|The gazillion-dollar question
Apr 20th 2006
From The Economist print edition
So what is a media company?
FOR his first few decades in the media industry—at CBS, then Walt Disney, then Warner Brothers, where he was chairman and co-chief executive—Terry Semel felt pretty clear about what media companies were. He was running them, after all. Then, in 2001, he left Hollywood and went to Silicon Valley as the new boss of Yahoo!, the world's largest internet “portal” (gateway). A self-avowed technophobe who barely knew how to use e-mail, Mr Semel suddenly found himself in “meetings with a bunch of 23-year-olds”. He already had the ambition to turn Yahoo! into the archetypal “21st-century media company”, but suddenly he was no longer so clear on what that meant.
Mr Semel has spent the past five years educating himself, counselled by trusted advisers such as his daughters, aged 24, 19 and 13. The first does a lot on the internet, the second does everything on the internet, and the third “lives online” and has so many beeping devices that Mr Semel, who has a New York accent and the kind of humour that goes with it, occasionally wonders “whether she is trafficking”. Between them, they have helped him to work a few things out.
The internet “is a much larger change than the coming of television” in the 20th century, says Mr Semel. In the past, “someone decided that the news goes on at 11 o'clock at night; people like my wife never even saw the news, because she never stayed up that late. We all grew up when somebody else was the programmer; now the user is the programmer.” That is change number one. To Mr Semel it means that Yahoo! must do more than provide technology. “We decided to open Yahoo! up, so that anybody using [their personalised start page] MyYahoo! can instantly go wherever they want to go,” even if that leads to the web pages of rivals. That credibility, he thinks, will keep users coming back for a “deeper engagement”. As people spend more time on Yahoo!'s pages—news, blogs, e-mail, chat groups, photo and music sites and so on—whether as their final destination or as stops on a journey, Yahoo! can put more and better advertising in front of them.
Change number two, says Mr Semel, is that—unlike in television, say—“you don't need hits”. Many small audiences are as good for advertisers as few large audiences, and indeed may be better. This has huge implications for content, turning it into one long continuum—from professional to amateur, from blockbuster to subculture niche. Chris Anderson of Wired magazine calls this stretched statistical distribution “the long tail”. In his forthcoming book of the same title, Mr Anderson argues that old-media economics, which are biased toward the hits at the “head” of this distribution, are being replaced by new-media economics, which allow creation and consumption along the entirety of a much longer content tail.
Yahoo!, says Mr Semel, will therefore be happy to mix professional content and user-generated content, no matter how small its potential audience, on its pages. The general direction, however, is towards ever more user-generated stuff. In March, Yahoo! said that it would limit its own production of content.
Where does all this lead? “It will look more and more like a stock exchange,” says Mr Semel. An exchange, that is, for users who “offer” (create) and “bid” for (search, navigate, share, enjoy) content. And a stock exchange for advertisers, who bid against one another to have their sponsored links placed in front of these users.
To most old-media executives, the conversation turns baffling at this point. They find it much more reassuring to insist that, in one sense, media companies will probably never change. They are still, at heart, audience aggregators that make money by selling advertising to third parties who want to reach those audiences, or by charging the audiences directly through subscriptions, or a bit of both.
Upon closer examination, this is not so reassuring. Using this definition, the media industry now includes strange newcomers. Google, for instance, “happens to be a media company run by technology people”, says Larry Page, its co-founder, because virtually all of Google's revenues come from advertising. In fact, Google is the most valuable media company in the world, with a market capitalisation about half as large again as that of Time Warner, the largest “traditional” media company. This is remarkable because Google, an internet search engine with lots of other free internet services, explicitly does not produce that which media companies have traditionally manufactured: content.
“We're engaged in a semantic exercise,” says Jeff Bewkes, the number two at Time Warner. “Is Google a media company? It's a weird discussion, what is a media company.” Ultimately, he thinks, “everyone is going to the same media place but they're coming through different doors to get there.” This still begs the question: What does that place look like? And do all the doors provide equally good access?
“The history of the world would suggest that the newer companies that were designed for the medium will prevail, and will then combine,” says Jonathan Miller, the boss of AOL, a rival to Yahoo!, partner in search technology to Google and itself part of Time Warner. That is because the newcomers are at ease in the long tail of content, whereas old-media firms tend to get stuck trying to generate hits.
Exchanges become necessary because people need help navigating around this huge continuum of content. In the present century, says Paul Saffo of the Institute for the Future, “you get large by allowing the many and small to gather on your lawn.” This is the media equivalent of what eBay, a Silicon Valley neighbour to Google and Yahoo!, has done for the trading of secondhand goods among individuals. It is what Wikipedia has achieved as an encyclopedia. It is also very similar to what, say, the New York Stock Exchange does.
Vinod Baya and John du Pre Gauntt at PricewaterhouseCoopers, a consultancy, argue exactly this in a report called “The Rise of Lifestyle Media”. Successful media companies, they write, will become “marketplaces that let consumers search, research, share and configure their media experiences.” To be good, these exchanges need to combine “a personalised media experience with a social context for participation.” Instead of “exclusive ownership of content or distribution assets” (the stuff of old media), the media marketplaces will compete in their “knowledge of consumer activity”, which they will use both to interact more intimately with consumers and to match them better to advertising that is unobtrusive and helpful (itself a novelty), and thus lucrative.
The analogy to marketplaces has another important implication: network effects. The value of networks (such as the telephone or postal systems) and exchanges (such as eBay or the New York Stock Exchange) increases dramatically as the number of participants rises. Once achieved, network effects also become barriers to entry by rivals. If they are looking for an exchange, for instance, both buyers and sellers will gravitate towards the market with the greatest liquidity in a given share or bond.
This is why a lot of new-media companies are now hurrying to create marketplaces with network effects before somebody else does. YouTube, a start-up launched about a year ago, lets people upload and share their own videos. It already transfers more data each day than the equivalent of an entire Blockbuster video-rental outlet. It goes without saying that Time Warner's AOL, Google, Yahoo!, Amazon and other internet companies are also working to exploit network effects.
This race to become the most liquid media marketplace has just started, and the winners are not yet obvious. But the giants, Yahoo! and Google, do have a head start. They already have network effects in their advertising, and emerging network effects in some types of media (text-based blogging, say) that can be transferred to other types (such as video). That is because the distinctions between different types of digital files are becoming increasingly unimportant (assuming a good broadband connection). To savvy teenagers, it's all just stuff passed around among friends.
As it happens, Yahoo! and Google have very different visions about what a media exchange should look like. This might be surprising, because on the surface the two companies are very similar. Their headquarters are in adjoining and equally drab suburbs; each was founded by two friends at Stanford University; and “both have assembled audiences of users the likes of which the world has never seen,” says Michael Moritz at Sequoia Capital, the lucky venture capitalist who early on invested in both of them.
But Jerry Yang and David Filo, Yahoo!'s founders, started their company as a hobby, says Mr Moritz. It was always meant to be a media company, and a rather relaxed, human one at that. Larry Page and Sergey Brin, by contrast, have always been “intellectually obsessed” with their mathematical algorithms, says Mr Moritz. This shows. Today, Yahoo! does interesting research into the sociological aspects of the internet, whereas Google hires the world's top computer geeks.
This is not unlike, say, the rivalry between the New York Stock Exchange (with its tradition of open-outcry floor traders) and the NASDAQ (where trading has always been done by computers). In news, for instance, Google displays stories selected by computer algorithms, whereas Yahoo! uses human editors to select the line-up. Caterina Fake at Yahoo! (and the co-founder of Flickr) says that Google's people “solve problems by brute-force computation”, whereas Yahoo!'s approach is “about people, behaviours, sociology”. Speaking for Google, Tim Armstrong, its advertising boss in North America, counters that Yahoo!'s talk about “creating a community has some of that old-media tone about it; is the future for corporate-created communities or user-created communities? Google has a high trust level in users.”
It is a religious war, in short, but one where worshippers for once get the benefit. Yahoo! is working on the social “folksonomies” described earlier in this survey. Google is working on solving problems such as providing (without charge) the enormous online storage required for all this uploading of media files. It is also working on the economics to ensure that not only Google but its users too get some of the financial benefits of their creativity. Google Video, for instance, is a service (or rather, the rough draft of one) in which Google lets anybody upload video. The main innovation is that the creators can determine whether their video is free or has a price. If it is charged for, the creators get 70% of the purchase or rental money and Google keeps the rest.
Where does all this leave old-media companies? For a number of years, they might continue to do well without changing, because many innovations (like Gutenberg's movable type) take decades to become mainstream. A few of these companies stand a decent chance of turning themselves into a genre-specific brand (such as “family content” for Walt Disney). Others, such as Viacom, which recently split its distribution and content into separate companies, are preparing for a future as content producers at a specific point in the “tail”. Yet others, such as News Corporation and Time Warner, are staying vertically integrated for now, and trying to combine old-media empires with new-media marketplaces (MySpace and AOL, respectively). But this is risky, since “in an attempt to protect the one you could screw up the other,” as Mr Evans at Boston Consulting Group puts it.
For old-media moguls who have become new-media moguls, such as Yahoo!'s Mr Semel, all of this is tremendous fun to watch. “Until recently they were just being protective, keeping their arms around their copyright,” says Mr Semel about the old industry that he left behind. “The faster they start to pay attention to making stuff for people like Yahoo!, the better for them.” They've been warned.
Next article in the survey: What sort of revolution?