make less investments. They are doing too many products and peanut buttering everything.”

Why?

“They’ve never had to make hard choices,” answered the former executive. “The company is so successful that it can do anything. They think they can make energy. Why? They have passion. That’s what makes Google great. The question is when things get hard, can they make tough decisions?”

The CEO of an old media company described a visit he and his COO made to Google a few years ago. They were doing what Mel Karmazin had done: take a tour of Google and have a meal with the founders and Schmidt. As an executive led them around, they paused to look at the gallery of photographs of the projects Google had launched. The Google executive explained the 20 percent time each engineer was given. The COO asked, “Has there ever been a project started where someone said, ‘OK, it’s not what we thought it was. We should get rid of it.’?”

“I don’t think so,” answered their tour guide.

When I pressed a longtime Google executive to recall the products the company had canceled, he came up with just two: Google Answers and Google Catalog Search. “This is a company that doesn’t set priorities,” said another former Google executive. Part of the reason, this person said, traces to the founders. “It’s the Talmud of the founders. The word of God. And everyone interprets the word of God at Google.”

It’s very hard not to defer to founders who have been right so often. But here’s where Schmidt is criticized for not imposing his will. One reason, said a former Google executive, is because “He hates confrontation.” A second reason, said another former manager, is because “Eric runs the company-unless there’s someting Larry really cares about. Anything Larry cares about, he runs. Like products.” Brin is said to assert himself on fewer things, but on advertising and privacy policies, business deals, or “Google’s approach to China, Sergey rules.” The prominent CEO of one company that does business with Google said he found Schmidt “odd, as if he’s holding something back. In the guise of someone who is straight-a sincere, decent, thoughtful, kind man-he is something different than all of those qualities. In his business dealings people will tell you that if he said, ‘OK, I agree to this,’ you will find that he actually hasn’t done so. If you confront him, he said he couldn’t. Or he forgot. Or he gives you gobbledegook.”

Why? “He is not the decider,” the CEO answered. “Yet in certain areas he pretends that he is. Eric is smoothly duplicitous.”

Silicon Valley venture capitalist Roger McNamee of Elevation Partners calls “Google the most impressive company I’ve ever seen.” Yet in mid-2008 he also said, “I am very disappointed in Eric Schmidt. He got off to a great start because he was wise enough to leave a crazy culture alone. The Google culture has become a monster.”

Even Coach Campbell, who has no direct managerial responsibilities, is not immune from criticism. “He’s more a crutch than a coach,” said a former Google executive, who believes Campbell compliments too much and challenges too little. A senior Google executive observes that until late 2008, Google never had an internal budget that apportioned capital, made choices about what resources to allocate; instead, it projected expenditures and revenues month by month. He blames the CEO for this, but also asked of the experienced coach, “Where was Bill?” He said Campbell spends too much time dispensing hugs. “I find him all hat and no cattle.”

MARC ANDREESSEN was of two minds about Google. On the one hand, he believed, “Google is in a great position,” particularly with YouTube, which he thought will find a way to monetize. On the other hand, he cautioned against Google’s “trying to do everything. You saw their energy initiative! History suggests that people have circles of competence and when you go outside the circle, they fail.”

Columbia ’s Tim Wu concurs. “Google is a precocious company. Great grades. Perfect IPO. A typical high school standout,” he observed. “The basic problem is whether they remain true to their founding philosophy. I don’t just mean ‘Don’t be evil.” Will they stay focused on search, on “their founding philosophy, which is really an engineers’ aesthetic of getting you to what you want as fast as you can and then getting out of the way?” Or will Google become “a source of content, a platform, a destination that seeks to keep people in a walled Google garden? I predict that Google will wind up at war with itself.”

Brin rejects this analysis, but when asked what his biggest worry was, he answered simply, “I worry about complexity. I admire Steve Jobs. He has been able to keep his products simple.”

Advertising pressures may add to Google’s complexity, for there is a built-in tension between the interests of users and of advertisers. Recall the aversion the founders once had to banner ads because, they said, “they don’t give the user the best experience.” And now Google heralds its purchase of DoubleClick as a means to get into the banner advertising business it once shunned. Because Google now admits to being in the advertising business, which produces almost all its revenues, they will have to answer this question: Is Google’s customer the advertiser or the user?

“I don’t think I’m worried about that changing at Google,” Brin said. He would not make the same argument for others. “I see other Web sites making trade-offs that I wouldn‘t,” including allowing “pop-ups and pop unders,” or online publications that allow “eight columns of ads on the side and one teensy article.”

But with such a wealth of data at Google’s disposal, their advertising customers will want more. And if Google’s growth sputters, pressure to satisfy advertisers will intensify. Richard Sarnoff, now the president of Digital Media Investments at Bertelsmann AG, whose great-uncle was David Sarnoff, the founder of NBC radio and television, likens these potential advertising pressures on Google to those faced by his great-uncle. “He had a vision of what radio and television could be in terms of being informational, educational, cultural, relevant. He said, ‘OK, we’ve got radio. Let’s put Tchaikovsky on!’… The reason the broadcast media didn’t end up being this public trust type of programming but became primarily-let’s call it lower-culture entertainment programming-is that radio and television was just so good at delivering audiences to advertisers. Business being what it is, whatever you’re good at, you concentrate on, you maximize, and that ends up delivering value to your shareholders. Google, like NBC in those early days, finds itself being a phenomenally effective way of delivering consumers to advertisers. The question is: To what extent is that going to change the very lofty principles that the company was originally founded on and that made them effective in the first place? Google is at that kind of crossroads.” Advertising pressures on Google will build. “What I have seen is that their very success has allowed them to resist such pressure-so far.”

All of these concerns, not to mention the luxury of being rich, contributed to the exodus of Google employees. George Reyes, the company’s long-serving CFO, with nearly three hundred million dollars in company stock, decided to retire at age fifty-three. Seeking to get on the ground floor of a hot new digital company, a number of other Googlers left, including executive chef Josef Desimone. Many who left did so out of frustration. The most prominent of them was Sheryl Sandberg.

Frustrated by what friends say was sometimes chaotic management at Google, and wanting broader responsibilities to address these, Sandberg left in March 2008 to accept the title of chief operating officer at Facebook. Venture capitalist Roger McNamee, an investor in Facebook and a close friend of Sandberg‘s, introduced her to founder Mark Zuckerberg. “Sheryl created AdWords,” he said. “The idea had many parents, but the execution was hers.” Her title, vice president, global online sales and operations, did not reflect her importance, he said. And he believed she was junior to some “tired executives.” In the effort to keep her, Google offered her the CFO job, which she declined. “She wanted to be a COO,” said Schmidt. “Sheryl is a terrific executive. But we don’t want a COO.”

By the time Sandberg stepped down, her Google team had grown to four thousand employees, with AdWords and AdSense then yielding 98 percent of the company’s revenues. “Sheryl is a person who balances the left brain and the right brain. All of us could learn from her,” said her close friend Elliot Schrage, who lost an ally in his ongoing efforts to persuade the engineers to think more broadly. Schrage soon followed Sandberg, accepting a position at Facebook similar at first to the one he’d held at Google. (Months later, he was also put in charge of overseeing Facebook’s relations with outside developers.)

Sandberg’s departure was jarring. Her move drew attention to Facebook, the new rocket, and highlighted the strained adolescence of Google. It brought some sadness as well, for Sandberg was popular, and not just among Googlers. When media executives like Donald Graham, CEO of the Washington Post Company, or Arthur Sulzberger, Jr., of the New York Times Company visited Google, they often separately went to her home in Atherton for cocktails or dinner with Sandberg and her husband, David Goldberg. Before she left Google, Graham tried to hire her for a senior position at his company. She was the friendly face at Google that some traditional media company executives trusted enough to let their hair down and ask: How can Google help my troubled business?

Google executives were stumped as to why Sandberg would take the job at Facebook. She wasn’t given the same broad responsibilities as most COOs: vital parts of Facebook-product management and development, engineering, and finance-would continue to report to founder Mark Zuckerberg. And they didn’t understand why she would leave for a company that, according to one Facebook insider, had generated only $150 million in revenues in 2007 and was bleeding money.

Google was already anxious about Facebook, and Sandberg’s defection elevated their discomfort. True, Facebook wasn’t making money, but neither had Google in its first four years. Facebook had 123 million unique visitors in May 2008, according to comScore, a 162 percent increase over the previous May. For the first time, Facebook had passed its rival, MySpace. Also making Google anxious was Facebook’s alliance with Microsoft, which owns 1.5 percent of the social network site and sells its advertising. Microsoft was coming after Google, aggressively allying with traditional media companies-agreeing, for instance, to sell online advertising for Viacom, to license and display its television and movie products on its MSN and Xbox 360 platforms, and expending half a billion dollars to advertise on Viacom platforms.

Google and Facebook were not yet joined in battle, observed Marc Andreessen, who joined the Facebook board in the summer of 2008, but they were engaged “in a little shadow boxing.” Mindful of his experience at Netscape, he said he believed that Google and Microsoft had already fallen into the trap of becoming obsessed with what each was doing. Of Facebook and Google, he said, “It would be a mistake for either company to rush to compete too quickly. The danger there is that you orient your strategy to what others are doing. Then the press wants to write a conflict story: Google versus Facebook.”

ALTHOUGH ITS FINANCIAL PERFORMANCE was sterling, the first quarter of 2008 was the winter of Google’s discontent. The company was becoming more defensive. It was under attack for its privacy and China policies, for its growing dominance in search, for its perceived threat to copyright owners, for its disruption of such traditional businesses as advertising, for its efforts to muscle into the mobile telephone business. The government was peering over its shoulder. Like other giant corporations, Google’s power, and sometimes its behavior, threatens to sabotage its trusted brand. A Microsoft executive, clearly enjoying the rain of criticism falling on Google, candidly observed, “People dislike Google for the same reason they disliked us: arrogance.” A major difference between the two is that while Microsoft’s dominant operating system was difficult to avoid, people can escape Google with a single click of a mouse.

Microsoft’s engineering culture, like Google‘s, had missed the warning signals that its actions had aroused the government bear. And Microsoft, like Google, truly believed it was advancing the public good. Microsoft’s Internet Explorer was, after all, given away for free. A single dominant operating system meant that PCs could more easily communicate with one another, as Microsoft liked to say. Both companies were capable of being blinded by righteousness-the flip side of hubris. Unlike Microsoft, Google was managed more chaotically.

The smart question asked of Google was the one Adam Lashinsky of Fortune posed in early 2007: “Is Google’s culture great because its stock is doing well, or is its stock doing well because its culture is great?”

WHAT WASN’T AT QUESTION was Google’s success. Measuring it by growth, profits, and market valuation, it’s difficult to claim that Google’s management has not worked. And a reason it has worked, so far at least, is that it is, in the words of Google director Ram Shriram, “controlled chaos-meaning that there is some method to the madness. If you have too much structure, you have less innovation.” Instead of describing Google management as chaotic, Brin said, “I’d prefer ‘less structured.”’ He cited Google’s youth as a partial explanation: “We’re only in this business ten years.”

Former vice president Al Gore recounted a private conversation he had with Brin and Page several years ago in the boardroom near their office. Gore worried aloud whether Google was maintaining its focus on potential new search threats and continuing to prosecute its technological lead in search. “They had to go to another meeting,” Gore recalled, “and said, ‘If you can stay, Al, we’d like to bring in the engineers and scientists in charge of this part of the business.’ Ten of them came into the boardroom. Larry and Sergey left. I spent another three hours. And then when it was over, I gave Larry and Sergey an oral report.”

Four weeks later, Gore said, laughing, “I went up to their office and found that all ten of these people had been moved in. All ten of them!” He described how Page and Brin had to cram twelve computer monitors into the glassed two-story office, and “move around some of their toys-a remote control helicopter, flying messenger boards, whatever the latest new supercool toy is.” These ten people stayed-“until they satisfied themselves that they had an ongoing system for maintaining hypervigilance in the organization on the continuing innovation necessary to make sure they were always at the cutting edge of the highest quality search experience available on the Internet… I defy you to think of any other executives in the world who would have a team like that into their personal office for weeks on end.”

Gore may have been a prod, but the execution of innovation at Google is due to the focused passion Brin and Page bring to Google. Barry Diller, who had that unsettling session with Page and Brin in the early days of Google, when Page would not look up from his PDA to talk to him, now thinks what might be construed as rudeness was really focus. “They had their own method of communicating and processing,” Diller said. “They give much less quarter than other people do to common business courtesies. They’ve stayed true to this. It’s a spectacular strength. It means you never get defocused by the crowd.” At Google the focus is on the engineer is king culture Brin and Page had the precocity to impose.

True to its open-sourced, wisdom-of-the-crowd ideals, Google has created a networked management. It is bottom-up as well as top-down management, and it unleashes ideas and effort. “There is a pattern in companies,” Page explained, “even in technological companies, that the people who do the work-the engineers, the programmers, the foot soldiers, if you will-typically get rolled over by the management. Typically, the management isn’t very technical. I think that’s a very bad thing. If you’re a programmer or an engineer or computer scientist and you have someone tell you what to do who is really not very good at what you do, they tell you the wrong things. And you sort of end up building the wrong things; you end up kind of demoralized. You want to have a culture where the people who are doing the work, the scientists and the engineers, are empowered. And that they are managed by people who deeply understand what they are doing. That’s not typically the case.”

CHAPTER TWELVE. Is “Old” Media Drowning?

(2008)

On a sunny July afternoon in Sun Valley, three friends who had competed and cooperated for a quarter century-Robert Iger, the CEO of Disney; Les Moonves, the CEO of CBS; and Peter Chernin, the COO of News Corporation-gathered for sodas. They sat beside a tranquil pond, but their world was not serene. By the summer of 2008, the economy had started its swoon. The shrinking of the audience for their broadcast networks and TV stations had accelerated. Their stock prices were getting mauled. “At least we’ve had a good run,” Chernin said, half joking.

“Yeah,” Iger replied with a laugh, “but I feel like we’ve gotten to the orgy and all the women have left!”

“We sound like three old men sitting in Miami Beach with blankets over our legs!” Moonves cracked.

The network and station business was once much easier. “The era when I worked at ABC was fantastic,” recalled Michael Eisner, who was a program executive at the network before leaving to become CEO of Disney in the early eighties. “There were three networks, and all I had to worry about was ‘Did we have a good show?’ Even if we had a bad show, we did OK.”

What does it feel like to be a media executive navigating these swiftly churning waters? Before he became CEO of Sony, Sir Howard Stringer spent much of his life in traditional media, starting as a researcher for CBS News and becoming an award-winning news producer, president of CBS News, and president of CBS Broadcasting. Today, seated in the Sony dining room in New York, he said, “If you read every piece in every newspaper and magazine about new technology, you would walk into the East River! There are so many options out there, simultaneously, that it’s a dizzying experience. For every time you see an opportunity, you also see a threat. Every time you see a threat, you see an opportunity. Or if you see a threat, you’re afraid you’re missing an opportunity. That’s the one-two punch of the technological marathon we’re all in. You worry about missing a trend. You worry about not spotting a trend. You worry about a trend passing you by. You worry about a trend taking you into a cul-de-sac. It means that any CEO or senior executives of a company have to induce themselves to have a calm they don’t feel, in order to be rational in the face of this onslaught.”

Sony, like others, had reason to fret about missed trends. Before Stringer was CEO, the company that in 1979 had introduced the Sony Walkman was being challenged in 2001 by a stylish upstart, Apple’s iPod. By 2003 Apple’s iTunes offered singles that could be downloaded simply and for just ninety-nine cents, hampering the sale of albums by record companies like Sony. Although the Walkman was still the dominant portable music player in 2003, the iPod was gaining. I asked then CEO Nobuyuki Idei, are you worried about the iPod?

No, he replied, dismissing the question like a man brushing lint off his jacket. Sony and Dell know manufacturing. Apple does not. Within a couple of years, Apple will be out of the music business.

Probably no other traditional media business has been so disrupted by the digital wave as has music. And none was slower to respond to the challenge. Music companies like Sony gave an incentive to digital pirates by insisting that their customers buy entire albums rather than allowing them to purchase individual songs. The music companies failed to understand that technology awarded power to consumers to mix and choose their own music, failed to strike an accommodation with Napster and other music download sites, failed to create a digital jukebox like iTunes, failed to enter the lucrative concert business for their artists, failed to start a TV platform like MTV Edgar M. Bronfman, Jr., the CEO of the Warner Music Group, said, “It’s fair to say we didn’t get it”-meaning the digital revolution. “But I’m not sure what we could have done.” He added, “The record business is in trouble. The music business is not.” He believes the music companies were murdered by technological forces beyond their control. In fact, they committed suicide by neglect.

A glance at the record company business suggests the depth of its travails. Into the nineties, best selling albums sold at least 15 million copies, said Jeffrey Cole of the Annenberg School ’s Center for the Digital Future at the University of Southern California. In 2007, the top-selling album registered only 3.7 million sales. People are listening to more music, but paying much less. Some performers, such as Madonna, bypass traditional music companies altogether. Following the predigital model of the Grateful Dead, who built their audience by encouraging fans to tape their performances, acts like Coldplay made single songs available for free over the Internet. (When released, Coldplay’s album Death and All His Friends shot to number one.) In 2007, worldwide digital music sales rose to 15 percent of all music sold, up from less than 1 percent in 2003. Yet this rise could not compensate for the decline of more expensive compact disc sales, which fell 10 percent that year. Music companies were in the business of selling albums, and since their sales peak in 2000 of nearly 800 million, album sales in 2007 plunged to just over 500 million. This helps explain why music company revenues have dropped significantly from $14.2 billion in 2000 and will dive to $9 billion by 2012, according to Forrester Research.

In one sense, newspapers share this dilemma. Most newspapers enjoy healthier profit margins than music companies, but these are shrinking. Investors punish their stocks because, compared with a Google or Apple, newspapers have dismal growth prospects. The speed with which the world of newspapering has changed was captured in interviews conducted by the Los Angeles Times Magazine with six former editors of the Los Angeles Times newspaper. William F. Thomas, the editor from 1971 to 1989, suggested that the so-called good old days were akin to what was commonplace at Google: “I never experienced any real restraints on anything we wanted to do for budget reasons… The only limit I recall was when they started enforcing a no-first-class rule.” By the time John S. Carroll took the helm in 2000, the newspaper’s corporate owners were seen as predators, people who understood math but not journalism, and Carroll, like his two successors, chose to quit in 2005 rather than obey directives from Chicago. With the benefit of hindsight, this fine editor blamed not just his former bosses, but himself as well. Carroll told the magazine that, like most editors, he was preoccupied with the fireman’s part of his job, answering news alarms, covering and editing daily stories. “If I had it to do over again, I might have taken some time off and tried to figure out where the Web was going and tried to do something about it.” This mistake-not to treat the arrival of the Internet with urgency, not to pour resources into a vibrant online newspaper-was one that most of his peers made as well.

In 2007, newspaper advertising, which accounts for about 80 percent of most U.S. newspaper revenue, fell 9.4 percent, according to the Newspaper Association of America. Adjusted for inflation, ad revenues were 20 percent lower than in their peak year, 2000. Circulation had dropped about 2 percent each year after 2003, and some papers, including the Los Angeles Times and the Boston Globe, lost about a third of their circulation in those years. The falloff in both advertising and newspaper sales would accelerate as more readers went online to sites like Google, Yahoo News, the Huffington Post, or Gawker.

The flight of advertisers from magazines was usually not nearly as severe, in part because advertisers believed they got more value from glossy, picture-filled pages. But even before the 2008 recession leveled magazines, many had slipped. Business magazines, said Time Inc. editor in chief John Huey, were battered by a severe drop in auto and tech advertising. Conde Nast would feel compelled to close Portfolio magazine in early 2009 and just months later Business Week was put up for sale. And the weekly news magazines, whose pages age rapidly in a time of instant news, were so bereft of advertising as to appear anorexic. U.S. News World Report at first announced that it would switch from a weekly to a biweekly publication schedule, then within months retreated further, saying it would only publish monthly.

It is true that if we add Web site visitors, newspapers and magazines had a net increase in readers. Twenty million unique visitors came each month in early 2008 to the largest newspaper Web site, the New York Times. The rub is that because the online audience pays less attention to ads and spends less time with an online newspaper, advertisers only pay 5 to 10 percent of what they do for the same ad in a newspaper. According to Jim Kennedy, vice president and director of strategic planning for the Associated Press, newspaper revenues in 2007 totaled sixty billion dollars, with online revenues accounting for only four billion of this total. Theoretically, a newspaper that abandoned print to publish online could save 60 to 80 percent of its overall costs, having done away with the expense of paper, printing, and distribution. To date, however, with the exception of the Wall Street Journal and the Financial Times, few if any daily newspapers have succeeded by charging for online subscriptions. With online newspapers generating minute advertising and zero circulation revenues-and with younger readers migrating online and exhibiting less loyalty to a particular news brand-newspapers that attempted to publish only online would undoubtably subtract more revenue than they would add.

Hemmed in, the print press in 2008 engaged in a blizzard of cost cutting. Newsweek shed two hundred jobs, Time Inc. six hundred; the San Jose Mercury News cleaved two hundred newsroom employees. The headcount at the world’s best newspaper, the New York Times, dropped almost 4 percent in a single year, and the McClatchy chain, which historically prided itself on its no-layoff policy, began laying off employees in September and by the spring of 2009 had reduced its workforce by 25 percent. After years of patching and pasting to get by, newspapers seemed to be in free fall. The Tribune Company cut five hundred weekly news pages in its papers and laid off employees, then filed for bankruptcy. The Philadelphia Inquirer and the Philadelphia Daily News would soon follow, as would others. The New York Times Company, with a bulge of debt payments due in the spring of 2009, sought a second mortgage on its headquarters building and accepted a $250 million loan at an inflated interest rate of 14 percent from Mexican billionaire Carlos Slim. The Christian Science Monitor shut down its daily print edition and went online, as would the Seattle Post-Intelligencer. Gannett, the nation’s largest newspaper publisher with eighty-five dailies, watched its stock price drop 87 percent in a twelve-month period.

Not everyone in the news businesses was on a starvation diet. Three wire services-the AP, Reuters, and Bloomberg-defied the industry trend. There were several reasons for this. The bleak economic climate for newspapers, ironically, benefited the wire services. As newspapers contracted, they outsourced more of their news gathering to the wire services. (“The cold our customers caught,” said Thomson Reuters CEO, Thomas Glocer, “has been good for Reuters-unless the patient dies! That would be bad for Reuters.”) And unlike most newspapers, the wire services moved early to tap new sources of revenue. The AP, according to its CEO, Tom Curley, “gets about 20 percent of our revenues from digital sources.” The AP’s 2008 revenues totaled $750 million, which means digital sources-Google News and Yahoo and advertising from newspaper and broadcast links and other customers-generated about $150 million. And broadcasting revenues were even larger. More than half the AP’s worldwide revenues now came not from the fees newspapers paid but from its broadcast and online operations.

Bloomberg and Reuters, for their part, were sitting on data-generating gold mines. Bloomberg, like Reuters long before it merged with Thomson, started as a collector and provider of financial data; essentially, it was in the service business, not the news business. The value of this business is demonstrated by contrasting two business transactions. In 2007, when Rupert Murdoch acquired Dow Jones, parent of the Wall Street Journal (and former owner of Telerate, a data business it failed to invest in and eventually sold), he paid five billion dollars. In 2008, when Merrill Lynch sold its 20 percent ownership in Bloomberg, the company was valued at a whopping twenty-two billion dollars. Both Bloomberg and Thomson Reuters tapped a rich revenue source from the terminals they rented to companies, and with readers hungry for business information from around the world, they expanded into news. According to Thomas Glocer, by 2008, Reuters had 2,600 reporters, and six hundred broadcast outlets as customers for its video news service; its profit margins topped 20 percent. Unlike newspapers, the three wire services were publishers who did not have the expense of paper, printing presses, or distribution.

On stage at the Dow JoneslJournal’s annual All Things Digital Conference in San Diego in May 2008, Murdoch noted that newspapers had lost 10 to 30 percent of their revenues and almost all were engaged in a frenzy of cost cutting. He said he saw this as an opportunity, and would pour more resources into the Journal, aiming to siphon general and business readers from the Times and the Financial Times. The jury was out as to whether by going after general readers of the Times he would over the long run chase business readers from the Journal, but to date his strategy has been a modest success. Comparing the Journal’s circulation in the six months ending March 2009 versus the same period ending in March 2008, the Audit Bureau of Circulations reported that the Journal was the only one of the top twenty-five newspapers to gain (just under 1 percent) circulation.

Murdoch was well aware of the newspaper industry’s plight. Some newspapers, he said, “will disappear.” As more news is aggregated online, it weakens the value of a newspaper brand. “What really is going on underneath this news aggregation,” said Tad Smith, CEO of Reed Business Information, “is that for journalism the return on investment for going out and hiring other journalists is negative. What that means is that Google has created an environment where the way to make money in the media world is with OPC: other people’s content.” Smith experienced firsthand the plight of print publications when his parent company put his division up for sale in 2008 and was unable to find a buyer to pay what it considered a fair price. They took Smith’s division off the market.

Eric Schmidt bridled at the suggestion that Google was somehow the fall guy for an Internet that had inevitably changed the rules of the game. “There is a systematic change going on in how people spend their time,” he said. “I think it’s important that Google understand that we are one of the companies that is making that happen. It’s very important that we be polite about it, and not be arrogant or obnoxious, because there is real damage being done. But also, our rationale is that it’s the end users who are choosing this. This is not a concerted effort by us to do anything other than adapt to the way end users behave. If looked at that way, we have a shared problem. We need newspapers’ content. And it’s critically important that they continue.” When users do a Google search or come to Google News and click on a newspaper story, he said, they are taken to that paper’s Web site, which increases its traffic and its ability to sell more online ads. Schmidt and newspaper proprietors have no illusions that Google can magically restore the economic vitality of newspapers. Google rubbed salt in the wound, however, when after seven years of being ad free, Google News in 2009 for the first time started accepting small text ads, triggering renewed newspaper complaints that Google was enriching itself on their content.

Book publishing “is in so much better shape than the music industry or certainly the newspaper or magazine industry,” said Authors Guild executive director Paul Aiken. He thinks the physical format of a book-and therefore the publishing business model-is not as easily altered. Nor is book publishing dependent on fickle advertisers, as are newspapers and magazines. But when asked if he was an optimist about the future of books, Aiken paused before candidly responding, “Sometimes.”

The reasons to be wary are many. Book sales were relatively flat in 2007, reaching $3.13 billion in the United States, a rise of less than 1 percent from the previous year. And according to a 2007 study by the National Endowment for the Arts (NEA), when adjusted for inflation, money spent to purchase books “has fallen dramatically.” Publishers rarely say aloud what this study suggested: books are losing younger readers. “Nearly half of all Americans ages 18 to 24 read no books for pleasure,” the study found, and the percentage of those 18 to 44 who read books was sliding. It is true that the following year, 2008, the NEA reported a modest increase in reading. But if one asked publishers, or educators, whether they had high hopes for the expansion of book reading, few would say yes. Publishers also fretted about whether Google Books would bring them the same piracy woes that bedevil music and movies; about the disappearance of independent bookstores and the squeeze on their profits from big distributors like Amazon and Barnes amp; Noble; about publishing houses’ increasing dependence on blockbusters, making it harder for them to justify publishing so-called midlist books that often make editors proud but lose money; about the folks who sign their checks but who often treat publishing as just another business and not an endeavor that can replenish the culture. That one day books would be printed on demand or that online book sellers could reach into the long tail and resuscitate books that were no longer in print was a distant shore to most book publishers in late 2008, when they imposed layoffs akin to those at newspapers. One publisher, Houghton Mifflin Harcourt, followed its round of layoffs by announcing that it would temporarily suspend the acquisition of new books.

Broadcast radio, with the notable exceptions of sports and talk radio, was also losing altitude in 2008; revenues began a steady decline in 2006, which has since accelerated. Les Moonves announced in July 2008 that he was selling fifty of his Infinity Broadcasting’s smaller-market stations. With his CBS stock hammered by investors who saw no growth prospects in the saturated radio market, he said he would sell his entire station group for the proper price, which he cannot get. Similar maladies afflicted satellite radio. Even with nearly twenty million customers and a merger between the two satellite services, Karmazin’s Sirius XM Radio, burdened by huge programming and satellite and debt costs-and by the emergence of new digital competitors that allowed consumers to program playlists for themselves-teetered near insolvency. All of radio is besieged by too many ads and too many choices-from Internet radio to podcasts to iPods to MP3 players-that siphon off listeners because they empower them to become their own disc jockeys.

Traditional advertising companies were growing, but only because they were no longer focused exclusively on creating advertising and selling it. They had merged and morphed into four worldwide marketing conglomerates-the WPP Group, the Omnicom Group, the Interpublic Group, and Publicis-with public relations and marketing and direct mail and polling and research and lobbying and political consulting divisions. Ad spending in the United States grew an average of about 5 percent from 1963 to 2007, peaking at $162.1 billion in 2008, according to Gotlieb’s GroupM. This was about 36 percent of the estimated $445 billion spent globally on advertising. Yet ad spending was less than half of what was spent on what is euphemistically now called “marketing.” A media campaign no longer consisted of buying ads on the three networks and a few other places; now a campaign might combine ads on TV and in magazines, a viral effort online, search ads, in-store sales promotions, telemarketing, polling, public relations-all of which was more expensive. The increased expense, and spending, spurred media buying agencies to merge into su peragencies, such as Irwin Gotlieb’s Group M. These media buyers now had enormous clout, which they exercised over traditional media companies that relied on advertising.

While advertising in most traditional media was declining or growing incrementally, online advertising was soaring. The advantage enjoyed by digital media is transparency. The client (advertiser) knows more about the audience, more about who actually responds to the advertisement. Marketing thus becomes less opaque, robbing ad agencies and sellers of their ability to sell what Mel Karmazin called “the sizzle.” This is a primary reason online advertising jumped 30 percent each year, topping twenty-three billion dollars in 2008. This transparency and the additional supply of media outlets, as well as a suspicion that advertising and media agencies had not sufficiently adjusted their fees downward, shifted leverage to the true buyer, the client.

Seeking to surf the Internet wave, companies like WPP bid aggressively to acquire digital advertising and marketing companies. They and others invested in digital advertising exchanges like Spot Runner, which creates an online dashboard of local media platforms on which small businesses advertise, and offers a roster of prefab commercials that can be cheaply customized. Want to buy a thirty-second TV spot in Santa Barbara? Nick Grouf, the CEO of Spot Runner, said he can reach into “the long tail” of local media and purchase it for a mere twelve dollars. This makes television advertising accessible to small business-pizza parlors, pet stores, hair salons-that would previously have found it unimaginable. “We told local businesses this and their jaws dropped,” said Grouf. “We’re democratizing the business, opening it up to small business.” By selling ad space once seen as undesirable, the digital technologies that allow advertising exchanges, such as Google’s AdWords and AdSense, shake the advertising business to its core.

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.

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.

CHAPTER THIRTEEN. Compete or Collaborate?

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.”

Microsoft was unaccustomed to losing. The ever-competitive Ballmer, a Microsoft adviser admitted, was filled with “jealousy” and rage that Google was doing what Netscape had done a decade before, not merely challenging but “mooning the giant.” Jealousy and rage are not the sturdiest foundations for rational decision making.

Microsoft seemed to affect Google’s testosterone level as well. Sergey Brin told the Associated Press that Microsoft’s takeover bid was “unnerving.” It would grant Microsoft near-monopoly power, not just over operating systems and browsers but would also “tie up the top Web sites, and could be used to manipulate stuff in various ways.” Eric Schmidt insisted that he believes in sitting down and talking to everyone. But did this include Microsoft? Reflecting a professional lifetime of being on the other side of the Redmond giant, Schmidt said, “If Microsoft wanted to do a business deal with us, we’d do it. You betcha. But we’d bring a tape recorder!”

Jitters aside, Google would find a way to gain advantage from the Yahoo-Microsoft melee, but not without getting bloodied itself. The company’s Executive Committee and Board of Directors held meetings to devise a blocking strategy. They discussed petitioning the Justice Department to obstruct the merger, using the same antitrust arguments Microsoft had employed to try to stop Google from acquiring DoubleClick. They wrestled with whether to make their own bid for Yahoo, but decided it would be difficult to integrate two large companies with different cultures and assumed, in any case, that the government would disallow on antitrust grounds a merger of the two dominant search engines. They reached out to Jerry Yang and in the spring jointly devised a roadblock strategy; they announced that Google would become the selling agent for a large portion of Yahoo’s search ads. “It gives them a tool to avoid being swallowed by Microsoft,” Eric Schmidt said at the time. Asked in September 2008 what was the most important Google event of the previous six months, Schmidt said, “the Yahoo business deal… It was a setback for Microsoft.”

Google’s effort to have the Justice Department block Microsoft’s bid for Yahoo brought to mind Ralph Waldo Emerson’s delicious observation that “a foolish consistency is the hobgoblin of little minds.” Like other corporations, Google and Microsoft extol the virtues of government’s leaving them unfettered, free to innovate-except when they call on government to intervene in order for them to gain a competitive advantage. But antitrust concerns were a real issue for others. The Association of National Advertisers, which represents major companies such as Procter amp; Gamble, petitioned Justice to block a Google/Yahoo alliance. The World Association of Newspapers, which represents eighteen thousand newspapers, urged both the Justice Department and the European Union to block the deal. This opposition unnerved Page and Brin. According to a member of Google’s senior management team, the idea that Justice was more concerned about Google’s becoming a monopoly than Microsoft provoked an uncomfortable discussion at a September 2008 executive committee meeting. The founders, this executive said, were “very upset” to be compared with Gates’s “evil empire.” They ranted about how Google was making the Web more accessible, not trying to kill competition. That the government could think they were trying to squelch search competition, or might possess too much leverage over advertisers, baffled them. They could not comprehend the anti-Google sentiment that was building.

This executive committee meeting coincided with the annual Google Zeitgeist press luncheon, and there I asked Brin and Page, “How do you feel when people accuse you of potentially doing evil?”

Not surprisingly, they didn’t really answer my question. “If you look at our products, search being our most popular one,” Brin said, “we don’t lock anyone into search.”

“The value to the world,” said Page, “of having access to everything for free everywhere, all the time, really fast, without degraded service anywhere, has really been a tremendous thing.”

A decade earlier, Bill Gates had felt similarly hurt that the government would call his motives into question by filing charges that Microsoft, which provided 95 percent of PC operating systems in America, was a monopoly. This blind spot to public fears, to emotion, prevented Gates from properly reading people, from anticipating the challenges that would materialize in Washington. Now Page and Brin seemed to have the same blind spot.

This emotional opaqueness was on display on the second day of the 2008 Zeitgeist. Al Gore was to conclude the conference by interviewing Page and Brin. The three men chatted on stage for a few minutes when Page interrupted to say that Brin wanted ten minutes to share something. Brin stepped to a microphone and riveted the audience for about ten minutes with a precise, impersonal account of his mother’s recent diagnosis of Parkinson’s disease. He explained that his wife, Anne Wojcicki, had cofounded 23andMe to study genetics, including the genetics of Parkinson’s. He said the evidence of a genetic link to Parkinson’s was at first slight, but studies had recently unearthed one gene, LRRK2, in particular a mutation known as G2019S, that in some ethnic groups creates a familial link through which the disease travels.

Brin said he had dug deeper, reading genetics journals, searching for pieces of DNA shared with relatives. Ultimately, he learned that he shared with his mother the G2019S mutation. He spoke as if he were talking about someone else. The implications of this finding are imprecisely understood, he said. What was clear was that he had “a markedly higher chance of developing Parkinson’s in my lifetime than the average person.” Sounding like a scientist, he pegged the odds “between 20 percent to 80 percent, depending on the study and how you measure it.” This knowledge left him feeling “fortunate,” he said; the mutation had been discovered early in his life and he could reduce the odds through exercise, certain foods, and by employing his substantial wealth to support further research. With the audience seated in stunned silence, he concluded, “That’s all I wanted to say,” and sat down.

Compared with Steve Jobs, who had declined to discuss his own health and issued opague statements even as he grew visibly ill, Brin was admirably forthcoming. Yet it never seemed to occur to him to turn his attention to introducing to the audience his very pregnant, beaming wife, soon-to-be mother of a child who might very well carry that same gene. Certainly it did not seem to occur to him to display emotion, to allay the concerns his comments would arouse among Google employees or shareholders. What was billed as “a personal statement” was really a science lesson. The way Brin dealt with his DNA mirrored the way Google dealt with Washington, politics, or traditional media: just give us the facts, don’t blur them by discussing your fears or feelings.

The Justice Department did finally intervene against Google, informing the company that if it did not terminate its ad sales partnership with Yahoo, it would be sued for antitrust violations, just as Microsoft had been the previous decade. Three hours before Justice was to file antitrust charges, Google dropped the deal.

Microsoft did not capture its prize, at least not through 2008. However, by the end of that year Microsoft seemed eager to return to the bargaining table, if only to purchase Yahoo’s search business. Gates’s company continued to lose search market share, and emerged from this battle with Yahoo looking feckless and defensive, not the posture one assumes before a foe with Napoleonic power.

In the confusion, other media companies maneuvered to achieve their own best balance of power. In tactics worthy of Metternich, Time Warner pursued simultaneous discussions with Yahoo, Microsoft, and Google about either selling off AOL or forming a partnership. The News Corporation schemed to combine with Microsoft to bid for Yahoo and, at other times, with Yahoo to block Microsoft.

Among the more interesting aspects of this drama was witnessing Microsoft cheered on as an underdog. “Microsoft,” said Philippe Daumann, the CEO of Viacom, “is the one company that can most effectively challenge Google’s emerging dominance.” A victorious bid by Microsoft would provide advertisers with more leverage, Irwin Gotlieb said. “We’re always better off with more than one strong party.” He added, “The real concern is that once Google has an eighty percent market share, they can change the auction rules.”

At Microsoft’s annual two-day forum for advertisers on its Redmond campus in mid-May of 2008, the company’s new head of advertising, Brian McAndrews, was the first to speak. He described the online advertising opportunities Microsoft was offering, and sketched for attendees Microsoft’s pitch to advertisers: “We seek ongoing input from you.” He did not cite Google by name, but his meaning was clear: We seek to work with you as partners, and the other guy does not. On the final day of the forum, Irwin Gotlieb was eating scrambled eggs at a breakfast buffet, greeting people as they came by to shake his hand or lay a palm on his shoulder. Microsoft’s sales pitch, he told those who came to ask his thoughts, is not new. “They’ve been saying it for a while. Microsoft has never been perceived by people like us as someone who is looking to destabilize an existing business model because they feel like it.” They were not vying to enter the advertising business the way others were. He, too, did not invoke Google’s name, nor did he have to.

Microsoft intended to close the forum by presenting a new plan to overtake Google, a plan it privately touted as “a game changer.” Company executives took care to brief people like Gotlieb beforehand, seeking not just his input but his enthusiasm for a program they hoped would attract more advertisers, more purchases, and more searches. For the unveiling of this plan, Bill Gates, who would step down the next month from his day-to-day duties at Microsoft to concentrate on the work of his foundation, appeared on stage to announce what he called “a milestone.” He was tieless and jacketless, his sandy hair uncombed, and he stood at the foot of the amphithe ater and described the program they called Cashback. The idea was that Microsoft would offer a cash rebate to consumers who did their searches on Microsoft and clicked to purchase products from more than seven hundred merchants, including Barnes amp; Noble. In essence, Microsoft was offering a reward for consumers who used its search engine rather than Google’s. Yusuf Mehdi, senior vice president of strategic partnerships at Microsoft, helped shape Cashback and described it as “maybe a genius idea,” a program that would transform Microsoft into “the Robin Hood of the search business.” The initiative offered Google “two bad choices,” he said: duplicate Cashback and lose income, or don’t and lose market share.

Mehdi and Microsoft were spectacularly wrong. The program did not excite many of the ad agency people in attendance, partly because the Microsoft program already had a name in the advertising community: it was a rebate program. Perhaps it failed to excite because Microsoft didn’t come up with a catchy name and a finely tuned sales pitch-“geeks acting like marketers,” muttered one attendee. In the press too, Cashback failed to generate the headlines or excitement Microsoft anticipated. Still, the jury was out. “If consumers perceive that the search process on Google and Microsoft are the same,” predicted Sir Martin Sorrell, “what Microsoft is offering will be important.”

By November 2008, the verdict was in. Cashback had not boosted Microsoft’s search share. Google’s search market share in the United States had risen from 57.7 percent a year before to 64.1 percent. In September, when I asked Eric Schmidt about Cashback, he could not resist: “All attempts by Microsoft to give people back money they paid them is great!” By January 2009, the two executives who headed Microsoft’s advertising efforts, Brian McAndrews and Kevin Johnson, would depart.

Meanwhile, Sorrell, whose WPP steers an annual total of between five hundred million and eight hundred million dollars of his clients’ advertising dollars to Google, grew more agitated. What enraged him, he said on a panel at the Cannes International Advertising confab in June, was that Google was now reaching out and talking to his ad agency clients directly, something he claimed Google had vowed not to do. In WPP’s annual report, Sorrell noted that although WPP and the next three largest marketing companies combined had 50 percent more revenues than Google, their combined market value was 75 percent less. He expressed hope that Google was now working “to develop the constructive side of our relationship.”

Had he attended Google’s 2008 national sales conference, held June 11 and 12 at San Franciso’s Hilton Hotel, he would have been more alarmed. In the main ballroom, Eric Schmidt and Tim Armstrong were onstage. Below them sat a Google sales force of fifteen hundred people, one-third of whom had been hired in the past year. Why did Google need such an army of salespeople? “Because our customers must talk to someone at Google,” Schmidt said.

Many of these new Googlers were account executives, like the people who work for Sorrell or Gotlieb. And their mission, Schmidt emphasized in his remarks, was to share with advertisers the targeting techniques that made search advertising a rousing success. Online, he said, Google was pouring engineering resources into making itself the leader in display advertising on YouTube. In traditional television, he said, they started by “reaching into the long tail” and he expected that “over a five- to ten-year period… we’ll become a very significant player in traditional television because of our targeting. The same thing when you look at radio or print.” Consumers of traditional media, he continued, “are scared. They’re scared of what they’re reading in the paper. They’re scared about what’s happening in their company. You show up and you offer a new message, a message of hope, a message of change and opportunity.”

Page and Brin showed up unannounced, and Schmidt spontaneously invited them to join him onstage. The troika sat in oversized armchairs and had a lighthearted colloquy before turning to the audience for questions. The first two were from a sales manager named Seth Barron, and both concerned missing pieces in Google’s effort: “How do we make it easier for agencies to work with us?” he asked first. It was a question that would have pleased Sorrell. The second question would not: “What resources do we need to be able to effectively compete for deals and eventually do bigger and better deals with companies like the Procter amp; Gambles and Mars of this world?”

“Today,” said Schmidt, “we lack the tools. We’ve identified this as a big hole in our strategy, and we’re either going to build them or buy them.”

“The piece that is missing is production,” said Barron. “The creative execution, the operational execution-those are the factors where we stumble today, and where our competition has world class solutions.” Later, Schmidt said that the “competition” Barron referred to was Yahoo and Microsoft and display advertising. But these are not the companies that produce “world-class solutions” to the puzzles of advertising. The true answer is probably that Google’s real “competition” is WPP and GroupM and their peers-the biggest players in the business of advertising.

THERE ARE THOSE WHO ASSUME Google has a master plan for world conquest, as Napoleon did. By early 2008, it was not unusual to encounter a traditional media executive who at the end of an interview whispered, “Have you read Stephen Arnold’s study on what Google is really up to?” Stephen E. Arnold heads a consulting firm, Arnold Information Technology, and starting in 2002 he and a team of researchers spent five years digging into Google’s various patents, algorithms, and SEC filings. Then, for a hefty but undisclosed fee, he sold his voluminous report to various media companies. The title of the report, “Google Version 2.0: The Calculating Predator,” telegraphs Arnold’s stark conclusion:

Analyzing “the Google” in a deliberate and focused way, we find that while Google may have started out to “do no evil,” it has, to some, morphed from a friendly search engine into something more ominous. Googzilla, fueled by technical prowess, is now on the move.

Where is it moving? The gruff Arnold, who responded to a phone call but refused to speak on the record to anyone who was not paying him, in his book often drops the scientific method in favor of a more fevered tone. Conjuring a monster, he repeatedly refers to the company as “Googzilla,” and writes that “Google stalks a market… then strikes quickly and in a cold-blooded way.” Behind Google’s free food and volleyball games he sniffs a public relations scheme to “misdirect attention. Like a good magician, Google is able to get its audience of competitors and financial analysts to look one way” Meanwhile, “Googzilla is voracious, and it will consume companies presently unaware they are the equivalent of a free-range chicken burrito…”

Arnold and his researchers have uncovered enough information from their study of Google’s patents and algorithms to terrify media companies. As Wal-Mart reshaped retailing, Google, he believes, aims to become a digital Wal-Mart, an online shopping powerhouse that allows consumers to shop for the best price, an essential middleman that offers efficiency and data to advertisers, and shovels revenues to Web sites and services to merchants, including back-office computers that find the quickest and cheapest way to reroute their delivery trucks.

The world would have been better served if its leaders had been more paranoid in the 1930s; media companies would be better served if they were less paranoid and defensive today. If Google is destroying or weakening old business models, it is because the Internet inevitably destroys old ways of doing things, spurs “creative destruction.” This does not mean that Google is not ambitious to grow, and will not grow at the expense of others.

But the rewards, and the pain, are unavoidable. When Google Earth started displaying paintings from the Prado in Madrid, allowing users to zoom in and see the art as an up-close digital photo, it was giving many people access to art they would never see, granting them the time to study paintings that security guards in the bustling museum would never allow them. This was a wonderful opportunity to extend the public’s appreciation of great art. But perhaps we’ll learn that it wasn’t so wonderful for the museum’s box office. Just as the invention of the telephone crushed the telegraph, so motion pictures crippled vaudeville, television eclipsed radio, cable weakened broadcasting, and iTunes shattered CD music album sales. In some cases, new technologies brought new opportunities. The movie studios, after huffing about television, belatedly discovered a lucrative new platform to sell their movies. Exposure on YouTube has broadened the audience for Saturday Night Live. If advertisers can sell their ads more cheaply and better target them through Google, should they fret that they are harming Irwin Gotlieb’s business? What we don’t know is whether the new digital distribution systems will generate sufficient revenue to adequately pay content providers.

David L. Calhoun spent his career at General Electric, where he rose to vice chairman. He left to become chairman and CEO of The Nielsen Company in 2006. When Calhoun joined, Nielsen had long dominated the audience measurement field but was facing a challenge from digital technology, including Google’s. He believes media company executives spend too much time wailing about disintermination. He prefers the word “reintermediate,” because it suggests a company more focused on offense than defense. The companies that “lean in,” he said, are those that embrace change; those who “lean out,” resist it. Companies that concentrate on defense “are frozen,” he said. “If Google’s looking at you, you look like an iceberg. And Google is looking at everybody.”

He does not impute sinister motives to Google, though he treats it like a frenemy: “I genuinely think they just want to empower the consumer. Anything that gets in the way, that blocks a perfectly efficient market, is fair game. If there is a moment they can do something to make the consumer more efficient, they will. And you should know that. But they don’t lie, they don’t cheat, they don’t give head fakes.” Calhoun seeks to collaborate with Google as well as compete, and in 2007 he entered into a partnership to work with Google TV Ads to provide the demographic data that digital set-top boxes do not now yield.

Of course Google is a frenemy to most media companies. Like all companies, Google wants to grow, and growth usually comes from taking a slice of someone else’s business. Because engineers excel at finding efficiencies in the digital world, Google can often offer a more cost-effective solution than companies less focused on engineering. And with 20 percent of their time to concoct new solutions, Google’s engineers are constantly dreaming up ideas-like the young engineer who entered Marissa Mayer’s office in the fall of 2008.

Mayer has one of the most important jobs at Google: to ensure that all Google products are simple and easy for users. She also has an almost photographic memory, the absolute trust of the founders, and joined Google when it was just a year old, so her memory becomes a virtual library of what has worked and what has not, what the founders would and would not want. Mayer sets aside regular open office hours to encourage Google engineers to stop in and describe the 20 percent projects they are working on; it is where they receive her encouragement, or discouragement. On that fall day, a young engineer sat beside her desk and described the device he was working on to search television digital video recorders. He wanted to know two things. Should he develop this as open-source software that others outside Google could tinker with and improve. (Yes.) Second, he needed clarification about something Larry Page had said when he broached the idea at an engineering meeting. Page, who like Brin doesn’t often watch television, expressed impatience with the idea of still another device in the home. Page told the engineer he was thinking too narrowly. The only useful device, he said, would be hardware or software that would allow Google to sell new forms of advertising on any device in the home, from DVRs to TVs to computers. The engineer came to Mayer’s office to better understand the thinking of the founders. The project was code-named Mosaic, and would let Google partner and share ad revenues with cable or telephone companies.

In Google’s way of looking at the world, she explained, any product that simplifies a task for consumers better delivers “the world’s information” to them. Which is another way of saying: Google engineers should imagine that search can be anything that makes a current system more efficient. Searching for a better way to display ads or a better advertising rate-or a better alternate energy source to reduce costs-are forms of search.

The answer is consonant with the Google culture. Understand this Google bias and you’ll better understand why it is a wave-generating company that other media companies ride, crash into, or are submerged by.

“I think they’re naive, not evil,” said CBS’s Quincy Smith. He said his friend Marc Andreessen thinks he’s naive to be so trusting. But Smith doesn’t subscribe to a conspiracy theory because “I don’t think anybody can be that smart.” Not that he’d allow Google to take over CBS’s ad sales function-“That would be letting the fox in the henhouse,” he said. However, having marinated in Silicon Valley for most of his professional life, Smith approaches Google as a potential partner, not adversary. He wants CBS to play offense. Pacing the floor of his new Menlo Park office, he said that media companies fail to understand that Google is a platform. “CBS has sixty-five thousand advertisers, and only fifteen thousand are core advertisers. Google has millions of advertisers.” By placing two- or three-minute clips on YouTube, CBS can sell advertising off those clips. Smith doesn’t believe Google is a content competitor. He does believe that the more CBS places its content on Internet platforms, “the less chance there is for piracy”; a two-minute CSI clip on YouTube watched by two million people is a fantastic way to enlarge CSFs audience. He is encouraged that CBS CEO Les Moonves wants CBS to play offense. Smith, however, was mindful that he was now a member of the broadcast fraternity-and presumably, though he didn’t say it, that his controlling shareholder was Sumner Redstone. “My objective is to be a little bit ahead of the pack, not a lot,” he said.

Eric Schmidt, who admitted in September 2007 that relations with traditional media companies were frosty, was more encouraged in September 2008. “The CBS deal is one” example of detente, he said. “We’ve done a series of deals. They are slowly happening.” Of course, he added, “it would be much better if I could point to a billion-dollar new revenue stream.” To try to calm advertising agency fears, Google established a forty-person team to visit agencies and assure them that Google was not a competitor, just another company that had products their clients would want to use and that could share valuable customer data with them.

To ease the fears of content providers, Google turned to David Eun, vice president of strategic partnerships. A soft-spoken man who displays few rough edges and who once served as a senior executive at Time Warner and NBC, Eun today supervises a staff of about two hundred employees out of New York. He and his partnership team made some deals for YouTube. HBO and Showtime agreed to run a handful of their full programs on YouTube, accompanied by ads; MGM licensed some of its movies, and music companies supplied videos. With a new antipiracy technology they called the Video Identification System (VID), YouTube has now archived the reference file numbers for companies’ content and set its computers to scan all uploaded material to determine whether numbers match. If they do, content companies are offered three choices: they can have YouTube take the clip down; let it run and monitor audience reaction; or sell ads against it, as CBS agreed to do in late 2008. David Eun pushed for the third option because he believes content companies, in addition to selling ads off this content, can collect valuable data. “The audience is telling you what they like,” he said. YouTube can monitor what content is uploaded and shared with friends, how much time users watch it, or what they click on. “These are like the presidents of your fan clubs. Would you arrest the president of your fan club?

“The headline here,” said Eun, “is that there has been a dramatic shift” in traditional media’s attitude toward YouTube. He singled out Quincy Smith as “one of the few people who seems to truly understand so-called new media versus traditional media.”

Eun made a larger point about how very different this new medium really is, how control has shifted to users. In the digital world, advertising is not locked into a time and space. Ads are interactive, allowing users to click to remove them from the screen or to fill the screen, to treat them as information and go deeper to learn more and make a purchase, or to forward the ad to a friend. “Traditional media was about bringing the audience to where you decided the content was going to be,” said Eun. Media companies would announce when a movie would open, a DVD would go on sale, a record would be released, a show would be scheduled on television, a book published. “It was about control. This is no criticism. That was the business. They created a huge, multibillion-dollar business. In this medium, the new media, it is not about bringing the audience to where the content is. It’s about taking the content to where the audiences are. And the audiences are all over the Web.” Not just YouTube but thousands of sites become potential platforms.

Because this is a very different model than traditional media is accustomed to, and because they have legitimate concerns about giving content away cheaply, “No one wants to be the first to jump into the pool, or be the last,” said a Google executive. The old media companies “are all clumped together. And if one breaks out-as Bob Iger did when he put Disney content on iTunes-then all follow. It is an industry that follows.”

Google did achieve a dramatic breakthrough when, in October 2008, it reached an accord with the U.S. publishing industry. The industry agreed to drop its lawsuit, subject to approval from the court; and Google agreed to pay $125 million to settle earlier copyright infringement claims, to reimburse publishers’ and authors’ legal fees, and to establish a system that will permit publishers and authors to register their books and receive a payment when these are used online. Individuals or institutions will be able to read up to 20 percent of out-of-print but copyrighted books, and either purchase digital copies or search them using Google, and publishers and authors will receive 63 percent of any sales or ad revenues, with Google taking the rest. Libraries will be able to display these digital copies for free; colleges and universities will, for a subscription fee, allow students to retrieve books online. Book titles still in print would be available to be purchased or searched, but only if approved by author and publisher. At the time of the agreement, Google Book Search had already scanned seven million of the estimated twenty million books that have ever been published. By winter, Brin said, Google was “able to search the full text of almost ten million books.”

There are two potentially momentous shifts here: First, Google had conceded it must pay for some content. And second, Google was not relying on a promise of advertising revenues to reach an agreement; rather, it agreed to an up-front compensation formula of a sort it had refused to make with other traditional media companies, with the exception of the Associated Press and some wire services. “It’s a new model for us,” admitted Google’s chief legal officer, David Drummond.

This new model was lavishly praised by authors and publishers, but it raised new questions. Was Google going to enter the online book-selling business, competing against an early investor, Amazon’s Jeff Bezos? With Microsoft dropping its book search project and no other deep-pocketed competitor jumping in, did the agreement concentrate too much informational power in the hands of a single company? Did Google have the right, as it claimed, to sell digital copies of books whose copyright had expired? If it is true-as the Internet Archive, a competitive book digitizer, claims-that the settlement grants Google immunity from copyright infringement, will the courts permit this? What of so-called orphaned books, those whose copyright owners can’t be identified-does Google, as it claims, get to own the digital rights? Will there be any regulation of the prices Google may charge libraries and colleges for access to digitized books? What will be the outcome of new lawsuits challenging this and other aspects of the settlement? And what impact would the publishing accord have on the Viacom lawsuit and Google’s dealings with other media companies seeking compensation for their content?

Viacom was quick to link the book copyright settlement with its own lawsuit. In a public statement released the same day, Viacom said: “It is unfortunate that the publishers had to spend years, and millions of dollars, for Google to honor that [copyright] principle. We hope that Google avoids the wasted effort and comes more quickly to respect movies and television programming.” Drummond insisted that his company has never favored free content and has not altered its posture: “There is a difference in wanting to push for access, and wanting to push for free access. There are some folks on the Web who think you should get access to copyrighted material for free. We don’t.” Fair use to Google, he said, was to create a card catalogue to open new sources of information-“allowing books to be discovered, not consumed.” The book settlement had no impact on the Viacom lawsuit, he added. “The litigation is in full swing.”

Why not offer Viacom compensation for their content, as Google has now done with publishers and did earlier with revenue guarantees to AOL and MySpace? Drummond does not oppose an up-front payment but wouldn’t agree to the amount Viacom sought. “A lot has to do with how much they want. They want a lot more, in my perception, than the monetization potential of the content.” Having guaranteed MySpace a total of $900 million in ad revenues over several years, and having fallen short of that guarantee, he said of guarantees, “We don’t do them as much as we did before.” By the end of 2008, however, Google acknowledged it had a total of $1.03 billion of “noncancelable” guaranteed minimum revenue share commitments through 2012. It was widely expected that Google would cancel, or curb, many of those agreements when the contract period expires.

Google at first said it was not in competition with Amazon to sell hard-cover copies, because most of the books they want to sell online are out of print. “We are unlocking access to millions and millions of books,” Drummond said. But of course, they could be in competition with Amazon-or any distributor-to sell electronic books. (In May 2009, Google announced it would compete to sell e-books.)

Might the book settlement apply to newspapers and open a vein of revenue for them? Drummond didn’t think so: “For news, it’s a little different. News has to be current. It doesn’t have the same shelf life as a book. We are thinking deeply about how to help. Now we send newspapers traffic.” He knows newspapers want more, but he said Google has found “no silver bullet yet.”

NOR, BY THE END OF 2008, had traditional media companies found the silver bullet. With some exceptions-the thriving worldwide game business being one-most media businesses seemed to be falling off a cliff. Their fall preceded the worldwide recession that struck like a category five hurricane in the last half of the year. The dismal headlines were not pretty.

By the end of 2008, daily newspaper ad revenues dropped 17.7 percent, about double the 9 percent decline of the previous year; average daily newspaper circulation among 395 dailies dropped 7.1 percent.

Magazine advertising pages plunged 11.7 percent in 2008, fell 26 percent in the first quarter of 2009, and were projected to fall 10.9 percent for the year.

The number of viewers tuning to prime-time network shows dropped almost 10 percent, and according to Nielsen, this figure includes viewers who later watch the shows on DVRs. Broadcast network television advertising fell 3.5 percent.

Broadcast radio advertising fell 9.4 percent.

Aside from Internet advertising, whose growth rate dipped in 2008 but still rose 10.6 percent, according to Nielsen the only medium to experience ad revenue growth in 2008 was cable television, rising 7.8 percent.

Record album sales dropped 14 percent.

The number of people going to movie theaters dipped, but thanks to an increase in ticket prices, box office revenues rose by 2 percent. DVD sales, which had been a revenue gusher, dipped to their lowest level in five years.

Book sales of about three billion books fell 2.8 percent, according to the Association of American Publishers (1.5 percent, according to the annual report from Book Industry Trends). And although electronic book sales climbed 7 percent to $113 million, this was a tiny percentage of the just over $11 billion generated by adult books.

Advertising spending in the United States was flat in 2008 at about $162 billion, and was projected by GroupM to fall by 8 percent in 2009. World wide advertising spending of about $450 billion grew just 1 percent in 2008 and was projected to fall by almost 7 percent in 2009, according to ZenithOptimedia, the media-buying arm of Publicis, the world’s fourth largest advertising/marketing company. Although estimates of ad spending differ, the other major firms predicted similar drop-offs. Total marketing spending-direct mail, event marketing, public relations, etcetera-dropped 1.7 percent in 2008.

In a December 2008 report, Morgan Stanley’s Mary Meeker produced a chart that should alarm traditional media. Titled “Media Time Spent vs. Ad Spend Out of Whack,” the chart reveals that advertising expenditures don’t conform to where consumers spend their time. Newspapers, for example, consume 8 percent of our time, yet receive 20 percent of advertising dollars. By comparison, the Internet garners 29 percent of our time, yet attracts just 8 percent of advertising dollars. At some point, those ad dollars will shift away from traditional media, probably dramatically. Whether or not one factors in the most severe recession to strike the United States since the thirties, change was slamming into traditional media with new ferocity. Unlike the fog in Carl Sandburg’s famous poem, it did not creep in “on little cat feet.”

CHAPTER FOURTEEN. Happy Birthday

(2008-2009)

In September 2008, Google was ten years old, which in Internet years virtually qualifies it for senior citizenship. Yet the company did not slow down and move on “little cat feet.” Announcements of fresh initiatives kept rolling out.

In the second half of the year, it was announced that the Google Content Network would employ its AdSense program to identify video-hosting Web sites and sell syndicated programs to them. The first show was a new animation series, Cartoon Cavalcade of Comedy, created by Seth MacFarlane, whose credits include Family Guy, a hit comedy show on Fox. There was Google Ad Planner, which provides advertisers with digital data free of charge to identify the Web sites their desired audience visits. There was the exchange of employees between Google and Procter amp; Gamble, with P amp;G saying it hoped to better understand how its present and future customers use the Internet and Google not saying that it hoped to snare a bigger slice of P amp;G’s $8.7 billion ad budget.

There was Google Maps for transit, an online navigation tool to allow riders to figure out subway routes in New York City and other metropolitan areas, and an announcement that Google News would pay to digitize newspaper archives, place ads next to the search results, and share any revenues with the publications. There was a new partnership with General Electric to improve the efficiency of the electric grid; new investments were made in renewable energy that would be cheaper, and cleaner, than coal.

Larry Page, usually parsimonious with his public appearances, mounted a campaign of speeches to persuade the FCC to set aside an unused block of the radio spectrum (known as white space) for wireless devices, including Wi-Fi and other high-speed wireless connections to the Internet. Broadcasters and Broadway theater owners protested that the use of that spectrum by these devices might interfere with broadcast signals and wireless microphones in theaters. The FCC voted 5 to 0 to open the spectrum. Google launched Knol, a searchable user-edited encyclopedia, to compete with Wikipedia; Google strayed still deeper into content by signing up Michael Davies, creator of Who Wants to Be a Millionaire, to produce an entertainment-news show called Poptub, to be distributed on YouTube and the Google Content Network.

David Calhoun of Nielsen said Google could no longer claim to be a digital Switzerland. “YouTube crossed the line by a mile. YouTube’s audience competes with other content.” If Google hopes to sell display advertising, as it does on YouTube, Terry Semel believes it will have to own content. User-generated content on YouTube “does not feel safe” to advertisers, he reasoned, and to lure ads Google will need to own attractive content in order to attract advertisers.

Eric Schmidt, when asked if Google had gone into the content business, split hairs, saying that YouTube and the Google Content Network were merely “hosts” of the content, “not authors.” This is akin to saying that ABC merely “hosts” the programs it chooses to pay for and air. Schmidt’s distinction ignores another salient fact: the more traffic his sites generate, the more data Google gets, and the more dollars it receives for its ads.

And what about Knol?

“Knol is an example of something right on the edge,” he conceded. (Not that Knol, which debuted in July 2008, posed a serious threat to Wikipedia. By the following January, it had just a hundred thousand entries and had relatively few page views.)

With all these new initiatives, the opportunity Schmidt was most excited about in late 2008 was cloud computing. It was an idea that had animated him since his days at Sun, when he promoted what was called “the network is the computer.” Now, he said, the shift from the PC to the Web was “the defining technological shift of our generation.” The excess capacity of Google’s data centers, and the variety of applications the company had developed-Gmail; Google Earth; Google Maps; Google Scholar; Google Finance; Google Product Search; Google Calendar; Google Desktop to search all text on a personal computer; Google Docs to do all word processing, spreadsheets, and presentations-offered Google enormous growth opportunities. “Eventually, this will be a very large source of revenue for our company,” he said, citing a professor in Africa who had told him his schools had no textbooks but as a substitute they used Google search. He was aware that South Korea, which has the world’s highest broadband penetration, was already eliminating textbooks and downloading books to laptops.

A Google-invented browser, dubbed Chrome, would provide access to all the applications. Because Google is not in the packaged software business, all of its applications live in the browser. With billions of people around the world on the Internet, increasingly a browser will become their operating system, the host for all applications. “Everything we do is running on the Web platform,” Page told reporters on the day Chrome was announced. “It’s very important to us that that works well.” When Brin, who arrived at the press conference wearing bright red Crocs, was asked whether Chrome was aimed at Microsoft, he said: “We don’t spend our time thinking about Microsoft.” In truth, Google couldn’t abide being dependent on Microsoft’s Internet Explorer, which then had a 72 percent browser market share. Schmidt described Chrome as “the most important product” Google launched in 2008. “The reason is that the browser, like our proposed Yahoo deal, has a defensive as well as an offensive component.” Defensively, he said Internet Explorer’s dominant position “allows Microsoft to make arbitrary extensions to the browser and close off the Internet”; Chrome would help Google defend against such a move. The offense comes from speed and flexibility. Schmidt maintains that Chrome is faster and, as an open-source browser, will encourage developers to compete to produce innovative applications. Chrome also grants Google “a platform on which to build better apps” and “to collect more data.” The data is important, for browsers produce the cookies that track what users do online. Despite its importance to Schmidt, by mid- 2009, the Chrome browser was still not available to Mac or Linux users.

Google introduced another major product-Android-in 2008. First announced in late 2007, Android was Google’s free, open-source operating system for smart phones. It promised new profits, and new conflicts. With three times as many mobile devices in the world as PCs, Google had ample incentive to jump into this market. They did not fail to notice when Steve Jobs stood up at Macworld in January 2008 and said that four million iPhones had been sold in the United States in the first six months, giving Apple a market share of 19 percent. Since the first 3G phones were sold in July 2008, over the next five months a total of nearly ten thousand applications-among them games and travel and book and finance and social network sites-had appeared for the phone, three quarters of them available to users only for a fee. Every day, Americans send 1.6 billion text messages on their mobile phones, and 10 percent of Verizon’s customers have replaced their wired telephone with a mobile phone, a number that CEO Ivan Seidenberg predicted would soon double. Because his customers use so many more services on a mobile device, including text messages and Internet access, the average monthly Verizon wireless bill is fifty-two dollars, about fifteen dollars more than the average landline bill. In the United States, AT amp;T and Verizon were each ringing up revenues of more than a hundred billion dollars in 2008.

If the Android phone (as with Microsoft’s Cashback, geeks are not always deft with names) sells well, Google will have some leverage over the telephone companies that sell the hardware and control distribution. And it would ensure that Google’s applications, including text and voice search, would be featured. The Android also opens up new frontiers for search; as Brin noted in the spring of 2009, “almost a third of all Google searches in Japan are coming from mobile devices.” Smart phones will yield more data for Google. And they will allow Google to explore ads or services on these devices to generate revenues.

Schmidt, however, was dubious about how Google would monetize Android: “I would love to argue that mobile is the next business for us. I’m not sure it is.” Among the reasons for his caution were that neither of the dominant phone companies was eager to jump into bed with Google. AT amp;T already had a deal with Apple, and Verizon was standoffish. “We’re watching it,” said Verizon’s Ivan Seidenberg, who added, “We said we’d be willing to consider something like that”-an open-source Android-but he said he was worried more about maintaining the quality of the Verizon system. “We want an open network where we can ensure quality,” he said.

“Google’s vision of Android is Microsoft’s vision of owning the operating system in every PC,” Seidenberg said. “Guys like me want to make sure that there is a distribution of platforms and devices. Is it in Google’s interest to disintermediate us? Yeah.” He let his voice trail off, not wanting to engage in verbal warfare. But he said his job is to “make sure we are never out-positioned,” never a “captive.” Neither Seidenberg’s power nor Schmidt’s skepticism deterred Google from plunging ahead. (In late 2008, T-Mobile ordered two million units in the hope that its Google-powered smart phone could rival iPhone.)

If mobile’s growth prospects are clear, the data questions are not. Do companies have the right to own, or share, data about their users? Who would own the data, the phone company or Google? Is there a privacy line they cannot cross? Many digital companies and advertisers agree with IAC/ InterActiveCorp CEO Barry Diller that privacy is overrated. “Privacy is a much noisier issue than it is for people,” he said. Of course, when it suited Diller’s interests to position his Ask.com search engine as superior to Google‘s, his company took out full-page advertisements declaring that its AskEraser would purge cookies of data and Google would not. But surveys suggest that the public disagrees with Diller. A March 2008 poll of one thousand Americans by TRUSTe, an organization that monitors privacy practices on the Web, found that 90 percent thought online privacy was a “really” or “somewhat” important issue, and only 28 percent said they were comfortable with behavioral targeting techniques. Even if the survey was flawed-surely the organization that conducted it had a rooting interest in the outcome-in this instance, Google seemed more attuned to the public’s feelings; in March 2009 the company announced that it would allow users to preview and edit the data it had gathered on them and would, as Yahoo has done, allow them to opt out. Because users are automatically opted in, and opting out requires that the user go through an esoteric process of clicks, Google’s announcement did not represent a major policy switch. Google demonstrated this when it was among the first major companies to announce that it would employ behavioral targeting, showing ads to users based on their prior activities online. The fact that Google would couple such a new transparency policy with its new behavioral targeting efforts is another reminder that privacy questions will continue to hover like a Predator drone, capable of firing a missile that can destroy the trust companies require to serve as trustees for personal data.

Alternatively, if the public is truly less concerned with privacy questions and more interested in trading data for, say, a subsidized service, or is more interested in the trivial, as the late scholar Neil Postman believed, then privacy will be the least of our issues. A former student of Marshall McLuhan‘s, Postman taught at NYU for more than four decades and authored a variety of important books, the best-known of which was Amusing Ourselves to Death. In that book he argued that the real threat was not the one described in 1984 but one contained in an earlier book, Aldous Huxley’s Brave New World.

Contrary to common belief even among the educated, Huxley and Orwell did not prophesy the same thing. Orwell warns that we will be overcome by an externally imposed oppression. But in Huxley’s vision, no Big Brother is required to deprive people of their autonomy, maturity and history. As he saw it, people will come to love their oppression, to adore the technologies that undo their capacities to think… Orwell feared those who would deprive us of information. Huxley feared those who would give us so much that we would be reduced to passivity and egoism.

This much is certain: neither concerns over privacy nor the issues raised by Postman have slowed the ascendance of smart phones. The attraction is undeniable. They are portable and perform varied functions, including playing movies, music, and games. They enable employees to work from more than one location. They can function just as a desktop or laptop does. They can serve as a key to unlock a car or as an ID at an airport or bank, or become a universal remote for a TV Third World countries that cannot afford a fiber infrastructure can build a low-cost wireless infrastructure that connects classrooms to libraries, individuals or health care facilities to medical expertise.

The question, of course, is how to monetize not just the hardware but also the services and applications. That’s where advertising comes in. Smart phones provide advertisers with precision targeting, reaching individuals they know are ready to purchase a car and are close to an auto dealer. Irwin Gotlieb, whose demeanor is normally subdued and steady, could barely contain his excitement as he sat in his office in the Garment District and described the Brave New World he envisioned. “It’s a totally different kind of advertising,” he said. “You’re in Tokyo. It’s noon. The population density is scary. You have forty-five minutes for lunch, and you go rushing out of your building and already there’s limited restaurant space. So you flip your phone open and up come six restaurants that have seating availability in the next ten minutes. You click on the restaurant you want to go to, telling them you need three seats, and the table is held for you. Is that advertising? Not the way you and I think of a thirty-second spot. But you better believe that restaurant is paying for it. Or it’s going to be built into the bill.”

He took a sip from his second cup of tea. “Let’s take another example,” he continued. “I’m standing on Fifth Avenue and I point my phone at a building and on my screen up comes the directory for that building, all the businesses in the building. Some of them are retailers. If I click on a retailer, I may get promotional offers. That’s an ad? There are revenue opportunities there. It’s a service.” He paused again, this time to talk about the power of the tiny handheld device: “The average phone today has more computing capacity, and more storage capacity, than the average set-top box does. They are powerful computers.”

The consumer has the power to make choices, but Irwin Gotlieb envisions that he will help steer the consumer to those choices and cash in on them. And if Gotlieb were to deliver the services, Google and Verizon would be excited by the prospect of serving as his facilitator. And maybe one day taking over the delivery of those services themselves.

THERE WAS, HOWEVER, a more pressing concern for the media: the colossal economic recession that struck in the second half of 2008. With advertising and other revenues plummeting, traditional media businesses accelerated their cost cutting. With less revenue and sinking market values, debt obligations became ticking bombs. For the Tribune Company and other newspapers, that bomb exploded. Faced with end-of-year debt obligations, Sumner Redstone was compelled to frantically sell Viacom and CBS shares and to propose the sale of National Amusements, his movie theater chain. He has since vowed not to cede control of his media empire, and renegotiated one of his debt obligations, but by the summer of 2009 it was still not certain he would eventually succeed. The recession pinned down most traditional media companies, hampering their ability to write the next chapter. Their core businesses were declining. It was tough for them to sell assets. They lacked resources to acquire new media ventures, and debt obligations loomed.

The gloom extended to Silicon Valley; at the November 2008 Web 2.0 Summit in San Francisco, there was clearly a dark cloud overhead. Welcoming the thousand attendees, the popular Tim O‘Reilly, whose O’Reilly Media cosponsors this annual event, appealed to the evangelical heart that beats in the Valley. Borrowing a campaign slogan from Barack Obama, he began his presentation by chanting, “Yes we can! Yes we can!” He paused, then continued, “It’s true in the campaign! And it’s true in Silicon Valley!” But even this enthusiasm couldn’t appreciably lighten the mood. O‘Reilly conceded that “these are tough times.” A number of other speakers agreed, including John Doerr. In his radio announcer’s voice, Doerr bellowed that venture capital funding would fall from thirty-seven billion dollars in 2007 to ten billion or even as little as five billion in 2009. “Google is not going to buy these Internet start-ups now,” he said, and no one else would either. He advised the executives in the hall to make cuts, to make sure they have eighteen months of cash on hand (and the rest in Treasury bills), to renegotiate contracts, and to be honest with employees but “keep up their hope.”

There were some at this conference, like Mary Meeker, whose optimism about the Web was unwavering. Although Meeker gave an unremittingly bleak analysis of the American economy at large, she offered a euphoric analysis of the tech world’s “opportunities,” expressing her faith that YouTube would be able to make the abundant ad sales that had so far eluded them.

To Doerr and others in the Valley, Meeker’s optimism seemed at odds with the facts on the ground. Layoffs spread even here, fueling talk of another dot-com bust. Intel and Cisco would report that their sales were heading south. Nokia predicted that global mobile phone sales would fall 10 precent in 2009, reversing a long trend. With PC sales slumping, Microsoft would cut five thousand jobs, 5 percent of its work force. Twitter, which attracts users but not yet profits, pared employees and installed a new CEO. Sequoia Capital, the venture capital firm that backed Google and Yahoo, convened a fall meeting of the Valley companies it was supporting and began its presentation with a slide that read, “RIP good times.” Unless the start-ups had a pool of venture capital and other monies, as Facebook, Linkedin, and Twitter did, investors had become less enamored of the Google mantra: The rise of Google had contributed to another article of faith in the Valley: Information wants to be free, and advertising would pay for it. The recession would, slowly, teach that the new media had fallen into an old trap of relying on a single source of revenue, advertising.

Where once optimism had ruled, rancor and incivility began to rear their ugly heads. Michael Arrington, the editor of TechCrunch.com, an influential arbiter of technology, began to feel firsthand the desperation of tech employees or investors who felt their companies had been victimized by bad press. He wrote a blog in January 2009 about an encounter he had had in Munich. As he was leaving a conference, a stranger “walked up to me and quite deliberately spat in my face.” He did not know why. All he knew was that the environment had become rancid: “I can’t say my job is much fun anymore. Start-ups that don’t get the coverage they want, and competing journalists and bloggers tend to accuse us of the most ridiculous things… On any given day, when I care to look, dozens of highly negative comments are made about me, TechCrunch, or one of our employees in our comments, on Twitter, or on blogs or other sites. Some of these are appropriately critical comments on things we can be doing better. But the majority of comments are among the more horrible things I can imagine a human being to say.”

Worse, he told of how “an off-balance individual threatened to kill me and my family” Because the individual had a felony record and carried a gun, Arrington hired a personal security team at a daily cost of two thousand dollars. He hid out at his parents’ house. “I write about technology start-ups and news,” Arrington wrote. “In any sane world that shouldn’t make me someone who has to deal with death threats and being spat on. It shouldn’t require me to absorb more verbal abuse than a human being can realistically deal with.” To “get a better perspective on what I’m spending my life doing,” Arrington said he would take a month off.

GOOGLE WAS NOT IMMUNE to the downturn. Signs of the downturn were apparent on Google search. During the fall, travel was no longer among the most popular search words or phrases, but home safes was; by early 2009, searches for bankruptcy had jumped 52 percent. The “most significant thing that happened at Google” in the past six months, Bill Campbell said in November 2008, “was the realization that there was a flattening of the business.” This realization, he said, was driven by Schmidt, who began reviewing “expenses relative to revenue every Monday.” Another senior executive at Google credited not Schmidt but the new senior vice president and chief financial officer, Patrick Pichette, “for forcing, for the first time, the company to focus on priorities” and to “allocate capital based on whether there are returns.” The founders’ push to expand into a multitude of businesses was, for the first time, subjected to a budget analysis and scaled back, this executive said. “While Google’s success is hard to dispute, I don’t think they are a particularly well-managed company,” Mary Meeker said. “Part of the problem was that Larry and Sergey didn’t need to care about the numbers because growth was so steady and the company’s competitive position was so strong they didn’t feel they had to. The downturn in the economy gave the new CFO help in imposing some cost discipline.”

Pichette had come over from Canada’s foremost telephone company, Bell Canada, where he was credited with slashing two billion dollars from its operating costs. A thin man of modest height, he comes to work lugging a backpack and wearing jeans, a button-down shirt with sleeves rolled up, and a ready smile. Told that he has come to Google at a bad time, he quickly disagrees. “You can argue that I came at a good time,” he said. “When everything runs well and works perfectly, at least according to financial results, you don’t take the time to ask tougher questions because you don’t have to. When you’re growing so fast that you’re running out of desks, if you talked to people about waste and inefficiencies they wouldn’t have listened to you. It would have been the wrong question to ask at that time.”

In a March 2009 Morgan Stanley conference interview with Mary Meeker, Eric Schmidt said, “Patrick is particularly good at business reviews, so we’ve been going through systematically business after business. In our hypergrowth period, we did not have the necessary systems in place…” Pichette was well rewarded; he received a bonus for 2008 of $1.2 million, though he had only worked six months; it was the highest bonus granted by Google. (Schmidt and the founders, as is their custom, take no bonus.) For the first time, Google was contracting. It slowed its hiring, adding only 99 employees in the fourth quarter of 2008, fewer than it added in a week at the start of the year, bringing its employment total at the end of 2008 to 20,222. It laid off some of its 10,000 outside contract workers, sliced 300 jobs at DoubleClick, reduced by one-quarter its 400 job recruiters, and scaled back some of its engineering teams. Taking a closer look at management, Google decided that management was not Dr. Larry Brilliant’s forte, and gave him a new title as chief philanthropic evangelist, replacing him with Megan Smith, who would retain her position as vice president for new business development. It delayed the opening of its Oklahoma data center by eighteen months, and closed its office outside Phoenix, which had two dozen full-time employees. After Pichette discovered that in some cafeterias-most buildings have one-a third of the food was thrown out at the end of each day, cafeteria hours were reduced and menus pared. Google also curbed some free services and, according to a longtime executive, engaged in a “hot debate” over whether to continue to offer water in plastic bottles or switch to less expensive filtered tap water. (By 2009, Google was serving filtered water out of plastic cups, which were soon to be replaced by reusable and renewable cups.)

Google also eliminated a few sites, including Lively, its virtual world, and began to welcome ads on such formerly ad-free sites as Google Finance and Google News. Although Tim Armstrong boasted in September that Google Print Ads had “70 percent of newspapers in the U.S. as clients,” the program had been encountering resistance from newspapers reluctant to cede control of big clients or sales staffs; as a result, it wound up selling mostly remnant ads, and often for below-market rates. Just months after Armstrong’s announcement, the program was terminated. In its day-care program, Google jacked up both the level of services and the cost-from $1,425 per month to $2,500, reported Joe Nocera of the New York Times. This elite offering-and its elitist price-seemed at variance with Google’s egalitarian ideals, and many employees were irate.

These cuts probably displeased two Google audiences, one external, the other internal. For talented young engineers, who look to join companies that are rockets, Google’s actions might suggest a company that had reached cruising speed and might be descending. And as Google coped for the first time with saying no, there was frustration among Google employees accustomed to hearing yes. The founders had sold Google’s mission as making the world a better place, not just making money. While the Google rocket soared, hard choices could be avoided; now they would have to be made.

Soon after Google shuttered its office outside Phoenix, the closing was raised at the September 19, 2008, TGIF session. The complaint came in a text message from an employee in London, which Brin read aloud to the assembled Googlers. It said, “What of people in Phoenix who can’t relocate? If we don’t take care of them, shame on us as a company!” Brin allowed Alan Eustace, senior vice president, engineering and research, to answer. Google, he said, would strive to find openings for those wishing to relocate; for the others, Phoenix was “a robust area for jobs.” Brin and Page said nothing, but associates said they were increasingly distressed by Google employees’ sense of entitlement. This was a company, not a socialist paradise, and the Phoenix question-like the grumbling when Google pared cafeteria hours and no longer allowed employees to cart home dinners for the entire family-troubled them.

With a cash hoard of $14 billion, Google was better positioned than most companies to withstand the economic shocks, but this did not stop its stock from plunging from nearly $700 per share at the start of 2008 to $307 at the end. The value of Brin’s and Page’s stock holdings reduced their net worth to about $12 billion each, which they said did not faze them. Although the downturn hit most media companies hard, online advertising continued to rise. Google now claimed 40 percent of all online ads. Revenues and profits climbed more slowly, though, and the company warned in its year-end 2008 filing to the FCC, “We believe our revenue growth rate will generally decline” as the search market matures.

Despite the downturn and its own difficulties, in many ways Google remained a company apart. It did not slash its investment spending on research and development or its data centers, investing a total of $2.8 billion on these in 2008. Its fourth-quarter profit margin grew to a fat 37.6 percent. While much of the Valley was contracting, Google decided to set aside $100 million to start a venture capital fund, Google Ventures, to invest in start-ups. Yes, it pared free snack choices from about one hundred to fifty, but that was still fifty more choices than most companies offer.

YouTube was not contracting. “Display advertising and YouTube will be big in the next twelve months,” Schmidt predicted. He was encouraged that a combination of cost cutting and new advertising formats would slash YouTube’s 2009 losses from a projected $500 million to $100 to $200 million, according to a knowledgeable Google executive. He believed the unusual traffic YouTube generates will become a magnet for advertising. In March 2009, according to Nielsen Media Research, two-thirds of all Web videos were watched on YouTube, and that month ninety million viewers came to the site, streaming a total of 5.5 billion videos.

Schmidt also believed that Google’s Android investment would produce many more Google searches and provide opportunities to play a dominant role in all portable devices. He remained bullish that cloud computing would take off, particularly with the advent of four-hundred-dollar (and dropping) netbook laptops that could be powered by Android and store their data in a Google server rather than Windows. Between YouTube, Android, and cloud computing and its Chrome browser, Schmidt remained hopeful that Google was still on its way to becoming the first hundred-billion-dollar media company.

For its employees, Google did something else that defied the bleak economic times. The company had awarded a total of $1.1 billion in stock-based compensation in 2008; by the end of the year, those stock options had declined below the current Google stock price. So Google announced that any employee whose stock options were “underwater”-priced above the value of Google’s stock price as of March 6, 2009-was eligible to exchange this stock for new options pegged to the March 6 price. Although the founders and Schmidt declined to partake, this generous bailout cost the company $400 million. Google reported that 93 percent of employees exchanged their old options for new ones priced at $308.57. It was a magnanimous gesture, and also a way for Google to keep valued members of its team from fleeing to a start-up. Many on Wall Street saw Google’s repricing-Google was not the only company to do this-through another prism, as if Google were unfairly granting employees a benefit denied other shareholders.

Asked in April 2009 what he considered Google’s biggest accomplishment of the past six months, Eric Schmidt said: “Our safe landing. We want to be the least affected by the recession.” There was evidence that Google succeeded. Although it experienced its first quarter-to-quarter revenue decline since going public in 2004, its net income rose 8 percent in the first quarter of 2009; new cost controls sliced expenses by more than two hundred million dollars, and its profit margin swelled to 39.2 percent. Its 2009 revenues were projected to drop by 31 percent over the prior year, but were still projected to grow by 4 percent.

What gave Schmidt more angst was the management upheaval that loomed ahead. With a number of relatively young senior executives blocking the upward path of the next tier, what happened with Sheryl Sandberg was happening with others. In February, Tim Armstrong, thirty-eight, announced that he was leaving to become CEO of AOL. A popular figure at Google,with salesmanship and people skills that are uncommon at engineering companies, Armstrong’s departure was widely mourned. Soon after, Singh Cassidy, who also reported to Omid Kordestani and supervised business in Latin America and the Asia-Pacific region, also left. In April, Kordestani, the company’s longtime sales chief, stepped aside to become a senior adviser to Schmidt and the founders. He was succeeded by the president of international operations, Nikesh Arora.

Google was not accustomed to such management turnovers. But Schmidt knew he was sitting atop a bigger management powder keg. With the development of Android, and the ambition to expand to provide the operating system for not just mobile phones but also the new generation of lightweight, low-cost netbook laptops, Google was on a collision course with Apple. This risked turmoil at the most senior levels of Google. “Because it is open source, Android is a horizontal system,” explained a senior Google official. “It is not devoted to any one hardware supplier. Apple is a vertical system that serves one supplier”-Apple. Already, as we’ve seen, Schmidt awkwardly left the Apple boardroom during iPhone discussions. By the summer of 2009, Schmidt and Jobs agreed the situation was untenable because, as Jobs said in a statement released to the press, “he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest.” Schmidt resigned. Arthur Levinson, who is on both boards, will probably have to choose between them, as will Al Gore. Most disruptive of all, Coach Campbell, the colead director at Apple and almost a brother to Steve Jobs, has told friends he would regretfully choose to sever his ties to Google. Tensions between Apple and Google were simmering. By the end of 2009, it was likely they would come to a boil.