Googled: The End of the World as We Know It

CHAPTER FIFTEEN. Googled

Media companies can be divided into two broad categories: the few who create waves, and the many who ride them-or drown. The elite companies that generate waves are rare, the wave riders common. A company can be successful-Cisco, Dell, Oracle-yet not fundamentally alter the behavior of consumers or other companies. Dell’s approach to efficiently making computers was an innovation, not a disrupter; it did not alter the way consumers behave. Steve Jobs and Apple are wave makers; companies like Dell-or Quincy Smith’s CBS and Irwin Gotlieb’s GroupM-attempt to ride the wave; newspapers crash into them. The Apple wave started with the Apple II, which launched the PC era in 1977; followed in 1984 by the Macintosh, with its innovative graphical user interface; followed by Pixar studios, which transformed movie animation; followed by the iPod and iTunes and the iPhone. It’s probably safe to say that Intel and HP created waves. Ditto Amazon. There are those who say Microsoft doesn’t qualify because it rode the waves others invented, but it is inarguable that it has thrived for three decades and changed computing. It is much too soon to know whether companies like Facebook, YouTube, Twitter, or Wikipedia will have a lasting impact.

It is not too early, however, to call Google a wave maker. The planet has been Googled, with the company becoming, as Larry Page has said, “part of people’s lives, like brushing their teeth.” Google has eliminated barriers to finding information and knowledge. “The Internet,” Hal Varian said, “makes information available. Google makes information accessible.” The Google wave has crashed into entire industries: advertising, newspapers, book publishing, television, telephones, movies, software or hardware makers. Its power is measured by the companies that fear it and the public that adores it. Google has fostered the growth of the Web by nurturing Web sites with its AdSense and AdWords programs, which have delivered advertising dollars and enabled small businesses to reach new customers. Google’s way of building its business-make it free and attract users before figuring out a way to make money-became the template for Web start-ups from Facebook to YouTube to Twitter to Ning. Google is responsible for creating an entire new industry of search marketers and search optimizers who gather by the thousands several times a year under the umbrella of Search Engine Strategies (SES); these companies set out to outwit Google’s algorithms so they can advise companies how to jump to the top of search or advertising results. Google has created a new model for an innovative business culture. Its search results provide a graph of our times, revealing which subjects preoccupy us; by studying search data on Google Trends, economists believe they can spot trends and better predict consumer behavior. By making information available, Google has facilitated political participation, as YouTube demonstrated throughout the 2008 presidential campaign. It has made institutions, from governments to corporations, more transparent. And with its open-source Android phone and cloud computing and YouTube and DoubleClick, it threatens to extend its considerable reach.

“Fifteen to twenty years ago, entrepreneurs would have said, ‘I want to be the next Bill Gates and Microsoft,’” Michael Moritz said. “Today people’s great ambition is to be the next Google. They went from zero to twenty billion dollars in revenues in four hundred weeks! Google has become the front door to the world for many people, the place they go for information. They are probably the most visible service concocted by mankind. Was Henry Ford more recognized in 1925? I doubt it. Because of the Internet, Google has leapt geographical boundaries.” Perhaps the only company visible to more of the planet’s occupants, he guesses, is Coca-Cola.

During the 2007 Zeitgeist Conference, a prominent media executive in attendance whispered a question to me. He was clear, he said, about the immense value Google was producing for itself. What he said he didn’t understand was this: What value was Google producing for society, other than shifting money from the pockets of traditional media to Google’s? During a long interview with Sergey Brin that day, I relayed the question. Brin had an easy answer if he wanted it; on the front page of that day’s San Jose Mercury News was a story about the jobs his company had created and the auxiliary businesses that benefited from what the headline called “The Google Effect.” But Brin chose to make a broader point: “It’s very simple. People with the right information make better decisions for themselves. People presented with the right commercial opportunities will buy things suited to them.”

By way of illustration, Brin described a trip he and his wife had made to Africa. With sophisticated digital cameras in hand, the two of them often jump on the private, customized Boeing 767-200 or 757 that Brin and Page purchased and that transports them to different continents. “One day in Zambia the driver was telling me how he was trying to get all the parts to a computer,” Brin said. The driver couldn’t locate some parts he needed, and those he could find were five times as expensive as they were in the United States. “He was trying to get a DVD-Rom drive. I said, ‘In the U.S. they cost about thirty dollars.’ He said, ‘What?’ He was about to spend two hundred dollars on a DVD-Rom. Imagine if there was information there? He would have been able to get that DVD-Rom drive for forty bucks. He’d be more efficient at his job, and it would help communities as a whole. I certainly believe that information creates value, rather than displaces it.”

Google search is of enormous benefit to other companies as well. Referring to the Internet as “a magic box where whatever you want to do, it’s all there,” Marc Andreessen credited Google with making the box “more magical. Google makes the world a much better place because it makes everything findable. Many companies spend a lot of time and effort to make their stuff more findable on Google. It’s a huge source of traffic and income. Facebook used to be closed off from Google-you had to be logged into Facebook to see people’s profiles. But then Facebook started publishing public profiles so that when you search on Google for someone, their Facebook profile pops up in the search results. That generates additional incoming traffic and therefore money for Facebook.” Web site owners report that Google search often sends them 80 to 90 percent of their vistors. With Google as the Internet’s prime navigator, there still remains the question Nicholas G. Carr asked in a 2008 blog post: “Is the company an exemplar or a freak?”

Itay Talgam did not mean to address this question when he appeared at Google’s 2008 Zeitgeist Conference, but he inadvertently offered an answer. Talgam, a renowned Israeli orchestra conductor, stood on a small semicircular stage wearing a wrinkled cotton polo shirt with a sweater draped over his shoulders, his sparse hair shooting in several directions. For a half hour, his presentation of how conducting could be a metaphor for transformational management hushed the audience. Music is “noise,” he began, and what the conductor does is “make a large group of people work in harmony.”

Scanning a century’s worth of conductors, he chose to discuss five. Each was outstanding, he said, but only two were transformational. The lights went down and on a large screen appeared a video clip of the autocratic Riccardo Muti, whose stern face and robotic baton movements brought forth from his orchestra no “joy,” and suppressed the development of individual artists. Muti’s “expression never changes,” Talgam said. “He tells everyone what to do. He is a micromanager.” The second conductor was Richard Strauss, who seemed to be in another place as he mechanically moved his arms, granting his orchestra more freedom but imposing no authority and offering no inspiration. The third was Herbert von Karajan, who never looked at his orchestra and also failed to inspire. The fourth was Carlos Kleiber, whose face was filled with rapture as he conducted and who, Talgam said, “creates a process” and “a feeling of freedom” while also conveying “authority.” Notice, he said, the way Kleiber shot a disapproving glance at a soloist.

Talgam saved his favorite conductor for last. With the fifth clip, we were treated to a video of Leonard Bernstein welcoming an orchestra of high school students from around the world who had been granted one week under his direction to perform Stravinsky’s The Rite of Spring. The first day of practice, the makeshift orchestra was discordant. But Bernstein did not wield a baton as a symbol of his “authority,” Talgam noted. Instead, he stopped the music and spoke of the feelings Stravinsky sought to evoke, of the smell of spring grass, of waking animals. “He empowers people,” Talgam said, “by telling them that their world is larger than they think.” Cut to a week later, and the high school orchestra sat attentively before Bernstein, who looked on with obvious satisfaction as an assembly of young strangers achieved musical harmony. Without a baton, arms folded, Bernstein conducted only with facial expressions-a curled lip and lowered head for the basses, a raised eyebrow for the higher strings, a nod to the horns, an extravagant smile for the finale. Talgam did not need to tell the audience what they had seen. It was a sublime management seminar demonstrating how unusual leaders liberate those who follow. Bernstein was the boss, but he was not an autocrat. He managed to coax the best out of his orchestra, to make them part of a community.

It was no accident that Google invited Talgam. This sense of being connected to something larger is central to its culture. Employees share offices and work in teams. Google strives to make employees feel that they are part of a network. When Patrick Pichette became CFO, he relied on a wisdom-of-crowds approach to cost cutting. He set up a Web page and invited employees to make suggestions to eliminate waste, which he said unearthed many of the best ideas. Google uses a variant of this network approach when it test-markets whether its users like blue or yellow, one beta product or another. Of course, this faith in quantification is what drove some designers to leave the company and to blog about their frustrations.

These forms of communication are characteristic of what Anne-Marie Slaughter, the former dean of the Woodrow Wilson School of Public and International Affairs at Princeton, has described as “the networked world,” a world that Google has been instrumental in advancing. Diplomacy requires “mobilizing international networks of public and private actors”; CEOs are acutely aware of “the shift from the vertical world of hierarchy to the horizontal world of networks”; the media increasingly is composed of “online blogs and other forms of participatory media” that “create a vast, networked conversation.” Society itself is networked, with “the world of MySpace” creating “a global world of ‘OurSpace,’ linking hundreds of millions of individuals across continents.” This world is one where a more open America, and a more open company, has distinct advantages.

Google has devised a management system that liberates its employees. The “Googly” way, said Laszlo Bock, Google’s vice president of people operations, is simply to treat employees better. “Google is a platform to say, ‘You can trust your folks.’ We want to be an example to other companies. The key is the 20 percent time, not the free food. There is a feeling here of intellectual freedom.” Even though there was some grumbling from Googlers in 2008-about costly child care, the closing of the Phoenix office-most recognized their work life was charmed. How many companies gifted its employees with new stock options to replace those that had become worthless? Asked what impact Google’s employment policies have had on other companies, Page said, modestly, “It’s hard for me to know. I’ve never worked anywhere else. But I feel that we have had an impact. We certainly got a lot of attention for the things we do for employees, and that’s positive.” It also means, he added, “Our competitors have to be competitive on some of these things.”

Marissa Mayer claimed that half of Google’s products materialize from the 20 percent time. This has fueled innovation at Google, and has helped wreak havoc on old media companies. The engineers who come to Mayer’s office seeking encouragement and company support for their projects often start with the same assumption Page and Brin do: that the tried-and-true ways of doing things are outmoded.

Google Voice, a suite of mobile phone services, provides a good illustration of how the company’s engineers think. They began with their favorite question, Why? If we use the Internet for phone calls, they wondered, why can’t all telephones have a single number? Why do we need multiple answering machines? Why do we need to switch phone numbers when we move? Why do we need to wait to listen to phone messages? Why can’t we convert them to text messages instead? Why can’t we record phone conversations if the other party consents? Why can’t our phones block telemarketing calls or make sure certain people are screened out? Because it’s over the Internet, why can’t most calls be free?

For its beta test, in 2007, Google introduced for a relatively small group a service that would work as Google Voice does. It was called GrandCentral, the name of a start-up Google acquired a few years earlier. With their regular phones, in the initial GrandCentral pilot project, users called into a voice mail service, then pushed a button to get a dial tone. They were now on the Internet. It was free and convenient. Users liked it but Google treated it like a “maybe” product, making no commitment to expanding the service. The snickers from those who thought the Google test must have failed, as David Pogue noted in the New York Times, became sneers.

In March 2009, Google Voice was announced, and the sneers turned to gasps. Everyone in the telephone business-from telephone companies to new entrants like cable companies to eBay’s Internet phone service, Skype, which imposes small charges on calls made on regular phones-had reason to be concerned. Google would at first give away the phone service for free, with a nominal charge for long distance calls, and hoped one day to sell the service to corporations at a low price.What was an advance for consumers was a potential setback for these companies. They were being Googled.

Once again, Google’s engineers proved their brilliance. They had devised the simplest, most cost-efficient way to accomplish a task. What impact Google Voice might have on the thousands of jobs in the telephone industry or on local communities was not a question the engineers asked. Nor did they ask about privacy. Because Google would be gathering data on the calling habits of its customers, there were obvious privacy questions. Nor did they ask what the ramifications were for a society if Google Voice succeeded and became as dominant in telephony as Google is in search, online advertising, YouTube, or digitized books. These questions were beyond the pay grade of the engineers.

Many Valley companies, and others, have modeled themselves after what Chris Anderson calls “the biggest company in history built on giving things away.” In his book Free, Anderson cites the many companies that offer free services, from Twitter to Facebook to MySpace to Yahoo’s photo-sharing service, Flickr, to e-mail services to Wikipedia to craigslist to news aggregators like Digg to the free shipping and returns offered by the online shoe retailer Zappos. By offering free services, Google has reinforced the notion that traditional media now wants to combat-that digital information and content should be free. “This is the Google Generation,” writes Anderson, “and they’ve grown up online simply assuming that everything digital is free.”

Many Valley companies have now copied Google’s 20 percent time, including the one Bill Campbell chairs, Intuit. Facebook offers subsidized housing for employees who live within a mile of the office, free meals, parking, gym memberships, laundry services, and a host of other benefits that mirror Google’s. “Google has raised the bar for everybody in the Valley,” said Campbell. “Everyone has to respond to the pressure that said, ‘If the engineer is good, we better hire him before Google does.”’

Of course, Google has borrowed as well as led. Stanford president and Google director John Hennessy, who once chaired his university’s computer science department, believes some Google ideas-such as the 20 percent time-can be traced to Stanford “and the academic world,” where Stanford graduate students like Jerry Yang and David Filo on their own time in the computer lab concocted the idea for Yahoo. Page and Brin have acknowledged that they took cues from the generous way Genentech treated its medical scientists, including a 401 (k) plan that matched up to 5 percent of their salaries; this was one of the reasons they recruited its CEO, Art Levinson, to join Google’s board. Google has a pet dog policy-allowing dogs to accompany owners to campus, providing an outdoor space, offering veterinary services-that Larry Page said was copied from Netscape.

Nor is Google unique. Netflix drives its employees hard but among other generous benefits, it lavishes unlimited vacation time on them. The e-commerce site Zappos encourages employees to point out any other employee who does outstanding work; that person then gets a fifty-dollar bonus from the company. Zappos also employs a full-time “life coach” who lets employees vent and serves as a corporate shrink.

Google has done something else that sets the best companies apart: it earned its customers’ trust. Google regularly ranks among the world’s most respected corporate brands. All companies endlessly talk about achieving brand status, but few attain it. They fail because they often confuse brand with name recognition; they don’t recognize that brand is a synonym for trust, which is not something that can be purchased with a rich marketing budget. Most consumers trust the information in the New York Times, the Think Differentness of Apple, the taste of Coca Cola, the safety of a Volvo, the bargain prices at Wal-Mart or Southwest Airlines. If we think of the Internet as a copying machine that produces free information, as one of the founders of Wired magazine, Kevin Kelly, wrote on his blog, then “how does one make money selling free copies?” Kelly’s answer: “When copies are free, you need to sell things which cannot be copied.” The first of these, he said, was “trust,” which is not duplicable. “Trust must be earned, over time.”

That trust is founded, in part, on a feeling that a company both serves noble ends and yields wealth for its shareholders. Recall the “Letter from the Founders” that was part of Google’s 2004 IPO, in which Page and Brin declared, “Google is not a conventional company. We do not intend to become one.” They said they would focus on users, not investors, and that they’d be concerned not with “quarterly market expectations” or paying dividends but rather with protecting Google’s “core values.” In a Q amp;A published as part of Google’s prospectus, Brin said the company’s aim was “greater than simply growing itself as large as it can be. I believe large, successful corporations… have an obligation to apply some of those resources to at least try to solve or ameloriate a number of the world’s problems and ultimately to make the world a better place.” They would try to serve, as Eric Schmidt said, as “a moral force.” The combination of free services, coupled with principled stances like its refusal to allow advertisers to rent space on its home page, or its insistence on a customer service that communicates to users that Google wants to get them to their destination quickly and without trapping them, have helped convince consumers that these goals were genuine. When the tsunami struck Southeast Asia in December 2004, Google made a billboard on its home page to alert searchers to the various international relief efforts they might assist. In 2008, Google Flu Trends began tapping the company’s database to predict flu incidents well ahead of the health warnings issued by the Centers for Disease Control. “Who would have thought,” said Steven Rattner, then managing partner of the venture capital firm Quadrangle, “that a bunch of computer geeks would turn out to be the best marketers of the twenty-first century?” Little wonder, then, that Google in 2009, as in prior years, was again ranked by Fortune as one of the “World’s 50 Most Admired Companies.”

Bill Gates, like Page and Brin, has always believed a corporation should be concerned with looking over the treetops. Before Page and Brin were out of college, he refused to deliver dividends to Microsoft’s shareholders, believing this money should be reinvested. But unlike the Google founders, Gates thought a company like his had one obligation: to increase its wealth. He also once said that he would not begin to make large personal charitable gifts until he had stepped down as CEO and could concentrate on making intelligent choices. He changed his mind in part because his marriage to Melinda French Gates broadened his thinking and gave him a partner, because his parents’ generous charitable endeavors had an impact, and because age had mellowed him. Starting in 2000, long before Google established its own effort, the Gates Foundation has been extraordinarily generous and smart about leveraging its resources to affect real change. More recently, Gates has enlarged his view of a corporation’s role. In a speech to the 2007 graduating class at Harvard, and again in a January 2008 address to business and government leaders attending the World Economic Forum in Davos, Gates called for a “creative capitalism” that relies on market forces to address the needs of poor countries. In an interview with Robert Guth of the Wall Street Journal, Gates spoke of the shortcomings of capitalism. He said he was troubled that innovations in education or health care tend to skip over poor people, and he proposed that successful companies spin off businesses that have “a twin mission” of making money and “improving lives.”

Over the years, it has not been unusual to hear Silicon Valley companies sound like social service agencies. In 1995, the newly founded Yahoo declared, “We believe the Internet can positively transform lives, societies and economies.” Craig Newmark, the founder of craigslist, extols “nerd values,” by which he means that he is intent on keeping his listings free for most of his users and refuses to enrich himself by selling his company or taking a large salary. Social idealism has been a core value in the culture of the Internet, from the insistence of Tim Berners-Lee, who believed that the Web should be open and that he would not patent it or enrich himself; to the open-source movement; to Wikipedia, which follows a democratic faith in “the wisdom of crowds” and has adopted a nonprofit model.

Before one dismisses these approaches as the gauzy thinking of left-wing populists, consider how often traditional companies now promote their own “corporate social responsibility”-in part to ecumenically emulate Andrew Carnegie, in part to bathe in the favorable publicity, in part to profit from some of these endeavors, and in part as a reaction against almost daily ethical business lapses. Companies like the Gap and Hallmark donate a portion of their profits to fight AIDS; Starbucks gave comprehensive health care to its employees, including part-timers. General Electric devised what it called an ecomagination strategy to address climate change and reap profits from it. WPP started issuing a Corporate Responsibility Report in 2002, and has promised to reduce its carbon footprint by 20 percent. One of America’s most powerful marketers, Jim Stengel, in late 2008 left his job as global marketing chief for Procter amp; Gamble to fund a private consulting venture to advise companies how to build trust in brands. His task, he said, is to create “emotional equity,” by which he means that consumers will believe the company cares not just about their dollars but about them. This is what P amp;G did with Pampers, consulting parents and designing diapers that felt more like cloth and kept babies warmer. And the Harvard Business School, in 2009, introduced a voluntary oath, which 20 percent of the graduating class signed, pledging to “serve the greater good” and avoid advancing “narrow ambitions.”

True, do-goodism is often a marketing ploy. True, the idealism one encounters at Google can be tempered by its business realism, as when Google placated the government of China, or denied that it wanted to snare a chunk of the income of media buyers like Irwin Gotlieb. It is also true that waves can inflict real damage. Google creates jobs, and it also destroys them. This poses life-and-death questions for traditional companies.

I asked Tom Glocer, CEO of Thomson Reuters, “Does Google help or hurt Reuters?” For a moment it seemed that Glocer was not going to answer. “My pause,” he said finally, “is the pause of a time frame. To date, they’ve been neutral to positive.” In the short run, Google has served as a spur, compelling traditional companies to “raise the level of our game,” just as Wall Street brokers had to improve their services and information to compete against online services like E-Trade or information sources like Yahoo Finance or CNBC. In the long run, he continued, “What everyone’s waiting to see is whether ‘Do no evil’ is true to the credo, their real inner core, or is it just a convenient sort of ’Don’t worry, Don’t worry‘-until they’ve built up such an amazing personal database about all of our habits and they then go to the New York Times and say, ’By the way, if you want the search engine to include your content, you’re going to have to start paying us.‘… They’ve created with software a narrow strait through which most people need to pass to do an activity that is at the root of much of what we do on the Web… The fear is that an increasing number of businesses depend on Google to get their eyeballs. At a certain point, Google can flip their business from being a utility” to a gatekeeper that charges for access.

This power imposes constant pressure on other companies. “You can’t wait for the wave to get there. You’ve got to start paddling,” said Peter Thiel, who was cofounder and CEO of PayPal, and is now president of Clarium Capital Management, a global hedge fund and Silicon Valley venture capital firm. “If you were running a railroad company in the 1940s and people started to fly airplanes, what would you do?” I asked Thiel what he would do if placed in charge of a traditional media company. He said there were two choices. Either you push consolidation and cost cutting much further than media companies have done. Or you “do something radically transformative.” On paper, the radical solution is more appealing. One question is how to adopt a radical solution, such as for newspaper companies publishing only a free Web edition, without destroying what you’re trying to save. One impediment is that in the digital age the transformation often depends on engineers, and media and engineering, as we’ve seen, are from different planets. “This is not a problem specific to media,” Thiel said. “When we started PayPal in 1998-99, we asked, ‘Why can’t the banks do this?’ They did try to copy us, but you needed engineers and the large financial institutions were not able to build it. The caliber of our engineers was significantly higher. Nothing against these companies, but if you’re a talented engineer, why would you go to work at CitiGroup? Why would you go to work at a place where your contribution is not seen as central to the success of the organization? If you’re a politician, you want to be in D.C. If you’re a finance person, you want to be in New York. If you’re an aspiring actor, you want to be in Los Angeles. If you’re an engineer, you want to be in Silicon Valley”

Most traditional media companies, including those that have a reasonably good relationship with Google, are worried that they will be Googled. But there is a larger context for their insecurity They are anxious about technological innovations that can quickly disrupt their businesses; about maneuvering in a world where corporate partners are also competitors; about how rapidly their businesses can change; about not being embarrassed by the omnipresent bloggosphere. Not long after he relinquished his CEO job at Disney, Michael Eisner flew JetBlue from Burbank to New York. “When I landed, I opened my BlackBerry and there was my picture on JetBlue. On JetBlue! In a blog saying, ‘Has something happened to Michael Eisner that he can’t afford a private airline or a big-time airline?’” He laughed about the incident, but used it to illustrate how cell phone cameras and bloggers transform private actions into public acts. The stage has widened.

The Internet and its Google surrogate impose pressure on companies to simultaneously play both offense and defense. Jeff Zucker, CEO of NBC Universal, explained that to be a CEO in the digital age “feels incredibly exciting, and incredibly scary.” He is aware of how quickly businesses can collapse, as did Wang and Gateway and Compaq computer, and of the ups and downs of companies like Motorola or Sun or Yahoo. He is wary of too quickly embracing a fad, as CBS seems to have done when it invested in Joost, a free Web site offering licensed full-length TV programming. After winning coveted innovation awards-and the commensurate buzz-when it was introduced in 2007, today Joost stumbles and in mid-2009 exited the consumer video market. Zucker is aware of the danger of throwing overboard the wrong business, as the company that once owned the NBC network, RCA, did when it decided at the start of the seventies to abandon consumer electronics. Convinced that no new breakthroughs were possible in consumer electronic products, RCA stood still while Apple and Microsoft and Sony surged. “What we all worry about,” said Zucker, “is destroying value as we innovate. And not letting that paralyze you is really the pressure that I personally feel. The scariness is not that I’m going to miss an opportunity, but that the business model will be destroyed as we’re innovating.” The “Innovator’s Dilemma.”

Every media company is speculating on where the digital wave is heading and how to ride it. This much is clear about Google: the company has a big appetite. After I watched the 1,500-strong Google sales force gather at the Hilton in downtown San Francisco, I met Eric Schmidt in a hotel conference room. Pressed to describe Google’s growth strategy, he was jaw droppingly candid. “All large media companies are both distribution and content companies,” he said, and “we really are competing with the distribution” side of these companies. Google wants to be the agent that sells the ads on all distribution platforms, whether it is print, television, radio, or the Internet. To advertisers, he said, “We say, use us.” In addition, he said, “As our technology gets better, we will be able to replace some of their [large companies‘] internal captive sales forces. They are not doing that much work; they are not automated. So the eventual goal is, again, to replace some of these sales functions by automation.”

So Google will disintermediate the functions of these traditional media companies? Schmidt disputed the word, but not the effect: “Disinterme diation is not the correct word to use. It’s better sales technology.”

He thought mobile phones would probably be “a smaller target for us” because to get on those platforms Google would have to pay large fees and cede control to telephone companies. Perhaps the biggest future opportunity for Google, he said, was YouTube. “If that works,” he said of YouTube’s effort to sell advertising and, he admitted, to become a content company, “then that’s the creation of the equivalent of the CBS network in the 1950s. It’s the creation of both content and a monetization mechanism.”

Sergey Brin told me that it is Google’s willingness “to experiment,” to “take risks” and “innovate”-to do the bold things Schmidt described-that will continue to set Google apart. However, companies with large appetites can get fat. Marc Andreessen believes Google aims “to do everything,” but is dubious that they can succeed. Andreessen also believes that in the digital age, technology alters the competitive battlefield, just as it did in World War II. Germany in 1940, as New York University professor Clay Shirky points out in his provocative book Here Cornes Everybody, was not the invincible power “etched in communal memory” Germany teetered near bankruptcy; its army was smaller and its tanks were inferior to France ’s. So why did the German blitzkrieg succeed? Because its tanks were equipped with a technology the French tanks lacked: radios. These radios allowed Panzer commanders to share intelligence and make quick decisions, leaving French commanders standing still and guessing while German tanks moved in concert. Even if the French had radios, Shirky writes, the Germans held another advantage: “The French regarded tanks as a mobile platform for accompanying foot soldiers. The Germans, on the other hand, understood that the tank allowed for a new kind of fighting, a rapid style of attack…” The technology advantaged Germany, but so did a superior strategy that allowed Germany to prevail.

CHAPTER SIXTEEN. Where Is the Wave Taking Old Media?

One morning in 2007, Joe Schoendorf was breakfasting at II Fornaio, the Palo Alto restaurant that serves as a Valley canteen. A burly, avuncular man with a prominent mustache, Schoendorf is a principal at the venture capital firm of Accel Partners, a primary backer of Facebook. In his more than forty years in Silicon Valley, Schoendorf has seen companies come and go, but he’s still humbled by the eye-blink speed of change. “If we were having breakfast in 1989, there was no Internet,” he said. “IBM was number one in the computer business. DEC and Ken Olsen were on the cover of BusinessWeek and the cover line was, ‘Can They Overtake IBM?’ If I said to you that DEC would go out of business, you’d think I was crazy.” Today, young associates tell him, “Old media is dead. Television and radio will become dinosaurs. Google is impregnable.” Schoendorf’s experience teaches him to be more cautious. He has witnessed the quick rise and fall of Lycos, Netscape, Excite. He has seen AOL go from Internet darling to a company few would buy. He respects Google’s prowess, but is wary of sweeping prognostications.

Robert Iger, the CEO of Disney, is equally humbled. When he was at ABC, he said, “I put America ’s Home Videos on the schedule. It was user-generated content. How come I didn’t envision YouTube?” In fairness to Iger, one could also ask: How come the New York Times or CBS didn’t invent CNN? How come Sports Illustrated didn’t start ESPN? How come AOL, which launched Instant Messenger, didn’t develop Facebook? How come IBM ceded software to Microsoft? No one knows with any certainty where the wave is headed. “Sometimes you have to guess,” said Bill Campbell, who recalled his experience at Intuit. “What you do-as happened at Intuit in 1998-is you say, ‘Let’s get five things and see what works.’ If two work, you have a home run. If three work, you double the stock.”

Was Barry Diller right when he said, “The world is moving towards direct selling-no middleman, no store”? Or is this the wishful thinking of an executive whose online enterprise would benefit if his prediction proved true? Or could one say that Google is itself a middleman because it brings together users and information, Web sites and advertisers? Was Irwin Gotlieb correct that consumers “will happily go along” with trading private information to advertisers in exchange for some free services or reduced charges? Will advertising succeed on social networks and YouTube? Will consumers opt to spend less on software by ceding storage (and control) of their data to Google’s cloud? Will younger generations raised in digital homes read books, and at what length? Is the Internet safe or is it vulnerable to hackers and viruses? Will the deep recession that commenced in 2008 prompt the Obama administration to become more of a digital cop, imposing new regulations, investing in broadband, strengthening or diluting antitrust oversight? And will this choke innovation, or enhance it?

Yossi Vardi, the Israeli entrepreneur whose company invented instant messaging, once spent three years trying to graph the future. The result was a presentation consisting of four hundred slides. He discarded the slides and substituted what he called Vardi’s Law: “If you need four hundred slides to explain it, it really means you don’t have a clue.” In fact, the questions are more apparent than the answers, and a central question that will profoundly shape the future of old and new media is this: Will users who have grown up with the Web pay for content they now get free?

IN THIS BACK-TO-THE-FUTURE moment, online companies ape broadcasters by proclaiming that their services are “free” because advertisers pay for them. This is the answer touted by Wired editor Chris Anderson in his latest book, Free: The Future of a Radical Price. He argues that making information free allows digital content creators to use the Internet as a promotional platform to create alternate money streams, including concerts, selling goods and lectures and premium services. In the digital world, he writes, “Free becomes not just an option but an inevitability Bits want to be free.” In his spirited book What Would Google Do? Jeff Jarvis argues that online news aggregaters like Google are the equivalent of newsstands that help papers boost online circulation and serve as promotional platforms for the newspapers. By increasing their online traffic, Jarvis posits, aggregaters allow papers to charge a steeper price for their online ads. “I believe papers should beg to be aggregated so more readers will discover their content,” he writes. He concludes, “Free is impossible to compete against. The most efficient marketplace is a free marketplace.”

There is no question that links increase the number of newspaper readers. Marissa Mayer said that Google search and Google News generate “more than one billion clicks per month” for newspaper sites. But for “free” to work as Jarvis says it will, news aggregaters like Google or Yahoo would have to be gushing money into newspaper coffers. They are not. While Larry Page, Sergey Brin, and Eric Schmidt insist they want to help newspapers, and AdSense does bequeath ad revenues to newspapers, the three men admit AdSense’s receipts are relatively modest, too meager to restore newspapers to health. Jarvis is correct that free “is impossible to compete against,” but I fear that the consequence will be the opposite of the one he intended. For newspapers, if revenues continue to fall short of costs, free may be a death certificate.

Second, advertising is a wobbly crutch. In economic downturns, ad expenditures are usually among the first to be pared. Indeed, in harmony with the worldwide recession, total U.S. ad spending dropped in 2008, and in 2009 Jack Myers, a respected marketing consultant, projects that total advertising will plunge 12.1 percent. Newspaper ad revenues, according to ZenithOptimedia, will fall from $44 billion in 2008 to $37.4 billion in 2009, or 8 percent; Jack Myers predicted the falloff would be almost three times greater (22 percent). And just as the Internet has disrupted traditional ad sales, it may well disrupt the effectiveness of advertising itself. Consumers now have the tools to easily comparison shop online, to compare prices and performance reviews. The emotional power of a commercial is weakened by the informational power of the Web. Even Wired editor Chris Anderson, who once more forcefully advocated that free was the perfect model, has changed his position. Blaming the deep recession, Anderson appended a “Coda” chapter at the end of his book in which he amends what he wrote earlier. He writes that he now believes “Free is not enough. It also has to be matched with Paid.”

Third, to rely solely on advertising is to risk becoming dependent on a revenue source whose interests may diverge from those of good journalism. The wall between advertising and news was erected to ensure that news was not at the service of commercial interests. This wall is easier to maintain when newspapers can buttress their ad revenues with subscriptions and newsstand sales. In a February 2009 Time cover story titled “How to Save Your Newspaper,” former Time editor Walter Isaacson quoted Henry Luce, cofounder of the magazine, as saying that to rely solely on advertising was “economically self-defeating.” Luce, Isaacson wrote, “believed that good journalism required that a publication’s primary duty be to its readers, not to its advertisers.” The warning was given life several weeks later when the management of Time Inc. goaded five of its magazines-Time, Fortune, People, Sports Illustrated, and Entertainment Weekly-to prepare major stories on a new 3-D animated movie from DreamWorks, Monsters vs. Aliens. The publications would each receive advertising from three of DreamWorks’ corporate partners on the movie, McDonald‘s, HP, and Intel. Many other media companies have felt compelled to make similar Faustian bargains, potentially trading credibility for dollars. In April 2009, page one of the Los Angeles Times featured an ad for a new NBC show that was laid out to look at first glance like just another news story

It is no surprise that advertisers will always want the most conducive setting for their ads; they want to sell products and have perfectly good business reasons to be concerned with the environment in which their ads appear. The problem is that this impulse leads them to push for more “friendly” news: a senior network news executive said, “I’ve seen increasing incursions by advertisers into morning show content. Can the evening news be far behind?” Of course, network news has in recent years made itself more of an inviting target for advertisers by allowing the morning shows and evening newscasts to become “softer” and more superficial. Likewise, it is as certain as a sunrise that advertisers will want tamer social networks and more predictable YouTube videos to accompany their products. To better target their ads, they also want to extract as much information about their potential customers as they can. But news outlets or Web sites that share users’ private information or allow themselves to be seen as bought and paid for will lose the trust of their customers. An additional revenue source will give them more leverage to resist.

When media companies depend solely on advertising revenues, there is also a real risk to quality. As more people read newspapers online, or watch their favorite TV shows online, or illegally but effortlessly download movies or music, the revenues of traditional content companies will fall. While it is true that too few newspapers do a good job of covering state capitals or city hall, or sustaining investigative reporting or investing resources in international news, those elite papers that do-the New York Times, Wall Street Journal, and Washington Post-are hobbled; that kind of reporting is expensive. Similarly, a television network’s ability to invest in expensive but exemplary programs like Friday Night Lights, 30 Rock, or even the more popular fare-Desperate Housewives, CSI: Miami -will be endangered.

A total reliance on advertising can menace many new media sites as well. Facebook and YouTube and Twitter have an enormous base of users, but they lose money Sites like Facebook and MySpace struggle to devise ad-friendly formats, but have so far stumbled. Robert Pittman, the former president of AOL, thinks he knows why: “Wrestling had bigger audiences than some prime-time shows, yet wrestling never monetized well. Why? Because most advertisers didn’t want to be associated with it. Environment did matter. We had huge audiences on AOL chat rooms. We couldn’t sell it worth a damn. People were communicating. They didn’t want to be interrupted by ads. You start running an ad on Facebook and users will say, ‘I don’t like GAP. Don’t put GAP on my page!’ It will attract some advertising dollars. But I don’t think social networks monetize to the size of the audience they have. The advertiser doesn’t want to be in an environment where they feel they are a big negative.” Social networks might be able to sell more ads if they share more of their users’ private information with advertisers, but when Facebook tried that approach in 2007 with an ad program called Beacon, irate users forced it to install a system that relied on the users’ willingness to participate. Eventually, if these sites cannot devise an ad formula that works, they will once again demonstrate-as AOL chat rooms or Friendster.com did-that advertisers may not always follow the audience.

One begins to hear anxious whispers in Silicon Valley that “free” might not be free. “I think people are getting more willing to pay,” said Marc Andreessen, who cited iTunes and Amazon’s Kindle as successful online pay services. “More and more of what people do, they do online. I think most people like the things they like and are willing to pay for it.” Maybe. Certainly there are products that users are willing to pay for on the Web, most notably the music on iTunes. Google generates 3 percent of its revenues by charging corporations for premium services-tailored searches, special software apps, extra Gmail storage-and expects those numbers to rise. Web companies such as Ning and Linkedin charge corporations for extra tools or premium services-including a fee to have an ad-free environment. Those wanting online access to the full Wall Street Journal, or to the New York Times archives and crossroad puzzle, pay for it. To read the Times on a Kindle one must subscribe. In 2008, each of the 40,000 member groups of Meetup.com paid the social network site fifteen dollars per month to host them online. One-quarter of CBS’s digital revenues comes from fees or subscriptions. The online dating service Match.com has nearly 1.5 million paid subscribers. By mid-2008, China was generating $2.5 billion in online video game revenues.

Mary Meeker predicts, “Ultimately, while advertising will remain the primary revenue driver for Internet content companies, I think we’ll find more and more examples of people paying for content, the way people do to download games on mobile devices. With mobile downloads, where the payment mechanism is integrated, I think you will be able to charge just a little bit a lot of times.” A research report from the market research firm Piper Jaffray projected that consumers would pay $2.8 billion to download applications to their mobile phones in 2009, a number projected to rise to $13 billion by 2012. One alternative is a monthly or annual subscription model. Another is micropayments. The impediment to either a subscription or a micropayment system is that with notable exceptions-mobile phones, Amazon, PayPal, Google Checkout, broadband providers-most Web sites do not have the names and credit card information of their users; new users would have to make a considered decision about whether the service was worth paying for before handing over their billing information. “At Ning,” Andreessen said of the social network site he funded, “we want to get credit card numbers. We’re edging towards it.” With over one million Ning niche networks-female writers have one, fans of Enrique Iglesias have one-the credit cards would stack up.

The cable and telephone companies, already in possession of the credit card or banking information of their customers, are well positioned to benefit from a micropayment or metered payment system. Using their broadband wires, they could offer a range of new pay services. Referring to smart phones as “the stealth device of this planet,” Ivan Seidenberg of Verizon painted a blue sky: “Your phone will replace your credit card, your keys. It will become your personal remote control to life.”

Nevertheless, a chasm yawns between the needs of business and the culture that has grown up around the Internet. Users may love YouTube or Facebook or Google News, but will they pay for them? Schmidt said he is dubious that “social network traffic will ever be as lucrative as business, professional, and educational traffic. When you go to a bar you may buy a drink, but you’re fundamentally there for social interaction.” Advertising, he believes, will become an annoying distraction.

Stanford president John Hennessy surprised me when he said, “We made one really big mistake in the Internet, which is hard to reverse now. We should have made a micropayment system work. Make it very simple, very straightforward. Let’s say I go to Google’s home page or Yahoo’s and I see a story I want to read in the New York Times, and that story is going to cost me a penny I click on it. I pay the penny electronically I have a system up that says, ‘Any story that costs less than a quarter, give it to me instantly If it costs more than a quarter, ask me first.’ I get a monthly bill. It pays automatically against my credit card. We could have done this easily The technology is all there to do it. The question is, how do we get back to something like that? We need some people to go out and say, ‘We need some approaches other than advertising.”’

In September 2008, I related Hennessy’s thinking about micropayments to Eric Schmidt. “A lot of people believe that,” he said. “I’ve been pretty skeptical.” Free is the right model, he believed then. “The benefit of free is that you get 100 percent of the market. And in a world where there’s no physical limits, it’s easy to have so much free. Traditional thinking doesn’t work.” There are businesses that can succeed by charging, he said, “but it’s a one percent opportunity The lesson that Google sort of learned a long time ago is that free is the right answer…”

It is not, I fear, the right answer for many media businesses. Nor was it the answer Schmidt came to seven months later, when we again discussed charging for content on the Internet. “My current view of the world,” he told me in April 2009, “is you end up with advertising and micropayments and big payments based on” the nature of the audience. Each member of the old guard-newspapers, magazines, TV and cable, phone companies-has its own online challenges. None can afford to blithely give away their services, yet neither can they afford to ignore that this is what the public might want.

For newspapers, the trends are clear: circulation and advertising revenues are falling, newspaper readers are aging, debt service and production costs are rising, and stock prices are stuck in the basement. Neither giving away online newspapers nor partnering with Google or Yahoo to sell ads has made an appreciable difference. The bleak headlines did not subside in 2009 as more newspapers shuttered, including the Rocky Mountain News and the print version of the Seattle Post-Intelligencer, and with the threatened closing of many others, the San Francisco Chronicle among them. Declining revenues-newspaper ad dollars fell by nearly one-third between 2005 and 2008-a reflection of new competition. Bloggers increasingly offer a wealth of local information and links that lumbering newsrooms don’t know how to match. The changing competitive landscape is being felt at the Journalism School, Columbia University While the foremost employers of 2008’s graduating class continued to be newspapers and magazines, according to Ernest R. Sotomayor, assistant dean, career services, there has been a profound shift. Many students clamor to take online media courses, he responds via e-mail, and to learn “to shoot/edit video, create audio content, Flash graphics and packages, etc.” And “virtually all those” who went to work for newspapers or magazines are working on their online versions. Increasingly, said Nicholas Lemann, the school’s dean, “many of our students go into ‘print’ or ’broadcast’ jobs that are actually mainly Web jobs.” Web sites have become for them, he said, the new Ellis Island, their point of entry to journalism.

Looking back on the investment mistakes made by newspapers, it is not hard to understand the too-sweeping contempt that people like Jeff Jarvis or Marc Andreessen harbor for them. Take the New York Times Company, which, though rightly proud of its flagship newspaper, has made its economic predicament worse with a series of what-were-they-thinking? business decisions. In 1993, at a time when it should have been clear that newspaper growth would slow, the Times spent $1.1 billion to acquire the Boston Globe. Instead of investing in new media, the Times purchased small television stations, which they have since sold, and spent more than $100 million to acquire a 50 percent stake in the Discovery Civilization digital channel, with an audience so small Nielsen could not measure it, and which was eventually sold back to Discovery in 2006. Instead of making other digital investments or reducing its debt, the company spent $2 billion to buy back its own stock, whose value has plunged; and it spent more than $600 million on a new headquarters building, which has since been leased out to help meet debt payments. The Times did make some smart moves: it made one big digital purchase, About.corn, an online source of information and advice, which has been a modest success; and it invested to expand its national circulation and advertising base, which helped cushion the paper from a local advertising and circulation falloff.

For the past decade, most other newspaper publishers have proclaimed that one answer to their woes was to offer readers more local news coverage, yet too few invested in local newspapers. Even fewer newspapers vied to make their Web sites innovative.

The Internet democratizes knowledge, allowing us to fetch information from most newspapers, magazines, or books anywhere in the world. It provides choices. It is convenient; Google aggregates information so that it’s easy to access. It spreads newspaper stories all over the Web, multiplying the readership. It opens lines of communication to bloggers and readers with valuable information and provocative opinions. And it generates some advertising revenue. But it robs actual newspapers of readers, reduces newspaper advertising and circulation revenue, and makes information in the New York Times equal to information from anywhere. Digital news has another side effect: it allows newspaper owners to quantify which stories appeal to their readers. As Larry Page lamented, “The kinds of stories that generate page views”-a Britney Spears meltdown or a Jessica Simpon weight gain-“are not the kinds of stories reporters want to write,” or that he personally wants to read, “and that kind of makes it worse.”

We are racing through a revolution comparable to the one ushered in by Herr Gutenberg’s printing press in the fifteenth Century. The outcome is as unclear today as it was then. “During the wrenching transition to print, experiments were only revealed in retrospect to be turning points,” NYU professor Clay Shirky wrote on his blog. He continued:

The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn’t apparent at the moment… When someone demands to know how we are going to replace newspapers, they are really demanding to be told that we are not living through a revolution… They are demanding to be told that the ancient social bargains aren’t in peril, that core institutions will be spared, that new methods of spreading information will improve previous practice rather than upending it. They are demanding to be lied to… We’re collectively living through 1500, when it’s easier to see what’s broken than what will replace it… Society doesn’t need newspapers. What we need is journalism.

Shirky is correct, I believe, that it’s vital to preserve journalism, but wrong about the unimportance of newspapers. By newspapers I don’t necessarily mean the printed papers we are accustomed to. I mean a product that offers readers a variety of news, including news they didn’t expect they would want or need. Maybe it’s a book review, or a recipe, or a description of pension padding by public workers, or the bonuses paid to investment bankers whose institution has received a federal bailout. Maybe it’s a report on the appointment of a finance minister in a country that’s going to be vital next year. A good online or print newspaper should be like a supermarket, with a variety of choices. No one is forcing readers to pull items down from shelves. But they ought to have available to them all the information they need to be well-rounded, informed citizens of a democracy Even a not very good newspaper-and most are not very good-broadens the horizons of its readers.

By newspapers, I also mean something often neglected by those who have a better understanding of technology than of journalism. While good journalism can be practiced by individuals-think Upton Sinclair or I. F. Stone-it is often a collaborative effort, the result of teamwork rather than solitary labor. Story ideas are kicked around in a newsroom. A journalist reports a story and phones the editor, who makes suggestions and prods the reporter to probe various angles and seek different interviews. When the story is completed it is transmitted to the editor, who usually asks: “Are you sure about this fact? Who’s your source for this anonymous quote? Have you got a second source on that? There was a report in X newspaper that drew the opposite conclusion. You buried your lede-the heart of your story is in paragraph ten. Did you talk to Y? This story needs more context.” On a big story, other editors will weigh in. This is not meant to disparage bloggers or other independent voices or experts. It is meant to say that the offhand dismissal of journalistic organizations-which is a cousin of the belief that a computer can assemble news without editors-will diminish the thoughtful journalism a democracy requires.

I asked Marc Andreessen, as I did others, to make believe he was the publisher of a newspaper. “What would you do?” The answer he shot back at me was a common one: “Sell it!” The problem with this strategy, as the Rocky Mountain News and other papers have discovered, is that there are no buyers. And those wealthy buyers who might be tempted to splurge for a newspaper trophy, the way their peers buy sports teams, risk looking like fools, not saviors, like Sam Zell at the now bankrupt Tribune Company.

Pressed further, Andreessen said he’d rush to put the newspaper online and move away from the print edition, as a handful of papers have already done. There are at least two vulnerabilities to this approach, as Andreessen recognized. First, because online newspaper ads today generate no more than 10 percent of what a print ad does, the paper really would be, as Mel Karmazin said, trading dollars for digital dimes. Second, public corporations are dependent on investors, and not many folks will invest in a declining asset. So the market value of newspapers will continue to fall, depriving them of the capital to invest in reporting and, in too many cases, the money to meet debt obligations. It may be true, as Rupert Murdoch’s News Corporation’s newspaper retreat concluded, that in another ten years online news will generate enough income to save the paper. The quandary is how to get through the next ten years. As Murdoch conceded, more than a few papers “will disappear,” either consolidating with others or collapsing. Some of these newspapers are mediocre outposts of former monopolies and will not be mourned. But many are valuable civic institutions that cannot easily be replicated.

Any number of ideas have been advanced to rescue newspapers and journalism. Newspapers are belatedly striving to make online editions more interactive and to better conform to a Web sensibility. Michael Hirschorn wrote a provocative media column for The Atlantic Monthly and took a stab at defining a Web sensibility. He wrote that newspapers should take some of their star reporters-he mentions Kelefa Sanneh, the pop music critic for the Times, and Dana Priest, the national security reporter for the Washington Post-and encourage them to create “an interactive online universe,” inviting others to share their information, views, or news tips. “Gaming this out in the most baldly capitalistic fashion,” he wrote, “the papers then stand a chance of transforming one Sanneh review (one impression) into the organic back-and-forth of social media (1,000 impressions).”

Newspapers are also experimenting with reducing costs by outsourcing functions to online ventures-investigative reporting to former Wall Street Journal managing editor Paul Steiger’s foundation-funded ProPublica; or international reporting to GlobalPost, a privately financed organization whose news operation is supervised by former Boston Globe foreign correspondent Charles Sennott, and which pays seventy correspondents in fifty-three countries one thousand dollars for four dispatches a month and gives them part ownership of the enterprise. Bloomberg has proposed that newspapers could outsource their business coverage to them; dozens of newspapers have ceded much of their national political and government coverage to the hundred reporters who work for Politico. Another form of outsourcing is for papers to share articles and photographs; this approach is being tried by a consortium of the New York Daily News, Buffalo News, Times Union of Albany, and New Jersey ’s Star-Ledger and The Record. It has also been proposed that newspapers could be saved by acts of philanthropic generosity similar to the Poynter Institute’s ownership of the St. Petersburg Times; or by injecting new revenues into newspapers (Yahoo has had some success in selling ads for a group of about eight hundred newspapers); or by various governmental actions, from relaxing regulations to tax breaks to advertising subsidies (as France did starting in early 2009) to-a really bad idea-direct subsidies.

While any of these Band-Aids might help slow the bleeding, two things are essential if print or online newspapers are to have a shot at survival. First, newspapers have to stop acting like victims, bemoaning their fate and clinging to the past. To blame Google is to prescribe a cure for the wrong illness. Second, they have to go on the offense by trying new things, including trying to charge for their content.

I was smacked in the face with this realization when my friend Kenneth Lerer, who started the Huffington Post with Arianna Huffington, mentioned in the summer of 2008 that he had hired a single twentysomething employee to launch its local Chicago online edition. The Web site, like Google, was free and offered links to stories in the Chicago Tribune, Chicago Daily Herald, and other local papers and Web sites. Aside from inviting citizens to blog, this local online “newspaper” was little more than a collection of links to work done by others. Lerer said there was promotional value for content providers like the Tribune. True. He said the more page views their content got the more advertising they’d sell. True. He said that “citizen journalists” often provide valuable information. True. But at a time when most newspapers proclaim local news as their potential salvation, these papers were suicidally supplying the Huffington Post with their own murder weapon. By 2009, the Huffington Post was discussing similar local editions in as many as fifty cities.

What to do? Eric Schmidt once told me that he thought “Apple’s iTunes is a great example of compromise” between old and new media and, of course, users pay for their music there. “Google,” Schmidt continued, “has not found the iTunes” model-yet. And unlike music and other forms of entertainment, few will keep replaying a newspaper story on their iPod. Andrew B. Lippman, the associate director and senior research scientist at the Media Lab at MIT, wonders whether the example of ASCAP, the organization that has channeled copyright payments to musicians since 1914, might be a way “for newspaper companies to share revenues.” Newspapers and Google have to keep looking.

Even if they locate the right model, the technical challenge is daunting. “Can you put it behind a wall and charge for access? Yes,” said Andreessen, who despite his criticism of traditional media still subscribes to the print edition of the New York Times and owns some eight thousand books and six thousand CDs. “Can someone still take that content, copy it and mail it to friends? Sure. Can somebody post it on a Web site in Russia and provide it for free? Sure. Can you get the Russian government to crack down on that? You can try. Can somebody put up every copy of the New York Times ever published on BitTorrent and make it available in a single pirated download? Sure. You can’t stop it. It’s bits. If anybody can see it, then there is going to be a way for everybody to see it.”

Today, more than one billion people go online and view these bits. They are accustomed to reading news for free. To suddenly try to get them to pay for it would be an imposing task. To prevent leakage, presumably newspapers would need to act in concert. To do so would require discussions, and such collusion might invite antitrust lawsuits. On the other hand, when the survival of newspapers has been at stake in the past, government has allowed joint operating agreements (JOAs) so that two papers can pool printing facilities or other resources to save money. As there’s little question that newspapers are endangered, our foremost papers-the Times, Journal, and Washington Post-might get together and agree to erect a firewall around their content. Responding to a March 2009 request from House Speaker Nancy Pelosi, Attorney General Eric Holder said he would consider relaxing antitrust regulations to allow newspapers to share costs and merge. In 2009, three longtime media executives-Steven Brill, the founder of Court TV and The American Lawyer; L. Gordon Crovitz, the former publisher of the Wall Street Journal; and business investor Leo Hindery, Jr.-announced that they had formed a company, Journalism Online LLC, in hopes of creating a single automated payment system so that print publications would be paid when their content was viewed.

The rub, of course, is that even if most newspapers agreed to erect a firewall, some would choose not to, probably including wire services like the AP that are now paid by Google for their news. Maybe the Christian Science Monitor, which now relies mostly on an online edition, or the Seattle Post-Intelligencer, which relies solely on its online edition, will achieve success with these and be unwilling to give them up. There would be leakage, as users shared stories. Or as Jack Shafer of Slate observed, an online publication like the Huffington Post or Gawker could subscribe to newspapers and rewrite their stories, as “Henry R. Luce and Britton Hadden started doing in 1923 as they rewrote newspapers on a weekly basis for Time magazine.” On the upside, perhaps online citizens would be better able to distinguish between good reporting and bad. If the online newspaper offers content not readily available elsewhere, along with interactive and video and other features, perhaps customers will pay for it.

In March of 2008, I asked Larry Page how he would save newspapers, and he grew uncharacteristically passionate. “I don’t know how to do it, or I would,” he said. “Or at least try to help.” He said he was spending time thinking about it. This was no abstract puzzle; he knew the question was linked to Google. “I do think that our mission at Google ends up being pretty close to this. We try to produce the best information we can. The success of a Google search is based on the quality of the information-is there a good article about this?” He went on to say, “I’ve been trying to learn more about journalism and trying to understand the issues better. I do think that there is a problem that if you’re primarily doing it for profit, it’s hard to do a really good job. The kinds of things that generate profits and page views are not necessarily the things that generate value for the world. If you look at really good newspapers, they have dual classes of stock. That’s part of our inspiration for doing that.”

Could he imagine Google in the newspaper or journalism business? “We look for high-leveraged things,” he said. “We’re trying to figure out, how does this one employee affect ten million people? I think most content creation companies involve more work. So we naturally steer away from that.”

The next day I asked Eric Schmidt, why not pay a paper like the Times for its content? “We’ve been able with the New York Times to convince them that they make so much money from the traffic that we send them that they want their content available to Google,” he said. “They have the choice of not doing it.” In fact, the Times does generate some income from Google, but digital income from digital operations accounted for just 12 percent of the company’s $2.9 billion revenues in 2008, more than a third of this from About.com. About half of the About Group’s revenues, according to Arthur Sulzberger, Jr., comes from Google’s AdSense, as does “a significant portion” of its online revenues. Might Google try to buy the New York Times? “The official answer is that we have discussed buying the New York Times over the years-and there are many such interesting companies,” Schmidt answered, candidly “In every case, we ultimately decided we don’t want to cross that line”-to become a content provider and risk favoring Google’s own content. “The reason I say we don’t rule anything out is that our strategy is always evolving. We might come up with a different answer in a year or two.”

A year later, in April of 2009, I asked Schmidt if he had come up with a different answer. “It’s the same answer,” he said, before adding that Google was working on a product that is targeted at individuals, that knows the stories that interest people and what they’ve already read and targets text and video to people based on those interests. “In order to do that model we would have to partner with news sources.” He mentioned newspapers like the Times and Washington Post as potential collaborators. Indeed, after leaving Schmidt’s office I bumped into the Times chairman and publisher, Arthur Sulzberger, Jr., and his senior vice president of digital operations, Martin Nisenholtz, grabbing lunch in the cafeteria of Building 43. They were startled to encounter a journalist, no doubt fearful word would spread that they were meeting that afternoon with Schmidt and the founders to discuss a partnership. How they would monetize such a partnership-share ad revenues, create a micropayment system, pay the papers a license fee for their content? Schmidt said he did not yet know the answer. He did know, however, that the new product would not be “a solution to the problems newspapers have today.” But, he added, “the fact that we don’t see a solution today doesn’t mean that it doesn’t exist. This is about invention. One criticism I would make of many industries is that they’ve lost the ability to reinvent themselves.”

In an e-mail exchange afterward, Sulzberger did not portray Google as a villain: “Our industry faces many challenges but I would not lay them at the feet of Google.” A major Silicon Valley figure only blames Google for playing a public relations game by appearing sympathetic to newspapers: “Let’s suppose you’re Google and you fully realize newspapers are screwed… and there’s not a damn thing you can do about it. Are you better off saying ‘tough noogies’ or ’we carefully considered all kinds of ways that we could possibly help?‘”

NEWSPAPERS-like the more seriously challenged music companies-have seen their decline abetted by the recession but not caused by it. By contrast, the sharp drop-off in magazine advertising that began in 2008 is probably linked to this downturn. Like newspapers, magazines require a robust online strategy And like newspapers, even in a bustling economy some will perish. But magazines are just as portable as newspapers, and their content usually doesn’t have to be read the day they’re published. In weekly and monthly magazines, stories often benefit from the luxury of time denied to most daily journalism. There is more context and opinion. There are vivid pictures and color. The paper is glossy, and clean. The ads are more inviting. As a business, magazines probably have better prospects than newspapers.

Few investors would rush to acquire magazines. Even fewer would buy a book publishing company. Their dominant source of revenue is book sales, and these have been fairly flat. The profit margins are slim, and as with newspapers or magazines, the cost of production and distribution is immense. There are long-term questions about what multitasking and the “quick snacks” available online are doing to attention spans. Is it an accident that the fastest growing book category consists of shorter romance and young adult novels? Technology now permits books to be distributed electronically, and upstart publishers have begun to produce paperless books. In turn, writers have to adjust to new pay formulas that involve less money upfront and more profit participation if their books sell. More books will be self-published. And an entirely new class of books-user-generated serial novels written online-now appear on cell phones in Japan, and will elsewhere. For readers, a digital book, like a digital newspaper or magazine, offers a multimedia dimension: video, music, games, interactivity between author and audience.

Early in 2009, Amazon CEO Jeff Bezos said that of the books that were available both in print and electronically at Amazon, 10 percent of these were downloaded and sold on its portable Kindle device. By May, Amazon said the number of electronic books it sold had soared to 35 percent. This figure had nearly quadrupled in a year. Although electronic books comprised but 1 percent to 2 percent of all books sold, it is clear that paper will continue to be replaced by bits. As with newspapers, this will reduce costs. What gives publishers pause is that Amazon, like Apple with iTunes, gets to set the price for these electronic books, and they worry, as advertisers do with Google, that if there are no potent electronic competitors, Amazon will be able to dictate price and publishing terms. This is a reason that publishers welcomed Google’s 2009 announcement that it would compete with Amazon to sell e-books.

Bezos has been smart about spotting trends, and he said he is optimistic about the future of books. At the Wall Street Journal’s D Conference, he told the audience, “Physical books won’t go away, just as horses won’t go away. But in the future the majority of books will be read electronically.” The reason, he later told me, is convenience: “We humans do more of what is easy for us. The more friction-free something is, the more of it we do.” Bezos was sitting on a Sun Valley patio with dark sunglasses shielding his eyes, and was more expansive. He said devices like the Kindle have the advantage of portability, have big, easy-to-read screens, provide online access to other information, and store many books. Most people, he believes, read more than one book at a time, and thus reading is more “frictionless” on devices like the Kindle or the Sony Reader. “The Kindle is an example of a device that is going to make long-form reading more convenient and less friction filled. As a result, you’re going to get more long-form reading. If you want more reading, make reading easier. That’s what we’re trying to do. If you have a book with you, you’ll read more.”

Broadcast television, like newspapers, suffers from too many choices. In the final two decades of the twentieth century, the new consumer options were cable and then satellite TV In this century, the Internet offers vastly more diversions, while TiVo and DVRs allow ad skipping and snatch the scheduling power away from network programmers. Although Americans still spend more time watching television than on the Internet, the proliferation of choices weakens the business model of many of these choices. This is especially true for broadcasters who, unlike cable, do not receive subscription revenue and rely solely on advertising. How, broadcast executives privately mumble, can they afford to pay three million dollars or more for each episode of a one-hour drama when ratings are falling? How continue to afford expensive nightly news broadcasts on ABC, NBC, and CBS when their nightly audience has plunged from thirty-two million in 2000 to twenty-three million in 2009? Local television stations, once known as cash cows because they generated profit margins of around 50 percent, have seen those margins collapse as viewers flock elsewhere and networks demand compensation for programming. Jack Myers projects that local broadcast station advertising revenues will drop 20 percent in 2009.

The belief embraced by too many television (and movie) executives that they are in the content business-and most digital companies are not-is not just smug but stupid. Content is anything that holds a consumer’s attention. If four million people in China subscribe to online games and play an average of six hours daily, as Activision CEO Bobby Kotick says they do, that audience is lost to television and most any other media. If Facebook or YouTube or Twitter is captivating audiences, the number of eyeballs watching CBS will drop. Internet video is growing twice as fast as television viewing, Nielsen reported in early 2009, and eighteen- to twenty-four-year-olds now spend the same amount of time-five hours a day-watching Internet video as American adults spend watching TV

“To survive,” said Quincy Smith of CBS, “media companies have to get out of a broadcast mentality. All of us-broadcasters, cable networks, Hollywood studios-have to display our content on multiple platforms, be it YouTube, TVcom, Hulu, MySpace, or iTunes. We need to use these platforms to promote our content and drive audiences, particularly younger audiences, to our primary platform.” Network television can no longer think of itself as a lean-back medium. The Internet, Smith emphasized, was more than just a distribution platform: “On the Web, you build communities. And traditional media has to change its DNA to think about that community. Our most trafficked CBS sites are the ones that create community. The Internet is not just a platform. It’s about interactive storytelling.”

By the summer of 2009, however, Quincy Smith decided that it was time to move on. He denied he was frustrated trying to turn the CBS ship around, steaming toward the digital world. He expressed admiration for CBS CEO Les Moonves. He desired to move on because he had accomplished what he set out to do. He had engineered the acquisition of CNET He now presided over CBS Digital’s three thousand employees. CBS Digital was generating one hundred million dollars in annual profits and growing 10 percent each year. The challenge now was “blocking and tackling,” he said-management. This was not his forte. If he won Moonves’s concurrence, he said he wanted to return to what he did best-deal making-and planned to hang his investment banking shingle in Silicon Valley and serve as a digital adviser to old and new media companies. If Smith left, said Moonves, he would want to retain him as a consultant.

The challenge for Smith’s potential successor, as for all old media, is to create unique content.

No cable or satellite or telephone system will pay a hefty price for a network series that appears for free on YouTube-or is available in a pirated version. Because Viacom took the extreme (and arguably foolish) position of suing them, Google and YouTube have made considerable progress in coming up with a better (if probably still porous) defense against piracy. And as Google acknowledged in the negotiations-and in its settlements with the AP and the book publishing industry-it has accepted the principle of paying for content. Whether piracy safeguards or deals with YouTube can spare traditional television from further slippage is doubtful. Ultimately, the fate of traditional media is to jump off a bridge without knowing whether there is a net below.

The Hollywood studios have their own concerns about piracy. The biggest box office movie of 2008, The Dark Knight, was illegally downloaded around the world more than seven million times, according to the New York Times. The Motion Picture Association of America claims that illegal downloads and streaming of movies in 2008 accounted for 40 percent of the industry’s revenue loss due to piracy. The audience for illegal downloads of Heroes, a studio-produced NBC series, was equal to one-quarter of the ten million viewers who watch it each week on NBC. In their efforts to stamp out piracy, the studios often offend their customers. Sergey Brin described going on a boat in Europe on his honeymoon and watching a DVD he and his wife had purchased. “We didn’t finish. So we took it with us, and of course it wouldn’t work in other DVD players.” The more he talked, the more exercised he got. He recalled the time he purchased The Transformers, hoping to watch this science fiction movie in high definition on his new Blu-ray player. But his copy wasn’t compatible with Blu-ray. “For a variety of reasons and some kind of piracy paranoia, they make it really hard on you… I kind of feel the studios get in their own way.”

Squaring the piracy concerns of studio executives with customers’ urge for convenience has thus far eluded a solution. The movie business may be glamorous, but the profit margins are tight. For decades, selling movies to television proved to be richly rewarding, as did VCR and then DVD sales and rentals. Now the revenues from all of these are declining. Downloading movies over the Internet could be the next profitable platform-if piracy can be solved, and if the Hollywood studios were not immobilized by fear of offending big retailers, such as Wal-Mart, which sells their DVDs, and instead partnered to sell their own movies directly.

The cable business is more robust. Unlike broadcasters, cable programming chanels like ESPN or MTV that produce content are not dependent on mass audiences because they enjoy two revenue streams, advertising and license fees from cable systems. Cable system owners like Comcast or Time Warner that own the cable wire and distribute content over cable systems also derive revenue streams from both ads and monthly service charges. Digital cable also has this advantage over broadcasting: it is able to offer interactive features like video on demand. Cable networks and online advertising are the only two of the seven media groupings projected to gain ad revenues in 2009, according to media consultant Jack Myers. However, like broadcasters, cable systems are dogged by the proliferation of platforms-YouTube, MySpace, CNET, Verizon’s FIOS, local stations, two satellite television providers-that weaken their power as gatekeepers.

By 2009, with cable networks and broadcasters distributing programs for free to various online platforms, giant cable system owners like Comcast and Time Warner were concerned that their programming was being devalued. So they initiated efforts to offer online access to all of their programs, but only to their cable subscribers. The hope was that if cable subscribers could summon any program they wanted when they wanted it, they’d have less reason to fret about YouTube or Hulu, and might lure new cable subscribers. Currently, cable system owners pay much of the thirty billion dollars in license fees collected annually by the cable networks that produce programs. The club cable system owners wielded to prevent the ESPNs from putting their programs online was a warning that they would not continue to pay these steep license fees for programs cable channels were giving away cheaply or for free.

But the cable programmers may hold their own club in the form of new technologies that could replace cable set-top boxes with wirelessly received signals that will allow users to integrate all devices-from streaming video to computers to TV sets to portable devices. In early 2009, Eric Schmidt saw a demonstration of one such sleek wireless box made by the Sezmi Corporation and came away thinking that this new technology posed an imminent danger to both cable and satellite TV systems. If the wireless system worked, the cable or statellite wire could become a superfluous middleman. Sezmi was planning to beta test its system that year and claims that it had already negotiated deals with cable and broadcast networks. TV manufacturers like Sony and Samsung are developing sets with Internet connections, allowing them to bypass the cable gatekeeper.

The cable system owners already lacked leverage over broadcast networks because they do not pay to air the programs of CBS, NBC, ABC, and Fox, all of which were pushing their own online strategies. If people could watch 24 on Hulu, its value to cable would be diminished. By placing their programs on a variety of online outlets-Hulu, TY.com, YouTube, Boxee-broadcasters also ran the risk of sabotaging their business. But if they didn‘t, they ran the risk of passively watching their business erode. Again, the Innovator’s Dilemma.

A major challenge confronting the cable and telephone and other distribution companies is to demonstrate that they are not just a pipe that others use to transport their valuable content for a bargain price. Verizon’s Seidenberg wants to position the phone company as a disrupter. “We can go directly to Procter and Gamble and they can reach you without having to go through Google. So the world will now move in a direction where distribution will have a more important role.” Verizon was experimenting in late 2008 by distributing Prince’s music “directly to customers without going through a middleman”: the music companies. “We can talk directly to directors and creators of content.”

Seidenberg, who began his career as a telephone lineman, was seated in a corner booth at the Regency Hotel, which is a New York power breakfast spot, and he grew blustery as he talked of what Verizon could do to middlemen. “We’re going to change ten percent of every relationship. In some cases, fifty percent. So will there be a need for media buyers? Maybe one!” He laughed. Because Verizon will own a wealth of data, he envisioned working directly with advertisers to better target customers. The telephone companies have a technology known as deep packet inspection (DPI) that both protects their pipes from security threats and exposes the web browsing activities of consumers to the kind of controversial behavioral advertising practiced by Phorm in England.

“It could be the broadcast networks” that Verizon siphons ad dollars from, Seidenberg said. “It could be the cable networks. It could be a lot of people.” Seidenberg’s words, however, bump against reality. Having existed for so long as quasimonopolies, the phone companies and cable companies may not be agile and daring enough to move with the speed required. It sounds hubristic for Seidenberg to assume, for instance, that a company like Verizon, with minimal experience working with Hollywood directors or advertisers, could overnight develop the skills to work with actors and directors, or with Procter amp; Gamble. And Seidenberg blithely minimizes the volatile issue of privacy.

Irwin Gotlieb also dismisses anxiety about privacy. He is more focused on the ability of digital technology to generate more data, which will mean that “the value of data will escalate dramatically.” The critical questions to Gotlieb will be: “Who collects the data? Who owns the data? Who gets to exploit the data? Who’s the gatekeeper? Who’s the toll collector? These are key strategic issues that need to be resolved”-between the ad agencies and Google and the cable and telephone companies, among others. But the data will be crucial because it will allow advertisers to move from guessing about “multiple correlations”-income, demographics, television programs watched-to “intent,” which he described this way: “Today, if I decide I need to sell a high-end watch, who’s the prospect? I can identify people with discretionary income. I can identify males or females fifty or older. But down the road, I will know you’re a watch collector because I will have that data on you. How? I will know your purchase behavior. A lot of retailers have loyalty programs, and they will share this information. If consumers have searched on Google or eBay to look at watches, all these searches are data trails. So instead of assuming that because you’re wealthy you might buy a watch, I can narrow my target to the small percentage of watch collectors.” And mobile phones offer still more data. Whether the mining of this data will provoke a public outcry is an issue Gotlieb does not stress.

To make the sale, he believes awareness, or brand advertising, will remain vital. He has a stake in saying this, but he seems to believe it: “I am not a proponent of the belief that most advertising is wasted. If I don’t create a predilection in you for a Mercedes when you’re a fifteen-year-old male, you’re not going to buy a Mercedes when you’re forty and can afford to. Take disposable diapers. Should you just market to pregnant women? I would argue that maybe the grandmother has significant influence. And maybe you could make little diapers for Barbies, so the eight-year-old girl becomes aware of your brand. Both of these require you to substantially expand your target.” And expand the money clients spend on advertising. It also assumes that the public will accept such hard sells.

Gotlieb believes only the agencies possess the skills and experience to engage in such long-term brand building. He refers to his work not as media buying but as “media investment management.” Whatever name he chooses, it’s endangered, which Gotlieb reluctantly admits. “I’m terribly concerned about getting disintermediated.” It’s why he thinks his business has to change from middleman to a principal. “I’ve grown up in a business where the media agency was a pure service business. I was taught from day one to put my clients’ interests ahead of my own. It may have been appropriate for the time and place. But it is no longer appropriate today, because we’re competing with people who are both vendor and client, as well as agent. Microsoft is a vendor, but owns a digital ad agency. Google is a vendor, but deals directly with clients. As a consequence, unless you’re terribly naive, we have to morph our business from pure service to a mix of service and nonservice.” He ticked off several options, including producing and owning content, whether it be television programs or movies; investing in technologies, as his parent company has, to try to capture more data and receive not just fees and commissions but “participate in the profits.”

What if a client asks whose interests come first, Gotlieb’s or the clients? “That’s a really good question,” he responded. “But how many people ask Google that question? If we remain purely a service business, we won’t be in business.”

Advertising will look very different in coming years. New digital middlemen have already surfaced. Like Google’s AdSense, these advertising networks act as brokers, putting Web sites and advertisers together. Computerized ad networks can quickly cobble together Web sites or TV stations that, together, reach an audience the size of an ESPN but at a fraction of the cost. This is a threat not just to traditional media, but to middlemen like Gotlieb. Still another refinement among agencies like Gotlieb’s is that, increasingly, the media buyers are beginning to offer to create ads as well. Because the giant media-buying firms operate under the same corporate umbrella as the creative agencies, this could produce civil war within firms.

Gotlieb knows that if he doesn’t refine his business model, Google or someone else may grab his clients. Most media (and not a few other industries) are in a race to avoid becoming superfluous middlemen. No matter how much popcorn they sell, movie theaters might face this fate when Hollywood begins to release movie DVDs simultaneously with the theatrical release. It is the danger faced by local TV stations as broadcast networks air their programs online and threaten to sell them directly to cable, and by media buyers like Gotlieb as clients work directly with Google or perhaps Verizon. The Internet and digital technology allows people to download movies rather than buy a DVD, to bypass stores and travel agents and perhaps eliminate financial or real estate brokers, publishers, bookstores, agents, music CDs, newspapers, cable or telephone wires, paid classifieds, packaged software and games, car salesmen, the post office. The Web allows sellers and buyers to connect directly, as they have done on eBay. Inevitably, new technologies will cripple many old media businesses.

One day when I was questioning Eric Schmidt about the travails of old media, he calmly asked, “Do you feel bad that the pager business is in trouble? No, because you use your cell phone as a substitute. When you have a good substitute, it’s very, very hard to fight against that.” Unless old media companies want to fight their customers, try to deny their desire for new choices and new conveniences, they have no alternative but to figure out how to ride the wave.

CHAPTER SEVENTEEN. Where Is the Wave Taking Google?

Google is surfing a huge wave that seems not to have crested. Eileen Naughton is the director of media platforms for Google and works out of its block-long New York office on West Fifteenth Street. Before joining Google, Naughton spent more than fifteen years at Time Warner, where she held a number of senior positions, including president of Time magazine and vice president of investor relations during the merger of AOL and Time Warner, when everyone feared layoffs, turf battles, a stock price drop, and senior management at the joined companies vied to mirror the Ottoman Empire, where the wives of sultans poisoned stepsons. When asked to describe the difference between working at Google and at an old media company, Naughton offered a one-word reply: “Optimism.”

Google may not have an overarching strategy, but it does aim to be a disrupter. Google has always been guided by a vision enunciated as early as 2002, as we’ve also seen, when Larry Page told a Stanford class, “If you can solve search, that means you can answer any question. Which means you can do basically anything.”

When Google defines its informational mission so broadly, and enters businesses where engineering can eradicate inefficiencies, it is left with a shooting gallery of swollen targets. An “innovative” company like Google, said Brin, enters fields where “we scale,” meaning where they have the infrastructure to enter fairly cheaply and without huge diversions of resources. With millions of computers and servers processing searches and collecting and digesting data, this architecture makes it possible for Google to “scale” into cloud computing, to store and search and sell digital books, to host the fifteen hours of video uploaded each minute on You Tube-the equivalent, Brin said, of uploading eighty-six thousand full length movies every week. “Everything Google does extends its reach,” Bala Iyer and Thomas H. Davenport wrote in the Harvard Business Review. “It is informational kudzu.” And although Google likes to say they don’t compete with media companies and prefers to call them “partners,” Iyer and Davenport write that by working with advertisers and newspapers, magazines, television, radio, mobile telephones and Web sites, it “is quite possible that what Google learns across various media as it solves problems for the ecosystem partners may position it to become the competitor that it now claims not to be.”

Google appears to be well positioned for the foreseeable future, but it is worth remembering that few companies maintain their dominance. At one point, few thought the Big Three auto companies would ever falter-or the three television networks or AT amp;T, IBM, or AOL. For companies with histories of serious missteps-Apple, IBM-it was difficult to imagine that they’d rebound, until they did. To avoid the roller coaster, Google has to avoid two sets of obstacles, one external, the other internal.

THE EXTERNAL HURDLES START with Microsoft, but they don’t end there. Because Google has been so audacious, it has “waked up the bears,” colliding with various industries and companies. Alert to Google’s growing dominance, Verizon in late 2008 chose Microsoft’s search engine for its mobile phones. Newspapers and magazines now want Google to pay to link to their stories. Television and movies seek license fees from YouTube. Telephone companies fear Google’s Android. Advertising agencies seesaw back and forth between wariness and hostility. Cable and telephone broadband providers are angry about Google’s call for an “open net.” Rupert Murdoch is unhappy that Google is likely to end its lucrative advertising guarantee to his MySpace when the contract expires in 2010, as Time Warner was when Google announced in early 2009 that it would sell its 5 percent stake in AOL, cheapening the value of AOL and of Time Warner’s stock. Microsoft needs no reminders that Google is their enemy and was reminded of this in July 2009 when Google announced-as Netscape, to Microsoft’s chagrin and alarm, did a decade earlier-that it was retooling its browser to become an operating system for PCs, one without boot-up delays and that would be simpler and faster and cheaper than Windows. (Of course, Microsoft countered with a Web-based version of its Office software that is also free.) Overseas, Google is challenged. Its social network site, Orkut, has seen its market share slip in countries like India and Brazil, where it was once dominant. Even in search, there has been slippage; in Russia, a private start-up named Yandex has a market share approaching 50 percent, well ahead of Google. As with nations, there are few permanent allies. Friends like Apple are angry about Android, and although Jeff Bezos was an original Google investor (and declines to say if he still owns Google stock), Amazon is mounting a cloud-computing challenge as Google is mounting an electronic book challenge. “These companies air kiss each other, just as any Hollywood company does,” observed Andrew Lack, the former president of NBC and the CEO of Sony Music, now the CEO of the multimedia division of Bloomberg LP. “So their level of sincerity is not much different than the traditional Hollywood. Usually we think of Hollywood and Washington, D.C., as company towns. Ironically, Silicon Valley is often right there with them.”

Google knows that one day its cold war with Facebook could turn hot. By March 2009, Facebook had 200 million users, double the number it had when Sheryl Sandberg joined a year earlier. Sandberg projected that by the end of the year, Facebook would have 1,200 employees. Despite sneers that Facebook makes no money, Sandberg said if her company extracted the money it reinvests in its computerized infrastructure, “we’ve been profitable for seven quarters.” (Of course, one can’t extract these core business expense.) By the fall of 2009, she predicted that Facebook would take in more cash than it expends. Asked whether Facebook was a threat, Bill Campbell replied without hesitating, “Anybody that gets a widely accepted user platform is to be worried about.They could be the start page for people that use the Web.” The Google model is based on getting users out of Google and to other sites, on maintaining the Internet as the primary platform. Facebook and other social networks seek to keep users on their sites, to become the hub of their online lives, to become their home.

Social networks might pose a threat to Google search. At the MIT Media Lab in the winter of 2009, a Ph.D. student named Kwan Lee was devising a mobile phone application for a social network search function. Lee began with the premise that “Ads on the side are not useful to me.” Google search, he said, “is a pull model,” in which the search program aggregates data and lets users decide what is useful. Lee thinks it is difficult for users to “pull” the data they want from the hundreds of thousands of links received in response to a single search query, much of which he considers spam. As a substitute, he is devising a “push” model with which friends who are part of a social network could push tips to friends, sharing what they purchased. It would also allow participants to ask questions of friends, who are likely to deliver more precise and trusted answers. “This makes search much more efficient,” said Lee, fondling his iPhone in his space on the fourth floor of the Lab. “My goal is to reduce and eliminate spam,” to allow “people to get recommendations from friends.”

This could pose a threat to Google, for although it has a broader base of data, social networks like Facebook, Twitter, Ning, or Linkedin retain more in-depth information about individuals and their community of friends. A familiar brand name like Amazon could also pose a challenge. “What happens if people searching for a product go right to Amazon and not to Google?” asked an important Google adviser.

Google’s founders are acutely aware that search is still fairly primitive. Type into your Google search box “Was Shakespeare real?” and in less than a second up pop 5,06,000 results. Because many books have been written exploring whether someone other than William Shakespeare penned his plays, one result would not be possible or even desirable. But 5 million? Page and Brin often say that their ideal is to have so much information about their users that Google can devise an algorithm that provides a single perfect answer.

Kwan Lee is not alone in thinking that Google is mistaken to treat search as an engineering problem. John Borthwick, who created one of the first city Web sites, sold it to AOL in 1997, and later became senior vice president of technology and alliances for Time Warner, thinks Google “lacks a social gene.” (Borthwick has since founded and now runs Betaworks, which seeds money for social media.) Information, he said, “needs a social context. You need to incorporate the social graph [the connections among people] into search. Twitter becomes a platform for search. People put out Tweets-‘I’m thinking about buying a camera. What does anyone think of this camera?’” It’s the wisdom of crowds-your crowd of friends. “Google is just focused on CPU-central processing computers-and ignores the processing of the human brain.” He believes this makes its search vulnerable. Google obviously has come to share this concern for a senior Google executive confirms that they tried-and failed-to acquire Twitter.

Search Engine Land ’s Danny Sullivan identifies another variation of this threat. “If I were Google I’d be worried about vertical searches,” he said-searches that tap the knowledge of experts. Jason Calacanis, a Web entrepreneur, started a niche search engine, Mahalo.com. The problem with horizontal search, Calacanis said, is that it spews out too much information and assumes that the most linked sites are best. “The ‘wisdom of crowds’ is great to find trends,” but there is such a “mob” of voices on the Web that search results produce too much useless information. He said he raised twenty million dollars to hire experts who produce targeted sets of no more than seven results-the seven best hotels in Paris, for instance. He hoped experts in various fields could produce answers to twenty-five thousand questions and computerize these. He vowed not to assign cookies to track a user’s past searches, and said he’d be content in ten years if Mahalo had ten percent of all search traffic. He saw Google more as a partner than a competitor; the AdSense program generates a good deal of his site’s income. The competition he worried about is from old media. “I would have been afraid if the New York Times or Bloomberg took a bunch of editors to compete with us.” Calacanis still can’t understand why they didn’t enter vertical search themselves. With experts in food, wine, movies, art, Iraq, finance-you name it-big newspapers might have been a search contender.

Of course, Calacanis himself might not be a contender. Perhaps a challenge will come from Wolfram Alpha, which was launched in May 2009 and does not search the Web or rely on experts but instead relies on databases to provide answers and offers additional links on the side of the search results. Unlike Google, these vertical search engines do not offer a universal search, which raises this question: how does a user anticipate which subjects are covered in the vertical search index? To date, with exceptions such as Expedia.com for travel, Monster.com for job searches, and HomeAway.com for vacation retreats, vertical searches have not thrived. And as Google moves toward better comprehension of the information users seek, it too will produce fewer and better-honed results. Google will have competition from Microsoft’s renamed and reengineered search engine, Bing, launched in May 2009, which in July 2009 finally succeeded in merging with Yahoo search.

One could argue that the ultimate vertical search would be provided by Artificial Intelligence (AI), computers that could infer what users actually sought. This has always been an obsession of Google’s founders, and they have recruited engineers who specialize in AI. The term is sometimes used synonymously with another, “the semantic Web,” which has long been championed by Tim Berners-Lee. This vision appears to be a long way from becoming real. Craig Silverstein, Google employee number 1, said a thinking machine is probably “hundreds of years away” Marc Andreessen suggests that it is a pipe dream. “We are no closer to a computer that thinks like a person than we were fifty years ago,” he said.

Sometimes lost in the excitement over the wonders of ever more relevant search is the potential social cost. In his provocative book The Big Switch, Nicholas Carr notes that Google’s goal is to store 100 percent of each individual’s data, what Google calls “transparent personalization.” This would allow Google to “choose which information to show you,” reducing inefficiencies. “A company run by mathematicians and engineers, Google seems oblivious to the possible social costs of transparent personalization,” Carr wrote. “They impose homogeneity on the Internet’s wild heterogeneity. As the tools and algorithms become more sophisticated and our online profiles more refined, the Internet will act increasingly as an incredibly sensitive feedback loop, constantly playing back to us, in amplified form, our existing preferences.” We will narrow our frames of reference, become more polarized in our views, gravitate toward those whose opinions we share, and maybe be less willing to compromise because, he said, the narrow information we receive will magnify our differences, making it harder to reach agreement. Carr also expressed concern that search extracts another toll. “The common term ‘surfing the Web’ perfectly captures the essential superficiality of our relationship with the information we find in such great quantities on the Internet… The most revolutionary consequence of the expansion of the Internet’s power, scope, and usefulness may not be that computers will start to think like us but that we will come to think like computers. Our consciousness will thin out, flatten, as our minds are trained, link by link, to ’DO THIS with what you find HERE and go THERE with the result.‘ The artificial intelligence we’re creating may turn out to be our own.”

The fear was that Google and its online brethren shortened attention spans and trivialized ideas by simplifying them. This was the thrust a quarter century ago of Neil Postman’s influential book, Amusing Ourselves to Death. He was writing of the public harm when television supplanted print. I can’t suppress a smile when I think how this communications scholar, were he still alive, would react to the Internet, to the thousands and sometimes millions of answers Google offers to a search question, or to an online text-messaging tool like Twitter, with its insistence that no communication be more than 140 characters.

Increasingly, teachers admonish their students that a Google search can be too easy, allowing them to bypass books that broaden the context of their thinking and surprise them with ideas their search words don’t anticipate. Tara Brabazon, a professor of media studies at the University of Brighton, in England, published a book, The University of Google, that caught the attention of the press, in early 2008. Google, she told the Times of London the day before she was to deliver a lecture based on her work, “offers easy answers to difficult questions. But students do not know how to tell if they come from serious, refereed work or are merely composed of shallow ideas, superficial surfing and fleeting commitments.” She does not let her first-year students use Google or Wikipedia as research tools because, she warned, “We need to teach our students the interpretive skills first before we teach them the technological skills.” These social costs will matter to the company if they erode the trust Google has earned and if generations of college graduates and their instructors are dubious about Google’s veracity or worth.

The other external threat to Google is government, a threat engineers have difficulty understanding; the Silicon Valley bubble can be as insular as the Beltway’s. Google had fair warning when the Federal Trade Commission held up its DoubleClick acquisition, and when the Justice Department threatened antitrust charges if Google did not relinquish its advertising deal with Yahoo. And these challenges were under the anti-regulatory administration of George W Bush. There is, with merit, a common belief at Google that the administration of Barack Obama and the Democratic leadership in the House are more sympathetic to Valley companies and technology issues. Eric Schmidt was an important economic adviser to Obama, and other Google executives, like David Drummond, were early and fervent Obama supporters. But Google would forget at its peril that Democrats traditionally favor more regulation, not less; that Google has made some powerful frenemies that command attention in Washington; and that Google juggles nuclear issues-privacy, concentration of power, copyright-that could explode at any moment. In May 2009, the Obama administration’s new antitrust chief, Christine A. Varney, announced that her department would more rigorously police tech firms like Google.

There are court threats and festering opposition to Google’s Book Search settlement. By the spring of 2009, the settlement was separating Google from members of “the tribe,” as Lawrence Lessig dubs them, who treat openness as a cause and crusade against those who advance their own narrow commercial interests and choke competition. The federal district court judge who must sign off on the agreement between Google and the publishers and the Authors Guild received amicus briefs from various groups asking him to address their antitrust and monopoly concerns. Under the terms of the settlement, Google was granted nearly exclusive rights to millions of “orphaned” books, or those books still under copyright but whose copyright holders are unknown. Because only Google would be granted the right to digitize these books and to sell them, the judge was petitioned to prevent a Google monopoly Librarians expressed concern that Google would monitor reading habits and compile data. Some literary agents protested, as did Charles Nessen and a group of Harvard lawyers, that Google did not have the right to abrogate an orphaned copyright. And with Google effectively locking up the right to digitize all the books ever published, including orphaned books, the claim was that competitors would be shut out. Safeguards were required, they asserted, to ensure that Google would not one day jack up the prices it charges universities and others. The federal judge gave opponents until October 2009 to register their complaints. Seeking to head off growing concerns among libraries, in May 2009 Google reached an agreement with the University of Michigan to grant libraries a say in pricing decisions and to settle disagreements by arbitration, a model it hoped to extend to other libraries. Ominously, the Justice Department also opened an antitrust inquiry. Many who petitioned the court or lobbied Justice acknowledged that Google’s effort to digitize books was salutary. Yet the din grew louder that Google was a mechanized steamroller.

And the U.S. government is not the only government Google must contend with. The European Union held up the DoubleClick merger, and may well object to Google’s worldwide book deal that was made with American companies and authors. China censored their search engine and, in early 2009, blocked YouTube for a time from appearing before the world’s largest Internet audience. As the Iranian government brutally suppressed street demonstrations in June 2009 not just with clubs but by jamming the Internet, the government of China had ordered PC makers to load filtering software on all machines sold after July 1. China claimed this would block pornography, but it would also grant the government a weapon to block political content it considered subversive. Not surprising, many governments are hostile to the idea of a free and open Web that Google advances, believing their national values-or the governing regime-are threatened. I soured on attending the World Economic Forum in Davos several years ago because I found too many panels there to be insufferably polite and boring-designed to bestow backslaps on corporate and government attendees. But what is mind stretching about Davos, and different from most conferences, is that attendees come from all over the world and bring with them different sets of values and assumptions about the meaning of words. I remember a panel in the late nineties moderated by Esther Dyson, an early champion of the Internet. She opened by extolling the democratic values-freedom, liberty, access to all information-advanced by the Web. The former foreign minister of Denmark chimed in with his agreement, emphasizing that the Web gave individuals more freedom. He and Dyson thought they were taking the unassailable moral high ground.

For the next several minutes, they sat slack-jawed as Singapore ’s ambassador to the United States challenged them. He said his government licensed Internet use with the idea that the Web must serve society, not the individual. “By licensing you are asking for responsible use,” he said. An Egyptian diplomat educated in America chimed his agreement. He favored regulating “human dignity” situations, such as expressions that might be construed as “racist.” He urged the adoption of international standards to prevent freedom of speech from being too free.

Astonished, Dyson and the former foreign minister challenged these ideas as threats to “liberal values.”

“I am not a liberal,” a member of the Iranian Parliament shot back, declaring that his government opposed the “pollution” of Western democratic values spread over the Web. “A nonliberal system does not equal intolerance,” he said, explaining that his country favored “community” over “individual” values.

This exchange was a reminder that “common values” are not always common, and that Google, whose mission is to share and make the world’s information accessible, will always have government bears to contend with.

THE THREATS FROM WITHIN GOOGLE are as significant as those from without. “What Google should fear most of all is hubris,” said Yossi Vardi, the Israeli entrepreneur who funds start-ups and is a friend of Page’s and Brin’s. “If you are successful and young and everything plays in your direction, you feel you can do anything.” When Marissa Mayer said that Googlers love to battle over ideas but “everyone” shares “a similar motivation to do good for the world,” or when chief cultural officer Stacy Savides Sullivan said, “What separates us is that our founders care about users, not making money,” they sincerely meant it. But history is littered with examples of people who believed too much in their own virtue and lost the humility that is a counterweight to hubris. Page and Brin, observed Stanford’s Terry Winograd, “are utopians,” believing deeply that “if people have better information they will live better lives… They are technological optimists in the sense of saying, ‘Let’s produce this technology and things will work out.’” They don’t always work out, and some of the clashes Google has had-with book publishers and the AP, or with ad agencies and governments-resulted from an inability to hear.

In the 1990s a coterie of math whizzes that included Nobel Prize winners Robert C. Merton and Myron S. Scholes crafted formulas they were certain would allow Long-Term Capital Management to consistently out-perform the stock market; they failed spectacularly because their computer programs lacked common sense. This is the same mechanical thinking that often overlooks the needs of workers when designing assembly lines. In the same way, Google’s engineers can get too wedded to their algorithms. As Google search has become more dominant, a chorus of complaints from media companies that the PageRank algorithm penalizes them has grown louder. By giving so much weight to the number of links a page received rather than the quality of the information reported, members of Google’s Publisher’s Advisory Council, which includes ESPN, the Wall Street Journal, Hearst, and the New York Times, complained that their links often appeared on page three or lower in the search results. Nat Ives of Advertising Age reported that the Times senior vice president, Martin Nisenholtz, told of doing a search for Gaza after the Israeli army launched an invasion to stop rocket attacks around New Year’s 2009. “Google returned links,” Ives reported, “to outdated BBC stories, Wikipedia entries, and even an anti-Semitic YouTube video well before coverage by the Times, which had an experienced reporter covering the war from inside Gaza itself.” While it’s true that judging “quality” in news is subjective, it’s also true that Google’s proclaimed desire to offer the best information often conflicts with algorithms that reflexively push to the top of the search results those sites with the most links. If such complaints received wide currency, they would sabotage the trust essential to Google’s continued success.

Hubristically, Google engineers were convinced they could devise a system to successfully sell ads for YouTube. So far at least, they’ve failed. Why? They failed to comprehend the fear major advertisers have of placing their ads alongside potentially unfriendly user-generated content, and they failed to sufficiently anticipate that users would find ads intrusive. In early 2008, when Eric Schmidt envisioned employing a Google sales force of a thousand to sell ads for radio, Danny Sullivan was dubious. “They have no experience,” he said, echoing Mel Karmazin’s comments from his 2003 visit. “They may be able to cut costs, but a lot of people at Google don’t understand that selling other ads is not like a search auction. They don’t understand it is an art, not a science.” In late 2008 and early 2009, a somewhat humbled Google canceled its print ads and its audio ads programs, and pared two hundred sales and marketing jobs.

Frantically, Google adopted a new approach to YouTube. With the site then on course to lose about five hundred million dollars in 2009, Schmidt transferred Salar Kamangar, who had crafted Google’s first business plan and shepherded AdWords, to YouTube headquarters to work closely with its founders to design a monetization plan. And the management team at Google recognized that to attract advertising, YouTube could not rely on user-generated videos or three-minute clips from the networks. They needed long-form content, and in April 2009 made ad-sharing deals with the Universal Music Group, the world’s largest music company, to create a music video channel on YouTube, and with several Hollywood studios and CBS to air movies and a library of TV shows. More ads appeared when Google accepted that YouTube needed more professional content, and its losses were shrinking.

Size is a concern for a company with more than twenty thousand employees. Venture capitalist Fred Wilson, a principal in Union Square Ventures, unhesitantly believes Google “is a great company.” But he also believes: “They are a big company Maybe they can’t innovate anymore. It takes them meetings and processes to make decisions. Things don’t get launched as quickly. They missed the whole video thing. YouTube beat them to it. They had to buy YouTube. They missed the whole social networking thing. Facebook beat them to that.”

Losing focus is another danger for a company this large and wealthy. “My sense is that Google is like that fourteen-year-old who suddenly gets to wear grown-up clothing and maybe looks old enough to get a drink at a bar,” said Strauss Zelnick, CEO of ZelnickMedia, which invests in and manages an array of media properties. “There’s really nothing that doesn’t look cool and interesting to a fourteen-year-old with an Amex card and no spending limit. Do you remember Michael Armstrong?” Zelnick recalled that Armstrong, the former CEO of AT amp;T, once boasted of spending a hundred billion dollars on acquisitions over four months. “I said, ‘He’s done.’ No one does that well. Focus. Google has done a phenomenal job. Right now they can afford to, but at some point in time they are going to need to have a crisp vision of who they are and where they’re going, and focus on that.”

Although Mary Meeker believes Google is a great company, she offers another caution: the power and precariousness of a culture shaped by its founders. When founders stay involved in the enterprise-she cited Steve Jobs of Apple and Larry Ellison of Oracle-they often maintain the core values and mission of the business and bring something invaluable to the enterprise. But Jobs and Ellison lost focus, and watched their companies suffer. They also profoundly learned from their ordeals, while Page and Brin have yet to “experience nasty failure” and its concurrent ability to teach, as Al Gore also noted. And now with wives, and a son born to Brin in early 2009 and Page expecting his first child in the fall of 2009, and with incomprehensible wealth and two huge airplanes more conveniently at their disposal-Brin and Page persuaded NASA to waive its prohibition on private planes parking or using the nearby NASA facility-both young men are in the office less, jumping on their planes to take photographs in Africa, to explore the wilds of Alaska; Page likes to tool around in his Tesla electric car or fly his own helicopter and Brin to spend time building his own kite-powered sailboat. Will their attention wander from Google?

Today, Google appears impregnable. But a decade ago so did AOL, and so did the combination of AOL Time Warner. “There is nothing about their model that makes them invulnerable,” Clayton Christensen, Harvard business historian and author of the seminal The Innovators Dilemma, told me. “Think IBM. They had a 70 percent market share of mainframe computers. Then the government decided to challenge them. Then the PC emerged.” Seemingly overnight, computing moved from mainframes to PCs. For a long while, Microsoft seemed unstoppable, he said, only to be diverted by government intervention and the emergence of Linux and open-source software. “Lots of companies are successful and are applauded by the financial community,” Christensen said. “Then their stock price stalls because they are no longer surprising investors with their growth. So they strive to grow but forget the principles that made them great-getting into the market quickly, not throwing money at the wrong thing. When you have so much money you become so patient that you wait too long. Again, look at Microsoft. No one can fault them for not investing in growth ideas. But none of these have grown up to be the next Windows.” Maybe, he added, we are now beginning to “see this at Google.” The company has poured money into YouTube and Android and cloud computing and the Chrome browser, but has yet “to figure out the business model for each.”

Of course, these are the what-ifs. Today, and for the foreseeable future, few of Google’s detractors would disagree with Fred Wilson, who said of Google, “There is no end in sight to the value they are creating.” The value can be measured in rising profits and searches, but to quantify Google’s success just in this fashion is to view the young company through a zoom lens rather than a wide-angle. The close-up misses how Google has transformed how we gather and use information, given us the equivalent of a personal digital assistant, made government and business and other institutions more transparent, helped people connect, served as a model service provider and employer, made the complex simple, and become an exemplar of the oft-stated but rarely followed maxim, “Trust your customer.” Because it is free, Google will be difficult to assail.

No one can predict with certainty where Google and the digital wave is heading, when it will crest, or who it will flatten. If the public or its representatives come to believe Google plays favorites, aims to monopolize knowledge or its customers, invades their privacy, or arrogantly succumbs, in the words of Clayton Christensen, “to the falsehood that you can grow and grow because of network effects,” then it will be more vulnerable. If Google maintains its deposit of public trust-continuing to put users first-and if it stays humble and moves with the swiftness of a fox, it will be difficult to catch.

Other companies have profoundly disrupted the business landscape. Think of the Ford automobile or the Intel chip. We can, however, be certain of this: Nowhere in the three billion daily searches it conducts, the two dozen or so tetabits (about twenty-four quadrillion bits) of data it stores, the more than twenty million books it plans to digitize, will we find another company that has swept so swiftly across the media horizon.