Dogfight: How Apple and Google Went to War and Started a Revolution (28 page)

Here’s an example. Lady Gaga’s next album,
ArtPop
, won’t be issued initially as a CD or digital download but as a mobile app. Her manager, Troy Carter, has a lot more in common with Facebook founder Mark Zuckerberg than with the traditional rock-star managers of old. He’s one of the first to use social media as the primary marketing vehicle for his client. In addition, he is fast becoming known as one of the savviest high-tech angel investors around, with early stakes in apps such as music service Spotify, taxi service Uber, and news service Summly (just bought by Yahoo!). “The music industry is healthier than ever right now, and it’s a fantastic time to be in it,” he told London’s
Guardian
newspaper at the end of 2012. When was the last time anyone said
that
about the music industry?

Emanuel says that from his and his clients’ perspectives not only have all the changes been good, they’ve created an embarrassment of riches: just as broadcast and cable companies are bidding for his clients’ work, so too are half a dozen tech companies—ones with enough spare cash to outbid any cable or broadcast company. Indeed, if you add up the cash on the balance sheets of Apple, Google, Amazon, Microsoft, Facebook, and Netflix, it approaches $300 billion—enough to buy all the big cable companies and broadcast networks combined. Emanuel has been critical of Silicon Valley’s lack of respect for copyrights. But he says Google especially is getting better about this. And it is hard to ignore how much the tech companies are bidding up the prices of his clients’ services. Emanuel said that there were 39 scripted TV shows in 2009. In 2011 there were 139. Yet the quality of programming, and the bidding for talent and distribution, has increased along with the supply. The quality of television programming today is accepted as better than it has ever been before. Emanuel has a reputation as one of the toughest negotiators in Hollywood, accused of never having a nice word for anyone. But of the rush of Silicon Valley money into Hollywood, he says, “It’s fantastic. I love them.”

*   *   *

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.

*   *   *

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.

*   *   *

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.