The least-surprising pact Google likely will do all year is an impending one with CBS. The two have held serious talks during the past several weeks, with a radio agreement all but sewn up, and are in heavy negotiation for other content and inventory deals.
Under the deal, Google would offer CBS revenue guarantees for the content licensing and the reselling of traditional media inventory.
Such a deal, according to people familiar with negotiations, includes everything from licensing content to Google Video to giving up radio inventory to Google's fledgling audio advertising service. But local TV ad inventory is the most interesting asset on the table -- and the first strong signal of how the search giant may make headway in getting into the $60 billion U.S. TV advertising business.
Making up for past sins?
Under the deal, Google would offer CBS revenue guarantees for the content licensing and the reselling of traditional media inventory. The deal is also likely to include -- though it won't be articulated as such -- a payoff to make up for YouTube's previous copyright transgressions. Several executives familiar with Google's negotiations with media companies say large cash payments or guarantees would help sate the media companies whose content has been used to fuel YouTube's meteoric rise and massive $1.65 billion acquisition, which closed in November.
"Payments will undoubtedly cover past transgressions," said an executive at another major broadcast-media company. "Although they'll never be positioned that way."
Major broadcast companies have yet to clearly outline exactly where they get their digital revenue from and omnibus-style transactions such as the one in the works with CBS and Google has some analysts worried the picture could get even murkier.
For example, CBS could take a lower content-licensing fee in exchange for selling its radio and TV inventory at a higher price in order to juice the broadcast results. Or, it could do the opposite to make it look like it has rich digital assets.
"We won't know the attribution for the license fee," said David Bank, analyst at RBC Capital Markets.
For the major media companies negotiating with Google, these deals ultimately ride on how much money can be guaranteed, not necessarily what's best for a long-term digital strategy. But it comes at a time when the media sector is under pressure from Wall Street to increase performance while at the same time being squeezed by advertisers' moving dollars from traditional outlets to the internet.
A deal with Google Audio could help boost CBS's struggling radio and, possibly, local TV ad-sales divisions. Radio revenue is down 7% through the first three quarters of 2006 and local TV is expected to face difficult comparisons in 2007 as last year it got a boost from the 2006 elections. Contrary to many assumptions, the deal wouldn't be just for remnant inventory, and would be instrumental in helping Google get its audio-advertising business off the ground.
Cutting out buyers
Jessica Reif Cohen, an analyst with Merrill Lynch, issued a note today suggesting that if the agreement included 10% of CBS Radio's advertising time, that portion of the deal could involve about $200 million in revenue. She also suggests it could lead to the disintermediation of traditional advertising buyers over time. And deals over time could lead to significant leverage for Google.
Additionally, the two companies have a friendly relationship. CBS already has a relationship with Google-owned YouTube and it was a year ago that CBS CEO Leslie Moonves made the first announcement about a deal to rent CBS TV shows through Google Video. Since then, Mr. Moonves has hired Quincy Smith to lead its digital-media strategy. Mr. Smith is a veteran of Allen & Co., the venture-capital firm that invested heavily in Google when the search giant was in startup mode.