Dogfight: How Apple and Google Went to War and Started a Revolution

by Vogelstein, Fred

  Instead, it turned out, most subscribers said yes. Within six months most of the big magazine and newspaper publishers were selling subscriptions to their content through the app store. They had to give Apple 30 percent of whatever new subscriptions they generated, but given what it cost to acquire new subscribers via analog methods, that seemed like a bargain. It typically costs $10 to $15 to acquire each magazine subscriber. In addition there is roughly $1 of manufacturing and distribution costs built into each magazine copy, compared to about ten cents for each digital copy. “The early response [when subscribers were first asked to share their information] was better than fifty percent, and now [in 2013] it’s running at better than ninety percent,” said Scott Dadich, editor in chief at Wired. As the magazine’s design director at the time he was part of the negotiating team for Condé Nast.

  The row in the television industry was even more heated. In early 2011 Time Warner Cable, Cablevision, and Comcast all came out with slick iPad apps that enabled the device to be used as a portable TV in different rooms of a customer’s house. Content companies such as Viacom and News Corp. said that watching their shows on anything but a television degraded their value and violated their copyrights. For a few months starting in April 2011, Time Warner Cable pulled News Corp. and Viacom programming such as the Daily Show from their iPad apps. And in June, Viacom sued Cablevision for not pulling its programming from their iPad apps. On the one hand Viacom’s position seemed preposterous. How was it possible that a small TV screen was okay but an iPad was not? That no doubt explains why the suit was settled quietly three months later. But it also illustrates how important and disruptive the iPad had become.

  Once media companies were freed of their initial worries about the iPad, most of them embraced it. Indeed, it sparked a wave of new, innovative, and popular approaches to consuming news and entertainment that few had seen out of the media industry in decades. Book publishers rushed to make all their titles available in downloadable formats. Newspapers and magazines scrambled to develop well-designed iPad editions. Cable companies such as Comcast and Time Warner Cable developed the watch-TV-anywhere software mentioned above. By the middle of 2011 one of the hottest new iPad apps was HBO GO, from the HBO division of stodgy Time Warner.

  With an HBO cable subscription, HBO GO allowed consumers free access to every episode of every show HBO had ever produced. If you had ever missed an episode of The Sopranos, Curb Your Enthusiasm, or Entourage, you could find it there, not to mention the roughly two hundred movies that were available to every HBO subscriber on his or her television. Previously a show’s fans had had to spend hundreds of dollars buying DVDs if they wanted to catch up on missed episodes or watch a series they’d missed completely. Released in early 2011, HBO GO had 4 million users four months later. Total users have settled at about 7 million, or 20 percent, of HBO’s total 35 million subscribers. The question HBO president Eric Kessler gets the most often now is when consumers will be able to get HBO without getting cable.

  The iPad also sparked a flurry of start-up companies that saw it not just as another means to read or watch but as a device that could change that experience altogether. The software entrepreneur Mike McCue and the Apple veteran Evan Doll started Flipboard in 2010 by asking a simple question: What if web pages looked like well-designed magazine pages instead of the jumble of headlines on a monitor we’d begun to grow used to? What if they were updated in real time and customized with personal Facebook and Twitter feeds? “The web isn’t broken. It just needs a face-lift,” McCue likes to say.

  It was a captivating conceit: the World Wide Web had revolutionized the world, but in the nearly twenty years since Netscape started it all with the first Internet browser, it had never undergone a redesign. Since the iPad now forced users to change the way they interacted with their screens—with their fingers instead of a mouse—why not also change the design assumptions underlying the content being interacted with? And moreover, said McCue, why not address the concerns of advertisers in the redesign process? Advertisers considered buying ads on news websites to be a necessary evil rather than something they sought out. Why not create a platform that actually proved attractive to and effective for advertisers?

  McCue was an old hand at the start-up game. He’d been the vice president of technology at Netscape in the mid-1990s before leaving to cofound Tellme Networks, a company that built automated call-answering software for corporations. Microsoft bought it in 2007 for $800 million. So when McCue and Doll started Flipboard, they had the credibility and contacts needed to get attention for their idea. Jobs himself took the time to look at the app before Flipboard launched, and by the end of 2011 it had become App of the Year and one of the best-known start-ups in Silicon Valley. Money and attention from top venture capitalists such as John Doerr flowed in. So did résumés, and not just from people at top engineering companies such as Google, Apple, and Facebook, but from people at top media companies such as Time Inc. McCue hired Josh Quittner from there to manage all of Flipboard’s media partnerships. Besides being a top tech writer at Time, he’d edited Business 2.0 and helped lead Time Inc.’s iPad app development.

  The iPad also spawned Atavist, a rethink of what a magazine would look like in the digital age. When they started it 2010, the journalists Evan Ratliff and Nick Thompson, along with the programmer Jefferson Rabb, wondered whether a newly conceived publication would be just text, photographs, and graphics or include video and audio too. Could readers be allowed to choose how much or how little beyond the words they would experience? Previous attempts at “enhancing” the written word had often seemed little more than distractions. Was there a way to employ these new ways of experiencing stories to ensure they were true and enriching additives?

  The founders called their venture Atavist because they were trying to breathe new life into old-fashioned storytelling and long-form journalism. It had become fashionable to conclude that soon there wouldn’t be any long-form journalism, but Atavist set out to prove otherwise by reconceptualizing what form that journalism took and how it was created. But it wasn’t just that these authors wanted to experiment with this concept, it was because Atavist offered to pay them differently. Traditionally a writer is paid by the word. It can be tough to make a decent living this way. A good four-thousand-word piece, including editing time, can easily take three months yet generate only $8,000. But Atavist devised a different business model. They sold downloads as part of Amazon’s new Kindle Singles category and evenly split with their writers whatever was left after Amazon’s take. One of Atavist’s stories, by David Wolman, was nominated for a National Magazine Award in 2012. Byliner, a startup cofounded by two former Outside magazine editors, teamed up with The New York Times on its “Snow Fall” project by John Branch. It won the 2013 Pulitzer Prize for Feature Writing. Both writers made a lot more money than they could have publishing their stories traditionally.

  What really got Atavist attention from investors and then mainstream media, however, was the sophistication of its software. Rabb had designed it to work with all the e-book and e-mag formats in existence. So as Amazon and Apple tried to lock authors into their proprietary formats—Amazon with its Kindle e-books, Apple with iBooks—Atavist became an attractive intermediary. Eric Schmidt of Google and the venture capitalists Marc Andreessen, Peter Thiel, and Sean Parker were part of an outside-investor group in mid-2012. By the end of 2012 the media moguls Barry Diller and Scott Rudin had teamed up to create their own e-books start-up called Brightline. Atavist, with its software, was to be their exclusive online publisher.

  The iPad’s impacts weren’t just limited to media. It seemed to change … everything. Pilots stopped carrying bulky bags of navigation charts, runway data, and weather reports. It all fit on an iPad—and was more up-to-date. Because children could figure out how to use an iPad long before using a personal computer, teachers started integrating them into the curriculum as early as kindergarten. Doctors began using iPads on rounds because they were e
asier to use one-handed by a patient’s bed than a PC and had battery life that lasted all day. The iPad had similar appeal on Hollywood sets, amid the controlled chaos of filming. It eliminated the time-consuming distribution of paper script changes. Corporations loved the iPad, and by the end of 2011 Apple reported more than 90 percent of Fortune 500 companies were using them in some way. It turned professional baseball players into data junkies, allowing hitters to use algorithms to better guess what pitch was coming and fielders to better guess where each batter was likely to hit the ball. The iPad even spawned a new kind of virtual painting—on an iPad canvas instead of a real one.

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  The convergence of so much media into one device, the iPad, happened so fast that even if media executives had wanted to resist, it would have been futile. One of the truisms of American media is that it follows its customers’ eyeballs, and by 2012 an enormous number of them were staring at iPads. By 2012, 16 percent of Americans had one. For thirty years the media had been dreaming and scheming about how to take advantage of the inevitable collision of digitized content with the integrated circuit—the silicon chip that powers everything from servers to the smallest iPod. But their bets about how it was going to happen had failed so often and so catastrophically that most had given up on the idea. Now they were scrambling to digitize anything they could to keep up with all the content consumers were suddenly willing to pay for.

  The list of tycoons who had been flummoxed by media convergence included not second-tier dreamers but some of the smartest, richest, and most successful entrepreneurs and executives in the world. Bill Gates spent more than $6 billion of Microsoft’s money on stakes in the big cable and telecom companies in the late 1990s and spent another $425 million to buy WebTV. He hoped to leverage Microsoft’s dominant position in personal computers into a controlling position over what we watched on our televisions.

  Earlier in the decade, TCI cofounder John Malone had tried to drive convergence by building the largest U.S. cable system, buying interests in more than two dozen cable programming operations—such as CNN, TNT, the Discovery Channel—and then attempting to merge all that in 1993 with Bell Atlantic, one of the big telephone companies. Had the deal not fallen apart five months later it would have given Malone control of a third of the televisions in the United States. Even back then, before anyone was talking about broadband or wireless anything, Malone was talking about a future in which every television had access to five hundred channels—compared to about two dozen then—and a host of interactive services that they might access through an advanced set-top box. It’s what we think of as the Internet today, but few were talking about the Internet at the time. Malone’s bold prediction spurred dozens of big companies to speed up their embrace of interactive television. One of the most famous was the Orlando Project in 1994, Time Warner’s failed effort in Florida to hook up four thousand homes with cable TV that allowed them to download movies on demand. The dream of convergence was the driving force behind pre–Internet browser dial-up services such as Prodigy and Compuserve, not to mention America Online, as far back as the 1980s.

  Those in the media industry—Malone, in particular—believed that controlling the television in the living room would be critical to convergence. They believed that the software and hardware they’d built to run televisions would just as easily run our PCs. Silicon Valley—largely meaning Microsoft and Bill Gates—believed that the same technology that ran our PCs—Windows—would run our televisions.

  Former vice president Al Gore may have called Malone the Darth Vader of the information superhighway because of how aggressively he used TCI’s size and monopoly control. But the fear Malone engendered paled in comparison to the worries Gates and Microsoft sparked. It wasn’t just a bunch of technology start-ups like Netscape that were scared of Gates. He also scared executives at phone and cable companies, and every newspaper, magazine, television, and movie executive too. He already controlled the end points of the network with Windows. If he controlled enough telephone company and cable television lines, they worried he could use those two pillars to get control of the content running through those lines. This is why there was ultimately so much public support for the government when it launched its famous antitrust trial against Microsoft in the late 1990s.

  The business calculus for all this dealmaking surrounding digital-content delivery wasn’t complicated. If you could stop consumers from stealing content, reducing the friction associated with buying newspapers, magazines, books, TV shows, and movies would boost profits. What executives didn’t realize was how long it would take before the technology would allow anyone to do that. It didn’t matter whether their background was in technology or media. They all moved too soon.

  When Gates was eyeing content as the next frontier to dominate with Microsoft Windows, most homes didn’t even have broadband connections that would allow television content and Internet content to be merged. Everyone at Microsoft had a superfast connection and could see the change coming. And Gates thought his multibillion-dollar investments in cable companies would help accelerate the process. But the delivery of broadband connections to homes happened so slowly that it’s hard to argue Gates had anything to do with it. It could have happened naturally just as easily. Back then most computers in the home connected to the Internet at 56 Kbps—1 percent of what many homes have today. It took another five years for most homes to have broadband, and another five after that before they had speeds that would allow the things Gates et al. had been dreaming of. Indeed, if Microsoft’s investments did help, speeding up the adoption of broadband helped the competitors Apple and Google much more. Microsoft divested its media holdings in 2009 for an undisclosed sum.

  Media companies tried to make a grab for convergence profits in a different way—through dealmaking—and uncorked a series of mergers that will go down as some of the worst-conceived deals in the history of American business. In the space of ten years, Time bought Warner Brothers for $15 billion. It took nearly eight years for Time’s shareholders to break even. Just as that was happening, the company shelled out $7 billion to buy Turner Broadcasting, owners of CNN and a giant movie library. Long before that deal could pay off, the conglomerate agreed to sell itself to America Online in 2000, at the peak of the Internet bubble, for $164 billion in AOL stock. By 2009, when the company finally divested itself of AOL, owners of Time Warner shares in 2000 had seen the value of their holdings reduced to eighteen cents on the dollar. By the beginning of the twenty-first century, media/technology convergence had been so discredited that mentioning it at conferences could make executives wince visibly.

  All this flailing on both sides of the convergence equation actually made it seem less, not more, likely for it to happen cooperatively. In 2000, when music fans started exchanging songs through illegal sites such as Napster, the industry didn’t reach out to Silicon Valley to find a solution. It sent in battalions of lawyers to shut down the sites and sue listeners—many of whom would happily have paid money to get their music that way. Executives such as Edgar Bronfman, who ran Universal, and Michael Eisner, who ran Disney, accused technology executives of, in effect, running a criminal syndicate, not unlike a bunch of Mafia dons who encouraged and supported theft.

  Technology executives endlessly pointed out that the movie studios had expressed the same fears about television in the 1960s and the VCR and DVD in the 1980s and 1990s, and that those technologies had actually helped them increase their profits. They reminded music executives of how movie moguls worried that consumers would stop going to the movies if they could watch at home but how new technologies just expanded the amount of time and money consumers spent on entertainment. This argument only made music executives angrier. Even Jobs, after constructing the deal that brought music into the iTunes store, where it could legally be purchased, couldn’t stop the entertainment industry’s grousing about technology and how it was wrecking their professional lives. He and those in Silicon Valley said that he had saved the
industry from being decimated by piracy. The industry maintained that since music industry revenues dropped by 50 percent after iTunes and the iPod took off—because consumers bought music by the song instead of the album—the industry would have found a much better solution on its own.

  By 2010, however, the entire media business was in such disarray that new technologies, approaches—anything—seemed better than the status quo. Executives at newspapers, magazines, publishers, and studios had seen revenues in the music industry cut in half largely because its executives fought rather than embraced technology. They didn’t want the same thing happen to their companies—and it looked as if it might if they didn’t take some risks. The Internet had already gutted newspaper and magazine circulation and advertising revenues. Amazon’s Kindle had created a new, low-priced market for e-books that wasn’t going away. Americans were watching less television because they were entertaining themselves with videos on YouTube and other video sites instead. When they were watching television, TiVo devices (known as DVRs, for digital video recorders) were enabling—even almost encouraging—viewers to skip commercials. And movies, which had only yesterday been a profit machine for the studios, were now being ordered from Netflix and either shipped on DVD by mail or simply streamed online.

  Scott Dadich, Wired’s editor in chief, said that while he’d been thinking about what Wired would look like on a tablet from the moment he saw the iPhone—he had even put together a presentation of what Wired would look like on an Apple tablet—“to be totally blunt, the real motivating factor was that [by 2009] we were scared Wired was going to go away [because of the recession and shifts in media consumption]. Portfolio, [a sister publication, since closed] had come in at one hundred and two pages. Wired wasn’t much thicker. We had to do something splashy so that Wired could differentiate itself.”