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Summary:

As we all learned last week, Google’s efforts to strike content deals with the major media companies, on behalf of their YouTube division, seems to have hit a wall. Viacom pulled all their video clips, NBC accused them of “Mafioso” negotiating tactics, CBS backed off at […]

As we all learned last week, Google’s efforts to strike content deals with the major media companies, on behalf of their YouTube division, seems to have hit a wall. Viacom pulled all their video clips, NBC accused them of “Mafioso” negotiating tactics, CBS backed off at the 11th hour of deal talks, while Fox and NBC continued to push their vision of launching a big media-backed YouTube competitor.

All such setbacks notwithstanding, it’s still pretty safe to predict that it’s just a matter of time before one of the big media brands caves in and strikes a ground-breaking deal with Google. And maybe not too much longer before Google starts buying programming directly itself.


At the center of such a forthcoming deal will be, of course, money. Specifically, the minimum amount of dollars that Google will guarantee the media company for every year of the deal term. Rumors are that they offered the old media giants as much as $500 million of guaranteed revenues per year, but it wasn’t enough.

Whatever the final guaranteed amount turns out to be, the bottom line is that Google is willing to take a substantial financial risk, upfront, to secure their rights for the distribution of content.

Taking such financial risks is nothing new to Google. In fact, one of the boldest moves they made early in their life was to offer AOL guaranteed revenues, a deal that could easily have bankrupted Google had it not worked out to expectations. Since then, they have used guaranteed minimums as a key weapon in securing every major deal they’ve closed — including the $900 million guarantee they made to MySpace.

But here is where Google’s dealmaking model gets even more interesting. Going back to their efforts with big media companies, Google’s willingness to guarantee substantial revenues further exacerbates the never-ending debate on whether “Google is a friend or foe” to the existing media establishment.

When you look at the big media companies that Google is trying to woo, like CBS, their business model is quite simple. First, they own distribution, which at the end translates into a fixed channel on your TV dial. For instance, I live in Princeton, N.J., so CBS for me is on channel 2. They then buy programming to fill up their channel, like CBS buys episodes of CSI from Jerry Bruckheimer.

Buying programming is the risky part, as CBS must pay the producer in advance often without the comfort of knowing that the program will succeed in attracting a sufficiently large viewing audience. Lastly, CBS will sell advertising against their programming in the hopes that they will recoup their upfront investments in the shows and make a profit.

Given that, let’s now look at what Google is proposing to do. First, Google owns distribution, both at Google.com and now also at YouTube.com. Then, as they negotiate with the big media companies, they are offering to “buy” their programming for an upfront, bankable financial instrument — the guaranteed minimums.

Here, Google is taking a big financial risk as it is very unclear that the guaranteed minimums will prove to be a smart move. And Google will find that out as they sell advertising against the programming they purchased, in the hopes of generating sufficient revenues to cover the guaranteed minimum commitments and make a profit.

The parallels between an existing media company’s business model and the one that Google is pursuing are pretty strikingly similar, aren’t they? And as you click down further, you start to wonder what will stop Google from eventually going directly to the Bruckheimers of the world, cutting out the broadcast networks as middlemen?

In fact, Google is likely to conclude that buying wholesale programming is a sure-fire way to improve margins. After all, in striking a digital video distribution deal with Google, CBS would have handed over the only asset/competency they possessed that would have handcuffed Google: ad sales. But then, Google effectively bought that asset also when they guaranteed minimum revenues.

  1. Lars mouritzen Thursday, March 1, 2007

    Google captures consumer attention and it monetises that consumer attention by selling it to advertisers. From that point of view, it is not different from any of the TV networks.

    What makes Google so different is the way it deals with audience fragmentation. Online attention is fragmented across literally billions of web pages. Google has created the ability to capture each tiny fragment of attention, and hook it up with precisely the advertiser who will pay the most for that particular fragment.

    However, this only works as long as we use Google to search. If we start navigating in some other way rather than search, then Google loses our attention and can’t monetise it. And that is precisely what is likely to happen in rich media, like video.

    The problem with using Google to search video is that Google fundamentally relies on words. A digital video file is just a bunch of instructions for displaying pixels on a screen. Not much use to a search engine.

    So how will we navigate a world with millions of hours of video? iTunes provides a clue – through recommendations, not search. “People who downloaded/ watched/ purchased this video also liked…” And if we are using recommendation and not search to navigate video, then Google is losing our attention and can’t monetise it.

    To capture our attention back in the online video space, Google will have to do it the old fashioned way – by providing good content. Hence the battle to strike video deals for youTubes.

    The real question therefore: Is Google changing from a new media company to an old media company.

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  2. Interesting way of looking at it Lars…i think you are right.

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  3. Jeffrey McManus Thursday, March 1, 2007

    You think it’s inevitable that one of the content providers will cave? Why? It seems far from likely to me.

    YouTube has all the traffic today but that’s not necessarily a permanent state of affairs, and while a Fox/NBC YouTube knock-off may indeed suck, it will have the benefit of carrying Fox/NBC content.

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  4. Google always has and always will be a media company, the old or new label does not matter. They make money selling ads. End of story.

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  5. Is Yahoo a media company ?

    Yes, and the word is Terry Semel has done a subpar job.

    What is Google doing different and better ?

    Can they sustain their edge and beat the snot out of the MSM ?

    I hope so…

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  6. And maybe not too much longer before Google starts buying programming directly itself.

    That’s effectively what revenue sharing will accomplish: content for cash.

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  7. Michael Stone Friday, March 2, 2007

    Google wants the Old Media Co’s to ask these questions because it confuses them long enough for Google to further destroy them.

    Media Company Definition: (1) Content, (2) Audience/Reach/Distribution, and (3) Ads

    Google fits the classic definition. The major difference: Google follows the eeact same model but with two different important twists:

    (1) They don’t produce content, rather, they aggregate it – much cheaper.

    (2) They monetize MUCH better through use of sophisticated ad technology while OLD MEDIA still slings untargeted banner ads ALL over the place in an embarrassing way.

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  8. [...] Wednesday, March 19, 2008 at 6:38 AM PT Comments (0) Almost a year ago, writing for GigaOM, Robert Young posted a piece that billed Google as a media company and eventually more a destination in the classic [...]

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  9. [...] a year ago, writing for GigaOM, Robert Young posted a piece that billed Google as a media company and eventually more a destination in the classic [...]

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  10. [...] a year ago, writing for GigaOM, Robert Young posted a piece that billed Google as a media company and eventually more a destination in the classic [...]

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