‘Google Needs TV’, Chairman Will Tell Broadcasters in Edinburgh

When Google’s chairman Eric Schmidt gives the MacTaggart lecture to an audience of television executives in Edinburgh on Friday, the first person from outside the broadcasting sector to do so, he will deliver a positive message: ‘Google (NSDQ: GOOG) needs you’.

Schmidt is expected to tell delegates that Google wants to help the industry realise a bright future. That is a striking change from the company’s uncompromising stance in the past, when it was fighting legal actions from broadcasters and film studios over alleged copyright infringement.

It would be surprising if Schmidt didn’t arrive at the industry’s most prestigious gathering armed with a few conciliatory words, but his message is heartfelt, sources close to the company insist. Chatter about Google’s most talked-about projects, including mapping the world’s streets and digitising every book, can disguise the fact they are driven by commercial necessity rather than corporate altruism. Despite its status as an internet giant with annual revenues of just under $30bn (£18bn) and an 85% share of the search market, Google needs content creators in order to thrive.

Good content drives search, and search drives advertising. The more compelling the content there is online, the more money Google makes. In Schmidt’s view, that makes Google and the TV industry potential partners and, in the right circumstances, natural collaborators.

The contents of Schmidt’s speech are a closely guarded secret. But a headline-grabbing initiative – perhaps a Google programming fund that production companies could bid for? – may help recalibrate the relationship between the IT nerds from Mountain View, California and the creatives from Soho and Salford.

Several years ago, that prospect would have seemed remote. Broadcasters watched with frustration as Google-owned YouTube generated traffic by allowing users to post clips from hit shows, while Google allowed others to find pirated material available elsewhere on the internet. Google’s retort to content providers who complained – that they should be grateful some of that traffic was being redirected to their own websites – was starting to wear thin.

Since then, however, the company has reached an accommodation with several of them, striking revenue-sharing deals that have smoothed ruffled feathers. Google did so by creating a program, Content ID, that scans the internet for pirated material. Content producers can then decide whether to remove those pages or leave them untouched and advertise against them; if they choose the latter option, they pocket all the associated revenue.

It is an olive branch that many groups have seized. In 2009, Channel 4, BBC Worldwide and ITN were among broadcasting organisations agreeing a deal with YouTube allowing it to put ads around their content. Today, only one major lawsuit is outstanding, although it is a big one – MTV and Paramount owner Viacom’s $1bn action alleging ‘massive intentional copyright infringement’.

The subtle shift in the balance of power between Google and the television industry is a phenomenon Schmidt is likely to acknowledge on Friday night. The emphasis will be on collaboration with content companies and major domestic players including the BBC and C4. He is likely to compliment the creativity that has enabled British broadcasting to claim that is the most successful in the world. The UK exports more formats than any other nation, according to Pact, the industry body for independent producers; it will reveal later this week that total international revenues generated by indies alone grew by 34% last year to £590m. Selling British formats overseas now accounts for a quarter of the sector’s total revenues.

In the meantime, Google’s long-anticipated assault on television has stalled. Google TV, which turns a television set into a web browser, launched in the US in the spring but it has flopped. That is partly because Logitech, which manufactures the set-top box required, priced it at $249 (it is preparing to slash it to $99). Worse, Google TV is clunky and difficult to use.

Those teething problems can be solved (the $12.5bn acquisition of Motorola (NYSE: MMI) Mobility last week may help because the group is a big player in set-top boxes), but as Google marches on to broadcasting territory, it is proving to be less sure-footed than many feared.

One of Google’s mantras is that it is a technology company, not a content company, and as it focuses on the crucial mobile market it is becoming less interested in the material users search for and more focused on the platforms they use to do so. It announced in April it would spend $100m creating original content for YouTube, but that is less than half of Channel 5’s annual programming budget.

Schmidt’s message is designed to reassure television executives concerned that Google would affect them in the same way it has other businesses, which have struggled to replace revenue lost to the internet. Yet unlike film studios and music and newspaper groups, commercial TV has always given its product away. Technological advances and new platforms, including the BBC’s iPlayer, have led to bigger overall audiences – the ability to watch TV streamed live or on catchup services online has expanded the market. The average UK viewer watched 18 hours and nine minutes of commercial linear TV a week (two hours, 35 minutes a day) during the first six months of 2011, according to Barb figures published last week. That is an increase of 48 minutes a week (seven minutes a day) on the same period in 2010. As many as one in five people now view hit BBC shows such as EastEnders after they’ve been broadcast. Last month, for example, an EastEnders episode won a Monday evening audience of 8.8 million, with a further 1.8 million watching later. A single Sunday night edition of Top Gear was watched by just over 8 million on BBC2, and a futher 2.8 million downloaded it on iPlayer.

Television is also defying the adage that media groups must be prepared to charge a lot less for digital ads that would have cost hundreds of pounds in the old analogue world. The cost per 1,000 impacts for online TV advertising is often higher than for linear TV, according to commercial TV marketing body Thinkbox. That is partly because the online audience tends to be typically between 16 and 34, a demographic advertisers covet. A 30-second commercial that reaches that audience on linear TV costs advertisers £19 per 1,000 views, industry sources point out, but the same ad costs between £25-£27 per 1,000 for an on-demand show.

The convergence of TV and the internet may not put an end to the business model that has served traditional commercial broadcasters well for more than 50 years. Viewers seem willing to accept TV advertising online, while not tolerating pop-up and banner ads. The online catchup version of The X Factor runs nearly eight minutes of ads per hour, almost the same as the live show.

So there may be grounds for optimism, but not everyone will be swayed by Schmidt’s charm offensive. ‘[Google’s] search business is mainly driven by quality content it pays nothing for,’ says one senior industry source. ‘But content owners have realised they have more power than they thought. [Schmidt] is going to say nice things and expect we’re all going to bow down, but it’s not enough. [We’re saying to him] ‘You’ve got to put your hand in your pocket’.’

Radical proposals include a one-off monopoly tax, which TV executives argue could be justified by pointing to Google’s 85% UK search share, with the proceeds used to fund programming. Given Google’s Downing Street connections – David Cameron’s director of strategy, Steve Hilton, is married to Google’s global head of public affairs, Rachel Whetstone – that idea is unlikely ever to get off the ground.

There was a time when Schmidt might have used a set-piece speech to fire a warning shot. The fact he is likely to deliver a rallying cry instead suggests TV executives will gain more than they lose by accepting that they need Google as much as Google needs them.

Source: http://paidcontent.org/article/419-google-needs-tv-schmidt-will-tell-broadcasters-at-edinburgh/