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

by Vogelstein, Fred

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  For Emanuel to call the blurring of the lines among Hollywood, New York, and Silicon Valley “dynamic” may actually be an understatement. Five years ago the words television and TV show had unambiguous meanings. Now they have become almost too confusing to use in conversation. Are you watching TV if you are watching House of Cards by Netflix exclusively on a smartphone or a tablet? It feels as if you are, but you are watching something backed and distributed by a technology company based in Los Gatos, not Hollywood. And you are watching something that is being distributed outside the cable and broadcast-television infrastructure. The only way to get House of Cards is with an Internet connection and a Netflix subscription.

  What about the difference between web content and professionally produced content? That distinction used to be clear too. Now, it’s no longer rare for hit shows to start on YouTube before getting picked up by big broadcast or cable networks for huge sums. That’s what happened with Burning Love and Web Therapy. And it is no longer rare for the big networks to take advantage of the Internet’s reach to play that game in reverse. Last fall, in order to build buzz and audience for a new series called Go On, NBC aired part of the pilot on YouTube about six weeks before the series’s official debut. Fox did the same thing with Homeland and New Girl.

  The blurring of technology and media is even changing how TV shows are produced, said Michael Lynton, Sony’s U.S. boss, during a 2013 interview at an All Things D conference:

  In the past you had a really difficult time creating long-form, open-ended drama. You had to wrap up every episode neatly in a bundle at the end—so that if you had never watched the show, you would know what was going on. That was because that was the way people were used to watching television, and it was because of the syndication side of things [through which series were sold to TV/cable stations complete or in chunks depending on their budgets]. Then when [some shows did test those rules] people would say, “I’ve missed two or three episodes. This is not worth my time and effort.”

  Then the PVR shows up, and Netflix shows up, and people say, “Oh, I can miss a couple of episodes and catch up.”

  I personally believe that one of the reasons you are seeing such an explosion in creativity—whether it’s Mad Men to Breaking Bad to House of Cards to Justified to Sons of Anarchy—is the fact that you can create thirteen-episode, long-form narratives where characters can be developed over thirteen hours. Better writers come to this because they say, ‘Gee, I can’t get it done in two hours of a movie.’ Better directors come to this. For a long time people have wondered when all this new technology was going to affect the creative side of things. This is the first one I’ve seen. Generally people think that is a good thing.

  All this has been enabled or accelerated by the explosive growth of smartphones and tablets in the past five years. At about 4 billion, the number of televisions in use worldwide is still double the number of smartphones and tablets—about 2 billion. But at current growth rates, there will be more smartphones and tablets than TVs within three to five years. Smartphone sales are growing at better than 25 percent a year, and tablet sales are more than doubling every year. Meanwhile, the sales of TVs worldwide is actually declining. Some of that is because of the global recession. But some of that is because more and more new college graduates aren’t bothering to buy one.

  Investor Marc Andreessen says that smartphones and tablets have not just exponentially expanded the number of people in the world who can consume media, they have also exponentially increased the number of times and places throughout each day that those people can watch. “You’ve got your phone and you can watch TV or movies anytime you want. The same with tablets. With a TV you have to be at home—to be sitting still—to watch it.”

  Andreessen sounds giddy when he talks about all this. He has been thinking about these issues and watching them evolve for more than twenty years, and he has been doing it from one of the best vantage points in the world—with the access to people and information only available to a select few Silicon Valley insiders. At the moment he and his partner, Ben Horowitz, are known as two of the top VCs in technology. But many have forgotten that Andreessen was also the cocreator of the first Internet browser, Mosaic, which became Netscape Communications in 1994. He helped sell it to America Online for $4 billion in 1999—despite losing the browser wars to Microsoft. Then in 2000 he cofounded one of the first cloud-computing companies, Loudcloud. It nearly failed when the Internet bubble popped. But he and Horowitz changed the name to Opsware, rebuilt it, and sold it to Hewlett-Packard for $1.6 billion in 2007. Most of the best-known VCs took a decade or more to make a splash. Andreessen and Horowitz have become two of the top VCs in four years.

  Andreessen says,

  In 1993 it was very obvious what the world would be like if everyone had a high-speed Internet connection and a big screen because at the University of Illinois [where he was at college] we had those things. But the only reason we had those things was because the federal government was paying for them, and they were only paying for them at four universities. Our first demo for Netscape showed how you could watch Melrose Place [the hot TV show at the time] in the browser.

  I actually think mobile is the biggest thing our industry has ever done. Our industry was basically born around 1950 at the end of World War Two [when William Shockley invented the transistor]. And that sixty years was basically a prologue to finally being able to put a computer in everybody’s hands. We’ve never had the ability as an industry to give a computer to five billion people [the number of people with cell phones currently], and that is precisely what is happening right now.

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  Nothing illustrates the power of the mobile revolution more than its impact on the U.S. television business. Five years ago the idea that anyone would give up cable TV seemed preposterous. Consumers were annoyed at rising rates, but there wasn’t a lot to watch on the Internet yet. Now, not a month goes by without some entrepreneur or television executive being interviewed about the long-term viability of asking consumers to pay more than $100 a month for cable programming. These aren’t theoretical conversations. The threats to the financial stability of cable TV—and by extension broadcast TV—are real and seem to get more powerful every day.

  The solutions to cable television’s problems are complex, but the origins of the problem are simple: the industry has become a victim of its own success. Network programming began in earnest in the 1950s, but it wasn’t until the 1980s and 1990s—when almost everyone could get cable TV—that the television industry really took off. For all the attention broadcast television generated, it was a technology inferior to cable. Consumers were typically limited to fewer than a half dozen channels, and many Americans lived in areas where the reception was so bad they were lucky to get one. The cable industry’s bet was that by sending TV signals over a wire it could offer consumers far more channels, flawless reception, and an unlimited array of programming. Cable executives believed that the difference in quality was so stark that consumers would even pay for this service. Meanwhile, the media landscape would be transformed. TV purchases would increase. TV watching would increase. And new programs would be spawned.

  Most of what the cable companies predicted came true, allowing family-run companies such as Comcast to become one of the largest corporations in the world, and allowing channels such as ESPN, FOX, and HBO to charge billions of dollars a year for their content. Then, beginning about a decade ago, the industry began to hook consumers on “the bundle,” a combination of TV service, broadband Internet, and telephone service. That also was visionary. It allowed cable companies to compete with phone companies for new customers. This helped the industry not only win more subscribers but also got them to pay more for their service.

  But cable broadband is now so fast that it has allowed competing content providers to grow up on top of it. The cable industry was been built on the assumption that consumers had a theoretical choice whether to pay for TV or get
it free over the air. But practically, it wasn’t a choice. Watching Internet video on a tablet, smartphone, or even on the television via a game console or other electronics, such as the Apple TV or those made by Roku, is a real alternative. It’s getting more attractive every day. It’s hard to miss the irony. Sure, more and more of the content we consume at home is on a mobile device. But those devices are connected to Wi-Fi networks that are connected typically to cable broadband. Cable is being forced to rethink its business because of Netflix, YouTube, Apple’s iTunes, Amazon movies and music, and Facebook. But its bandwidth is what has enabled all of them to exist.

  The difference between what is available to watch on the Internet and what is available to watch through cable TV remains vast. But while it is narrowing, the difference in the price of a monthly cable subscription (typically in excess of $100 for a family) versus, say, one from Netflix (less than $10) is not. Baby boomers may talk about the importance of watching TV as a family. Millennials think that’s just a rationalization for not having what everyone really wants: TV without programming compromises. So-called cord cutting, when households drop their cable TV subscription and only get broadband, has been overblown. But cable TV subscriptions are no longer growing, and new households—those started by adults right out of college—are subscribing to cable in smaller numbers than ever before. This group even has a name in the industry: cable nevers.

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  All this is straining the cable companies’ relationships with content providers to the breaking point. On one hand, cable companies remain the highest bidders for content, and content creators worry about doing anything to mess that up. About $4.50 out of every cable bill goes just to ESPN for its sports programming. That’s close to $3 billion a year from all cable subscribers. It is what enabled ESPN to agree to pay $15.2 billion to the National Football League through 2021 for Monday Night Football. It’s not just sports that relies on subscriber fees. Each episode of Game of Thrones on HBO reportedly costs $6 million to make.

  On the other hand, Internet media networks are proving that the money no longer has to come from cable subscribers. Netflix didn’t originate House of Cards. Independent studio Media Rights Capital took bids from a handful of networks, including HBO, Showtime, and AMC (where you can see Mad Men). Netflix outbid them all. Google isn’t handing directors such as CSI creator Anthony Zuiker millions to make programming on YouTube because it’s being charitable. It thinks that YouTube’s audience is so enormous that a good show will pay for itself in advertising revenue. YouTube boss Salar Kamangar said in an interview at an All Things D conference in 2012 that in the traditional YouTube experience, “you have to decide, what do I care about and what do I want to watch every three minutes.” The new content will be more interactive and more focused on specific niches. “We think that’s going to increase minutes watched, we think that’s going to improve the experience,” he said.

  One of the nastiest fights right now is whether or not a company called Aereo has the right to exist. In 2012 Aereo started offering consumers in the New York City area the ability to get their local broadcast channels live on any device they own for between $8 and $12 a month. Aereo doesn’t pay the networks or the cable companies anything for those broadcasts, but it allows subscribers to watch live or automatically record local television on their phone or tablet anywhere there is wired or wireless Internet connection. When Aereo launched, most networks allowed you to watch yesterday’s broadcast that way, but not today’s. But by the middle of 2013 it looked like that stance was changing fast. ABC said it would begin offering live same-day streaming of programming in some Aereo cities, such as New York, even though not all of its programming was available and users could get it only if they had a cable subscription. By the time you read this, all of the other networks may have followed suit.

  What Aereo is doing sounds as if it should be illegal. Cable companies pay broadcast networks hundreds of millions of dollars in fees every year to transmit their broadcast signals over their wires. Aereo is getting away with not paying a cent. But for the moment judges have ruled that because of a loophole in the copyright laws Aereo is completely legal. The cable and television industry sued Aereo as soon as it was launched in 2012, seeking an injunction to shut it down. But they lost. When you subscribe to Aereo, your house is assigned a specific antenna in Aereo’s server farm. As long as each house is receiving the broadcast signal on an individual antenna based in the local area, it’s legal reception. The law doesn’t require the antenna to be based in your house.

  This is, of course, terrifying for cable and broadcast companies, and they plan to use every dollar at their disposal to continue their fight. Retransmission fees are a huge source of income for broadcast networks. Meanwhile, Aereo together with a Netflix and Hulu subscription at about $20 a month starts to become a compelling alternative to paying $100 for cable service. One of the things that has kept cable customers from cutting the cord has been the absence of live TV—local sports on local broadcast stations in particular.

  It’s going to be an enormous battle, because Aereo isn’t a half-baked start-up with easy-to-scare venture capitalists. Barry Diller, who built his career in Hollywood at ABC, Paramount, and FOX television, is backing it. He knows and has worked with most of the executives running the networks. But from the early days of his career he has also always been much more interested in disrupting the status quo than in making sure people like him. “I knew there was going to be controversy, but I couldn’t find a flaw because I felt that the existing law was so much on the side of what Aereo was doing, and that’s what intrigued me,” Diller told David Carr at The New York Times in March 2013. Those remarks brought the following curt response from Les Moonves, the head of CBS: “It is clear that the whole premise of Aereo is to make money off the back of the hundreds of millions of dollars we invest in programming. We pay the NFL one billion dollars a year. Right now we have a lot of correspondents in Rome. We think it is patently illegal to take our signal and those of the other networks and resell it without paying for it. It is so wrong on so many different levels.”

  The future of HBO will also be a good proxy for how the mobile revolution is going to evolve. For the last few years the company has successfully been embracing technological change with its hugely popular HBO GO app while professing its loyalty to the cable companies who continue to be the gateway to its high-end programming. That’s an understandable position, a kind of straddle. For all its growing popularity as a brand, HBO has never had to sell or manage relationships with its customers. It has had to manage its relationships with the cable companies, and they take care of everything else. This has provided HBO with all the money it needs to buy and produce the top-quality shows it is known for.

  HBO’s problem is that it is increasingly unclear how long that straddle is going to work. Netflix, with the success of House of Cards and its other original programming, has now proven that you no longer need a cable network to offer consumers top-quality programming. HBO knows Netflix’s model well. It is similar to the one HBO used to become the dominant cable entertainment channel in the world: Use movies to build a subscriber base, then use the subscriber base to start making your own content. The difference is that you only need an Internet connection and $8 a month to get Netflix programming. You need a top-tier cable TV subscription at more than $100 a month to get HBO.

  HBO is keenly aware of this, and in an interview in February 2013 its president, Eric Kessler, said that it had partnered with Tivili, a three-year-old start-up led by two Harvard students, to bring HBO GO to a handful of college campuses. Students won’t need their parents’ cable-subscription number to sign up. They’ll be able to do it for free with their Facebook log-in. Kessler said that HBO never wants to be associated with an audience of middle-aged adults only—as Oldsmobile became—and said he assumed that many college students today would get most of their HBO programming through HBO GO. But he also said he believed that they would be gettin
g that programming via a cable TV subscription for a long time to come.

  But this issue is clearly a moving target inside HBO. Just six weeks later—at the premiere of Game of Thrones in San Francisco—fifty miles from Netflix headquarters in Los Gatos—it seemed as if HBO had completely reversed course. Its CEO, Richard Plepler, said that HBO was thinking hard about allowing those without cable subscriptions to get HBO anyway. Customers could pay $50 a month for their broadband Internet and an extra $10 or $15 for HBO to be packaged in with that service, for a total of $60 or $65 per month, Plepler explained. “We would have to make the math work,” he added.

  The antagonistic standoffs between the entertainment industry and the Silicon Valley of the Napster days back in 2000 are not completely gone either. In early 2012 the entertainment industry thought it could use its lobbying clout in Washington to quietly push two bills through Congress that would have given it new powers to control the content of websites violating their copyrights. But the bills read as if they were as much motivated by a nefarious Hollywood power play as by a desire to stop illegal activity. Big tech companies such as Google blacked out their website names in protest of the SOPA/PIPA bills. Some, such as Wikipedia and Reddit, went dark. And the bills were quickly defeated.

  But what happened after the SOPA/PIPA fiasco was as interesting as the event itself. Instead of hardening their positions as they had in the past, executives from Hollywood and Silicon Valley figured out a way to make headway. Hollywood executives, such as Chase Carey, the COO of News Corp., were contrite, acknowledging openly that the industry had been heavy-handed. Meanwhile, companies such as Google agreed to figure out new ways to flag pirated content. Ari Emanuel, who had been publicly critical of the high-tech industry—particularly Google—on this issue in mid-2012, was by the end of the year talking about all the progress that had been made. He said Google had demonstrated to him that it was now moving sites it suspected of piracy down in search results—which, if it takes a site out of the top ten, can be akin to making it disappear. “So Silicon Valley and Hollywood are working pretty well on aspects of content and distribution in new media,” he said.