Googled

Chapter 8

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Why?

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

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

"I don"t think so," answered their tour guide.

When I pressed a longtime Google executive to recall the products the company had canceled, he came up with just two: Google Answers and Google Catalog Search. "This is a company that doesn"t set priorities," said another former Google executive. Part of the reason, this person said, traces to the founders. "It"s the Talmud of the founders. The word of G.o.d. And everyone interprets the word of G.o.d at Google."

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

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

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

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

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

Columbia"s Tim Wu concurs. "Google is a precocious company. Great grades. Perfect IPO. A typical high school standout," he observed. "The basic problem is whether they remain true to their founding philosophy. I don"t just mean "Don"t be evil." Will they stay focused on search, on "their founding philosophy, which is really an engineers" aesthetic of getting you to what you want as fast as you can and then getting out of the way?" Or will Google become "a source of content, a platform, a destination that seeks to keep people in a walled Google garden? I predict that Google will wind up at war with itself."

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

Advertising pressures may add to Google"s complexity, for there is a built-in tension between the interests of users and of advertisers. Recall the aversion the founders once had to banner ads because, they said, "they don"t give the user the best experience." And now Google heralds its purchase of DoubleClick as a means to get into the banner advertising business it once shunned. Because Google now admits to being in the advertising business, which produces almost all its revenues, they will have to answer this question: Is Google"s customer the advertiser or the user?

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

But with such a wealth of data at Google"s disposal, their advertising customers will want more. And if Google"s growth sputters, pressure to satisfy advertisers will intensify. Richard Sarnoff, now the president of Digital Media Investments at Bertelsmann AG, whose great-uncle was David Sarnoff, the founder of NBC radio and television, likens these potential advertising pressures on Google to those faced by his great-uncle. "He had a vision of what radio and television could be in terms of being informational, educational, cultural, relevant. He said, "OK, we"ve got radio. Let"s put Tchaikovsky on!" ... The reason the broadcast media didn"t end up being this public trust type of programming but became primarily-let"s call it lower-culture entertainment programming-is that radio and television was just so good at delivering audiences to advertisers. Business being what it is, whatever you"re good at, you concentrate on, you maximize, and that ends up delivering value to your shareholders. Google, like NBC in those early days, finds itself being a phenomenally effective way of delivering consumers to advertisers. The question is: To what extent is that going to change the very lofty principles that the company was originally founded on and that made them effective in the first place? Google is at that kind of crossroads." Advertising pressures on Google will build. "What I have seen is that their very success has allowed them to resist such pressure-so far."

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

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

By the time Sandberg stepped down, her Google team had grown to four thousand employees, with AdWords and AdSense then yielding 98 percent of the company"s revenues. "Sheryl is a person who balances the left brain and the right brain. All of us could learn from her," said her close friend Elliot Schrage, who lost an ally in his ongoing efforts to persuade the engineers to think more broadly. Schrage soon followed Sandberg, accepting a position at Facebook similar at first to the one he"d held at Google. (Months later, he was also put in charge of overseeing Facebook"s relations with outside developers.) Sandberg"s departure was jarring. Her move drew attention to Facebook, the new rocket, and highlighted the strained adolescence of Google. It brought some sadness as well, for Sandberg was popular, and not just among Googlers. When media executives like Donald Graham, CEO of the Washington Post Company, or Arthur Sulzberger, Jr., of the New York Times Company visited Google, they often separately went to her home in Atherton for c.o.c.ktails or dinner with Sandberg and her husband, David Goldberg. Before she left Google, Graham tried to hire her for a senior position at his company. She was the friendly face at Google that some traditional media company executives trusted enough to let their hair down and ask: How can Google help my troubled business?

Google executives were stumped as to why Sandberg would take the job at Facebook. She wasn"t given the same broad responsibilities as most COOs: vital parts of Facebook-product management and development, engineering, and finance-would continue to report to founder Mark Zuckerberg. And they didn"t understand why she would leave for a company that, according to one Facebook insider, had generated only $150 million in revenues in 2007 and was bleeding money.

Google was already anxious about Facebook, and Sandberg"s defection elevated their discomfort. True, Facebook wasn"t making money, but neither had Google in its first four years. Facebook had 123 million unique visitors in May 2008, according to comScore, a 162 percent increase over the previous May. For the first time, Facebook had pa.s.sed its rival, Mys.p.a.ce. Also making Google anxious was Facebook"s alliance with Microsoft, which owns 1.5 percent of the social network site and sells its advertising. Microsoft was coming after Google, aggressively allying with traditional media companies-agreeing, for instance, to sell online advertising for Viacom, to license and display its television and movie products on its MSN and Xbox 360 platforms, and expending half a billion dollars to advertise on Viacom platforms.

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

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

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

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

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

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

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

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

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

CHAPTER TWELVE.

Is "Old" Media Drowning?

(2008).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Technology was the frenemy of all traditional media businesses. According to an Annenberg Center study, the average American family cla.s.sified as poor spent $180 per month on media services-mobile, broadband, digital TV, satellite TV, iTunes, and the like-that did not exist a generation ago, and the average American household spends $260 per month. (Irwin Gotlieb"s GroupM data pegged the number at $270.) By providing consumers with all these choices, new technology inevitably disrupted traditional habits. The audience that had once belonged to broadcast television moved to cable, to video on demand, to DVDs, to YouTube and Facebook and Guitar Hero. TiVo and DVRs allowed viewers to become their own programmers. This was great for viewers but not so great for the television business. It meant that viewers were often skipping the ads broadcasters relied on for revenue, and programs being watched were not being counted in the Nielsen ratings, weakening ad rates. And networks are soon to be slammed by another disruption: surveys show that those between ages fourteen to twenty-five (called millennials) are watching less television and spending more time on the Internet and with video games. Television executives like to argue that this is really good news for the broadcast networks. Yes, they will say, the live viewing audience for ABC, Fox, CBS, and NBC plunged 10 percent in the year 2008. But, they boast, their ad revenues continued to inch up, because in an age of niche media and fragmented viewership, no other medium delivers a ma.s.s audience. If they took a truth serum, though, they would admit that one day their advertisers will also fragment. They would also admit that their investment in local broadcast stations, which once yielded profit margins of 40 to 60 percent, were now a drag on their growth.

The U.S. movie business was growing overseas, but was under attack everywhere else-from Internet piracy to DVD and video sales and rentals that were declining in the face of compet.i.tion from movie downloads. Equally worrisome, personal video recorders empowered viewers to ignore ads promoting new movies. "We"re not like a car or prescription medicine company where you can build a brand over a long term," said Michael Lynton, Chairman and CEO of Sony Pictures Entertainment. "You have to build a brand in five weeks. If they skip over your ads, you"re in trouble." Flat screen TVs, DVDs, and movie downloads drained customers from movie theaters. Video games were stealing the attention of teenagers. And that burgeoning business-now taking in twenty-one billion dollars a year worldwide and expected to double by 2012-was expanding from action games for teens to ma.s.s-market Wii games for adults to play with their kids, or with one another. Telephone companies watched their lucrative landline phone business rapidly lose customers to Skype Internet calls and mobile and new cable phone services. Yahoo and Microsoft were tossed in the digital storm. With better search and advertising technology, Google"s search widened its lead. With the promise of cloud computing and free software applications, Google menaced Microsoft"s packaged software business. Everywhere they turned, new technologies were disrupting businesses faster than they could respond.

MORE THAN A QUARTER CENTURY AGO, as the age of cable TV materialized, the three television networks were slow to recognize the seismic shift that cable heralded, missing their chance to own rather than compete with cable networks. They were not alone in disdaining the new. When Robert Pittman cofounded MTV in 1981, Coca-Cola and McDonald"s refused to buy advertising, saying they would not advertise on a television network that did not reach at least 55 percent of the nation. Pittman did persuade Pepsi to place some ads, and for the next several years Pepsi had a de facto exclusive advertising platform that greatly boosted its market share. It took Coca-Cola and McDonald"s four or five years, Pittman recalled, to change their minds. Likewise, most traditional media companies in the Google era concentrated more on defending their turf rather than extending it. Belatedly, most have begun to dip their toes, and in some cases entire feet, into new media efforts, hoping that technology could also be their friend.

In the summer of 2008, CBS became the first full-scale traditional media company to open a Silicon Valley office in Menlo Park. Quincy Smith, who had been promoted to CEO of CBS Interactive, supervised the office and averaged two days a week there. Under his prodding, CBS made a number of digital acquisitions. The biggest was the $1.8 billion CBS spent to acquire CNET, whose online networks generated revenues of $400 million. It was a pricey acquisition-three times what Murdoch spent for Mys.p.a.ce in 2005-but CEO Moonves said he hoped the digital acquisition would add "at least two percentage points" to CBS profits and growth rates. CBS had also become one of YouTube"s biggest suppliers, uploading eight hundred one- and two-minute clips per day from CBS programs. It was also among the first traditional media companies to strike a deal with YouTube to treat pirated video, as Brian Stelter reported in the New York Times, New York Times, "as an advertising opportunity." Instead of ordering YouTube to remove the content illegally uploaded by citizens, CBS and a few others granted YouTube permission to sell ads off these and to split the revenues. Smith said CBS had about two hundred partners, and was selling digital copies of its shows on Yahoo, iTunes, and Amazon. Smith"s digital group now had 3,300 employees in its various ventures, and Moonves predicted that the group would generate revenues of $600 million for CBS in 2008, with $90 million to $100 million of that as profit. "as an advertising opportunity." Instead of ordering YouTube to remove the content illegally uploaded by citizens, CBS and a few others granted YouTube permission to sell ads off these and to split the revenues. Smith said CBS had about two hundred partners, and was selling digital copies of its shows on Yahoo, iTunes, and Amazon. Smith"s digital group now had 3,300 employees in its various ventures, and Moonves predicted that the group would generate revenues of $600 million for CBS in 2008, with $90 million to $100 million of that as profit.

Almost daily in 2008, old media announced new media efforts. Seeking to extend its programming to other platforms, NBC said in January 2008 that it would customize shorter content that it called promo-tainment and sell ads on nine other platforms, including screens in gyms, subways, and the backseats of taxicabs, on gas pumps, and at supermarket checkout counters. In its compet.i.tion with YouTube, NBC and News Corporation"s Hulu video site had, by October 2008, signed up Sony and Paramount and other studios. Hulu offered a choice of about a thousand network shows, and reached an estimated 2.6 percent of the online video market-far below You Tube-but in a promising ad-friendly environment that would soon make it the second ranked video site. CBS, which declined to join Hulu, later established its own site, TVcom, to serve as an online platform for its present and past programs and for those of other content creators. Disney sold ABC programs and movies to iTunes, defending Apple"s then policy of a single price for programs, movies, or music on the grounds that it was simple and clear and better served consumers. In April 2009, Disney"s ABC gave a boost to Hulu by joining NBC and Fox as an equity partner. By mid 2009, Hulu-like You Tube-was still not profitable.

Local stations scrambled to create Web sites for their news and weather and to lower their ad rates in order to sell inventory to small businesses. A consortium of the six largest cable operators started Canoe Ventures, an effort to forge a single national digital cable platform to sell and target ads and collect the kind of user data Google gathers. HBO experimented by offering some of its programs for free online. Viacom joined with MGM and Lions Gate to create Epix, a premium cable channel with a Web site to stream their library of movies. All the movie studios sought to improve picture quality by offering films shot in high definition and by replacing costly reels of film they sent movie theaters with digital copies. Trying to demonstrate that it was not "a dumb pipe company," Verizon rolled out its cable video service, called FIOS, and announced plans to spend twenty billion dollars by 2010 to ensure its success; by the summer of 2008, FIOS was available in one million homes. AT&T promised to offer video services for mobile phones. Spurred by the success of Apple"s iPhone, mobile phone companies moved to transform their devices into PDAs that were really powerful minicomputers. People who had grown up in the television business, such as Disney"s former CEO, Michael Eisner, or MTV"s Albie Hecht, and Jason Hirschhorn and Herb Scannell, switched careers to become Internet programmers.

And yet all of these efforts failed to answer two lingering questions: would these efforts make money? And would storytelling change on the Web? Eisner said he believed it would not, that though there are many more platforms to display stories, stories need s.p.a.ce to be told. He didn"t believe attention spans had shrunk, that mult.i.tasking diverted attention, or that interactivity would reshape storytelling. "If the story is really good, they"ll stay with it," Eisner said. "I don"t think a lot of the rules for storytelling are unique for the Internet." I think Jason Hirschhorn was closer to the truth when he said that the way storytelling will change is that the audience-as Google"s YouTube demonstrates daily-will "do a lot of snacking." Everything will speed up, probably including the decline of old media.

CHAPTER THIRTEEN.

Compete or Collaborate?

To achieve a balance of power against Napoleonic France, Prince Metternich of Austria helped organize the weaker European monarchies-Austria, Prussia, Russia-into an alliance. And in the Congress of Vienna, which followed the defeat of Napoleon, he maneuvered to maintain peace in Europe by forging an agreement among these nations to prevent the rise of another superpower. They would achieve a delicate balance of power among European nation-states, with no nation dominant. As in nineteenth-century Europe, today"s traditional media companies must decide how to deal with the new superpower, Google. Do they aggressively compete or do they collaborate? Can they achieve a balance of power? The strategy media companies choose will pivot, as it did in Metternich"s day, on whether they a.s.sume they are strong or weak. If executives of old media believe their business model is strong-that content is king-their strategy will likely veer from those who believe they are gravely threatened. If executives feel particularly vulnerable, convinced that they require substantial financial and security guarantees before risking their copyrighted material, they are likely to focus on these fears rather than on their best hopes for the Internet. And if they distrust Google"s intentions, cooperative agreements will be elusive.

Although Google appears less vulnerable than Napoleon turned out to be, many traditional media companies chose to stick out their chests. Viacom filed a lawsuit, as the book publishing industry had. Fox and NBC refused to join Redstone"s lawsuit but teamed up to create Hulu as a rival to YouTube out of fear that YouTube would cannibalize their audience and cheapen the value of their content. "The economics around these digital properties are not yet fully formed-that"s five years away," NBC Universal CEO Jeff Zucker told a Harvard audience in early 2008. "We can"t trade today"s a.n.a.log dollars for digital pennies."

Zucker"s dollars-for-pennies claim is "not the right way to look at it," said David Rosenblatt, Google"s then president, global display advertising, and the former CEO of DoubleClick. "That implies that the preservation of your existing business is more important than understanding what the new economy will be. My great-grandfather was in the ostrich-feather business. He went out of business in the early part of the twentieth century because ostrich feathers, which women wore attached to their hats and had worked well in carriages, no longer fit into automobiles. He could have said, "I need to find smaller feathers to preserve my business."" Despite these entreaties, Zucker, like many of those in traditional media, viewed Google as a frenemy.

Microsoft, like Viacom, treated Google as an outright enemy. This was never more evident than during the winter of 2008, when it made a Murdoch-like bid of $44.6 billion to acquire Yahoo, a valuation of $31 per share, or 62 percent more than Yahoo"s stock price at the time. The battle that ensued left Microsoft and Yahoo bloodied and embarra.s.sed, each wounded by self-inflicted blows.

There were reasons for Microsoft to pursue Yahoo. On paper, it was a way to increase Microsoft"s then meager 9 percent share of the search market and to boost the $3.2 billion in online advertising Microsoft totaled in 2008, a figure dwarfed by Google"s more than $20 billion; it was a way for Microsoft to piggyback on Yahoo"s lead over Google in display advertising; it was a way for Microsoft to combine its MSN portal and e-mail with Yahoo and achieve a dominant market share; it was a way to sh.o.r.e up Microsoft"s defenses against Google"s cloud computing offensive.

Yahoo clumsily resisted. After initially rejecting the offer, Yahoo CEO Jerry Yang and his board feigned interest; then again said they were not interested; then swallowed a poison pill so costly-saying at first that it would award each of its fourteen thousand employees a two-year window in which, if Microsoft won, they could quit and pocket generous severance benefits-that Yahoo was later compelled to abandon it. Yang and his board then said they"d accept thirty-seven dollars per share; then lowered this to thirty-three dollars; then said they"d consider selling just their search engine and not the rest of Yahoo. Microsoft"s moves were equally maladroit. Steve Ballmer called off discussions, then put them on, then off again; he sought partners to make another run at Yahoo; then threatened to mount a proxy fight to remove the Yahoo board; then said he was no longer interested in Yahoo. By the end of 2008, the general he had placed in charge of Microsoft"s battle plans, a man named Kevin Johnson, had left the company.

This comedy continued at the Dow Jones/Wall Street Journal"s Jones/Wall Street Journal"s annual D Conference in San Diego. Ballmer and Yang met privately that day, May 27. In the opening session that evening, Ballmer, answering pointed questions from annual D Conference in San Diego. Ballmer and Yang met privately that day, May 27. In the opening session that evening, Ballmer, answering pointed questions from Journal Journal columnists Walt Mossberg and Kara Swisher, insisted, "We are not rebidding for the company." But he opened the door a crack, saying, "We reserve the right to do so." The next day on stage, Jerry Yang answered their questions and said the opposite, declaring that Microsoft had slammed the door shut and "was not interested anymore in buying the company." In November, Ballmer told his annual shareholders" gathering that Microsoft had "moved on" and was "done with all acquisitions discussions" with Yahoo. In December, he said he was interested in acquiring Yahoo"s search business "sooner than later." columnists Walt Mossberg and Kara Swisher, insisted, "We are not rebidding for the company." But he opened the door a crack, saying, "We reserve the right to do so." The next day on stage, Jerry Yang answered their questions and said the opposite, declaring that Microsoft had slammed the door shut and "was not interested anymore in buying the company." In November, Ballmer told his annual shareholders" gathering that Microsoft had "moved on" and was "done with all acquisitions discussions" with Yahoo. In December, he said he was interested in acquiring Yahoo"s search business "sooner than later."

Yahoo shareholders were bludgeoned by these gyrations. In January 2009, Yahoo"s stock was trading at around $12.00 per share, well below its $19.18 price on the day Microsoft made its initial bid a year earlier. Each company appeared indecisive. As the venture capitalist Roger McNamee observed, "The two biggest forces competing against Google have banged heads and knocked themselves unconscious."

Microsoft was unaccustomed to losing. The ever-compet.i.tive Ballmer, a Microsoft adviser admitted, was filled with "jealousy" and rage that Google was doing what Netscape had done a decade before, not merely challenging but "mooning the giant." Jealousy and rage are not the st.u.r.diest foundations for rational decision making.

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

Jitters aside, Google would find a way to gain advantage from the Yahoo-Microsoft melee, but not without getting bloodied itself. The company"s Executive Committee and Board of Directors held meetings to devise a blocking strategy. They discussed pet.i.tioning the Justice Department to obstruct the merger, using the same ant.i.trust arguments Microsoft had employed to try to stop Google from acquiring DoubleClick. They wrestled with whether to make their own bid for Yahoo, but decided it would be difficult to integrate two large companies with different cultures and a.s.sumed, in any case, that the government would disallow on ant.i.trust grounds a merger of the two dominant search engines. They reached out to Jerry Yang and in the spring jointly devised a roadblock strategy; they announced that Google would become the selling agent for a large portion of Yahoo"s searc

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