It has become a staple of Sunday newspapers, television talk shows, and late-night news programs: the cautionary tale about the Internet turning America's youth into a generation of socially inept zombies, plugged in but tuned out, incapable of any conversation longer than an instant message, and headed for a sedentary life of weight gain, eye strain, and information overload.
But if anyone is in danger from the growing power of the Internet and its transformative effect on communication, entertainment, information, and commerce, it is not America's youth but the old media themselves. Companies such as the New York Times, Walt Disney, News Corp., and NBC/Universal, as well as magazine and book publishers, are increasingly losing ground to a new breed of media elites who grew up in the digital world and are now out to control it by offering content and services to users worldwide. "These new entities have emerged with real businesses and real earnings," says independent media analyst Harold Vogel.
Just how quickly the landscape is shifting was demonstrated in the past two weeks. Google posted blowout profit numbers in the third quarter, with earnings rising sevenfold, handily beating estimates as its stock pushed the $400 mark. Rival Yahoo! saw revenues rise 42 percent in the quarter. Microsoft, which increasingly sees online portals as its greatest threat, announced it would offer Web-based versions of its dominant Windows and Office software packages as it shifts more resources to the Internet. Even AOL, battered during the dot-com bust, has regained some luster, with a host of suitors from Yahoo! to Microsoft to cable giant Comcast seeking a piece of the 110 million-viewer Web portal. Time Warner directors met last week to discuss the offers, as AOL cofounder Steve Case left the board to pursue his own healthcare ventures. Old media's woes continue to mount, meanwhile. The largest shareholder in Knight Ridder, the nation's No. 2 newspaper chain, called for the company to be broken up and sold partly because it cannot capture ad dollars that are migrating to the Web. Merrill Lynch analyst Lauren Rich Fine pointedly noted there might be a shortage of buyers, given the "secular challenges" facing traditional media houses.
Full speed ahead. It's hard to remember that Google, Yahoo!, and MSN were barely on the radar screen a decade ago. It was a dial-up world where only a small percentage of Internet users had high-speed access to the Web. Traditional media companies, with their film, television, and news operations, controlled the content universe and determined what was news, releasing information and entertainment products on a schedule of their choosing. Today, more than half of U.S. households have high-speed lines that allow them to easily access and download music and video from the Web onto an array of devices from laptop computers to cellphones to iPods. The average person now spends three hours a day on the Internet, and with the explosion of blogs and social-networking sites, where users provide free content, the line between consumers and providers has all but disappeared.
"Yahoo! wants to become an end-to-end media ecosystem," says Allen Weiner of Gartner. "They will become the newspaper and radio station and TV station and also your communications provider."
Competitor Google's audacity appears boundless. The $36 billion company is plastering help-wanted signs all over the Net and even in newspapers. It is going ahead with a controversial plan to digitize the world's top libraries on its site and is joining forces with NASA to research such topics as supercomputing, linking up with former rival Sun Microsystems to take on Microsoft, and testing an online classified-ad business that takes aim directly at eBay.
Yahoo!, which pulls together content from a wealth of sources and whose 400 million unique monthly viewers make it the world's most visited Web portal, is expected to post revenues of about $5.3 billion this year, up 47 percent over 2004, with a fat profit margin in excess of 40 percent. "Yahoo! is so hyperfocused on meeting the needs of its users, and it continues to innovate around them," says Charlene Li, a technology analyst with Forrester Research. "For them, it's not just about having the best content but having the best aggregation of the best content." And now the portal is giving its own users more control over what goes onto its thousands of Web pages through an array of user-generated content sites such as blogs and social-networking sites, where photographs, product reviews, movie and music recommendations, political opinions, and other consumer information are posted on the site by users. It has even put a toe into producing original news and content, hiring TV journalist Kevin Sites to do online reporting from the world's trouble spots and adding a bevy of personal finance columnists to its popular Yahoo! Finance pages.
What the upstarts are doing is turning upside down the age-old relationship between the brokers of information and their audiences. Remember when Walter Cronkite was in everyone's living room ending his CBS newscast with "And that's the way it is" ? Now, "it isn't somebody else who programs you anymore," Yahoo! CEO Terry Semel told an industry audience in New York recently. "The consumer is the programmer. All those folks who used to make those decisions for us, thank goodness they're not in our lives anymore." (Cronkite, meanwhile, appears on an online blog.)
Photo album. Hyperbole aside, Semel's vision is playing out. During Hurricane Katrina, Yahoo!'s coverage offered traditional reports from the Associated Press, USA Today, ABC News, and other news outlets. But it also included hundreds of pictures posted by locals on Flickr, the amateur photo gallery Yahoo! purchased in March, blogs from ordinary people reporting the scene in their backyards, home video, and even emergency contact information. "It was a comprehensive package of all forms of media," says Morgan Stanley Internet analyst Mary Meeker.
The shifting tectonic plates have left executives of the old media--who a few decades ago controlled the news agenda from offices just blocks apart in midtown Manhattan--playing catch-up at a time when their stock values pale in comparison with those of the new kids on the block. "When the bubble burst and the stock prices on all these new media companies tanked, [they] breathed a collective sigh of relief that they could go back to normal," says Esther Dyson, editor at CNET Networks, which publishes Release 1.0. "But they were totally mistaken, and now they're finally waking up to what they're losing."
And that's big bucks. Internet advertising is up by 26 percent this year to $14.7 billion (out of total advertising of $278 billion) and is expected to top $26 billion by 2010, according to research by Forrester Research. Google alone sold $6.1 billion in ads this year, double that of last year and more than any newspaper chain, magazine group, or television network. By 2006, its ad revenues are projected to top $9 billion, which would put it fourth among American media companies in total ad sales and ahead of such giants as NBC, Universal, and Time Warner.
Some of the graybeards have adopted the strategy of "if you can't beat 'em, join 'em." Rupert Murdoch's News Corp. plunked down $1.3 billion earlier this year on acquisitions including MySpace.com, a fast-growing social-networking site, and IGN Entertainment, which publishes video games and other content. CBS owner Viacom tried to buy MySpace and IGN but ended up instead with Neopets, a website for children offering virtual pets. Disney recently announced a landmark deal with Apple to sell ABC' s top-rated television shows Desperate Housewives and Lost in a digital format where they could be downloaded to a video iPod. The New York Times Co. bought About.com (which features independent experts offering advice) earlier this year for $418 million. Although its third-quarter revenue of $14.2 million was a small portion of the Times Co.'s earnings, About 's ad revenues mushroomed by 67 percent--compared with just 2.9 percent for the Times Co. overall.
Online ads appeal to marketers because their effectiveness can be measured in a number of different ways. Advertisers can see exactly how many people click on the ads, where they go once they click through, who they are (in some cases), and how often the ad converts a shopper to a buyer. "The virtuous circle," says Yahoo! Chief Operating Officer Dan Rosenzweig, "is that if the content is more relevant and the advertising is more relevant, the consumer will be happier and will keep coming back."
TV offers nothing comparable, so advertisers rely on ratings information that is often subjective and less than reliable. "The Internet is the most ubiquitous experimental lab in history, built on two-way, real-time interactions with millions of consumers whose individual consumption patterns can for the first time be infinitesimally measured, monitored, and molded," says Richard Yanowitch, a veteran Silicon Valley marketing consultant.
Get your clicks. The Internet is also helping to rewrite the very rules of advertising, where companies aimed ads at selected demographic groups they believed were most interested in buying their products. "Traditionally, the focus has been on the outbound message," says Tim Armstrong, vice president of ad sales for Google. "But we think the information coming back in is as important or more important than the messages going out. For years, demographics has been a religion among advertisers because it was the only information they had. Now they're realizing there's more out there." Google rationalizes that reaching 60 people who have actually shown interest in a particular product by visiting its marketing site or a related blog is much more effective than targeting 600 people who are in the right age, education, and income bracket to buy the product but have not indicated any special interest in it. And because most of Google's ad-buying clients pay for ads only when users click on them, the company can precisely measure their effectiveness and charge more for ads that really work.
The question for the traditional media powerhouses, with their troves of content, is which role they want to assume: simple providers of content on whichever portal suits them, or portals unto themselves, offering search (the biggest magnet for advertising right now), instant messaging, E-mail, and other services directly to their users.
News Corp. is taking the portal approach and plans to add E-mail, search, and voice services to its Web offerings. Disney, burned from its Go.com portal venture, is now spreading its money around, investing in mobile phones, interactive television, and other advertising-supported websites. Steve Wadsworth, president of Walt Disney Internet Group, says the company has learned a lot since the Go.com days. "Just because something is cool doesn't mean people will do it," he says. "People do change their behavior, but it happens more slowly than you think and often in different ways than you expect." The ability to download a movie over the Internet to your computer doesn't necessarily mean you want to. But if you can download it onto Apple's new video iPod, that may prove more appealing. In February, the company will launch Mobile ESPN, a cellphone service that gives users immediate access to real-time sports scores, news, columns, fantasy sports team management, and video highlights they can find on ESPN, which is owned by Disney.
Some of the hottest approaches to the Web, being embraced by new media and old alike, are sites like MySpace.com, Facebook.com (story, Page 58), and Flickr, where users create the content and the online community. The beauty of user-generated content is that it is free and almost limitless, and ads can be sold against it. MySpace, for instance, is adding 125,000 new, mostly teenage users each month, who spend an average of one hour and 40 minutes a month on the site, writing blogs, listening to music, and viewing each other's home pages while browsing ads from the likes of Nike and other consumer brands. But free content alone wasn't enough to justify News Corp.'s spending more than $500 million for the site, and the entertainment giant, which owns Fox Broadcasting, has no illusions about how quickly cool can shift to cold. "The great thing about MySpace is what the users give each other. They're the evangelists of the business," says Ross Levinsohn, president of Fox Internet Media. "But we have to continually give them features and products and the ability to make it relevant, to make it work. We need to keep growing their engagement." To that end, Fox plans to use MySpace as a giant focus group, testing its new fall TV pilots online or floating ideas from its hit teen shows American Idol and The OC and having MySpace users weigh in with their take.
Yahoo!'s research shows, for example, that even limited user reviews of movies, cars, consumer products, and travel experiences are surprisingly popular--and can draw ads. "A small number of users give reviews, but large numbers use those reviews," says James Slavet, who runs Yahoo!'s auto and travel sites. "Expert views are really important. But other users' opinions are another angle on making a decision."
Ebert and Roeper, in other words, had better make way for Joe from Dayton. User content is the core offering of some of the fastest-growing sites, including Wikipedia and Instapundit . Yahoo! now builds new services specifically to take advantage of its users' proclivity to weigh in. A new product just rolled out, called Trip Planner, allows travelers to pull many Yahoo! services, such as airline and hotel reservations, local maps, and sightseeing guides, into one document they can print out, like a mini travel guide. They can also go further and ask other users for tips. And once they've traveled, users can create public blogs and slide shows of their trips for others to use. "A lot of the time, you don't want a 600-page guide," says Slavet. "You want 10 pages personalized to you."
Blog it. Buying into the blogosphere is another way big media companies--old and new--can connect with their users. AOL recently paid a reported $25 million for Weblogs Inc., a conglomeration of advertising-supported blogs covering everything from gadgets (Engadget.com) to autos (Autoblog .com). "Although blogs don't typically generate much revenue, blogs are low cost, low production, and you can get in quickly," says Jim Bankoff, executive vice president for programming and products at AOL. Blogs also give a big portal like AOL a way to divvy up its audience for advertisers into influential microcommunities. "If there are three people in the world you want to call up and ask what they think about a car, those people hang out on Autoblog, " says Bankoff. That said, once a media giant like AOL gets its grip on a blog, the blog loses its outlaw flavor, and its audience may be next.
In fact, it won't be long before all the new media are old enough that they start losing their rebelliousness and looking a lot more like their old-media predecessors, with thousands of employees, big bureaucracies, and heavy market pressures. "They're going to start acting like their parents," says analyst Vogel. "And inevitably they will disappoint people, have a down quarter, and the stock market reactions will be severe."
If history is any guide, that moment could occur anytime. It was only five years ago that the first round of Web frenzy came to a crashing end when many Internet stocks (and the companies behind them) lost all of their value. But there is a crucial difference now: The Internet leaders today actually are making money, gobs of it, with Google alone sitting on $7.6 billion in cash. That exceeds the current market value of Knight Ridder--what investors currently think the newspaper chain is worth--by a cool $3.5 billion.
NEW MEDIA, OLD MONEY
As advertising shifts to the Web, the leading Internet sites are raking in the big bucks.
COMPANY 3Q REVENUES 3Q PROFITS
Time Warner (AOL) $10.5 billion $897 million
Disney (ABC) $7.7 billion $851 million
Google $1.6 billion $381 million
Yahoo! $1.3 billion $254 million
New York Times Co. $791 million $23.1 million
Source: Companies. Note: Disney's third quarter ended July 2.