>> this week on "the communicators," a discussion on how digital media, copyright policy and google are affecting

the publishing industry. our guest is richard sarnoff of bertelsmann incorporated. >> host: this week on "the communicators," richard sarnoff who's president of bertelsmann dij call the media investments. joining in the questioning, greg piper. just start off by giving us a brief snapshot of the bertelsmann companies. >> guest: sure. we're a major media company based in germany. our key divisions are in television, that's broadcast television and television production where we're the largest broadcaster in europe with brands like rtl and mc in france, channel 5 in great britain. we're very active in the magazine field, we're the largest magazine publisher in europe as well. tunnel -- we have a very large services company which provides all kind of media services from

the reproductions of dvds, you know, all the way to printing of books to electronic payment services for google and microsoft and others. and then last but not least in the u.s. we have businesses such as random house which is the world's largest consumer book publisher based here in new york actually, and we have a number of printing and servicing concerns here in the u.s. and, of course, we have free mantle media which is one of the producers of "american idol" and other television shows here. so we have quite a spread of different media, and it's one of the larger media conglomerates in the world with north of $20 billion. >> host: and you're former executive vice president of random house. what kind of investments do you look for as president of bertelsmann media investments? >> guest: we call it bdmi looks

for early stage investments in the kinds of businesses that will affect our core businesses over time. so to give you an example some years ago we invest inside a company called audible which pioneered the digital downloading of audio books so that people could enjoy them in devices that played things like mp3s. and that business was really, was a pioneer there and was, ended up being the largest customer for our own audio book business which, you know, we're the largest producer in north america. and that kind of business as we saw it develop gave us an idea of, you know, how to expect developments in the digital realm overall for random house. the same thing applies for rpl and free mantle television production. so we try to make investments, and we have about 15 portfolio companies now, that can be

lighthouse investments, that can kind of show the way forward for some of our core businesses. many times there'll be close connections where there'll be a supplier relationship or distribution relationship with our core division and these smaller innovative companies, but in any case, if these companies are successful, they'll show us something about how these markets will develop and how the digital media will be affecting these markets in the future. >> host: do you see a day where we move away from paper and television sets and 20th century technology such as that? >> guest: i do foresee a day, that day is today. i don't think there's any question that people's habits of media have changed substantially even in the last five years so that, you know, your kids and certainly mine are just as comfortable watching a television program on their computer as they are on a television set whether it's through hulu or youtube or any variety of things they can find on the internet. the same thing is true with amazon's kindle and sony's

reading and a variety of reading devices including the iphone now where people are getting comfortable reading full books on screen. and this kind of behavior is, you know, is certainly fascinating in how it's mapping the changes of our cultural role, but it's also, you know, fairly concerning to major media companies because as things switch to digital there is the danger that a lot of value can leak out of the industry and that our authors or our artists won't have enough revenues there to pay for their best work and that we won't have enough revenues to pay for our own infrastructure. and you need look no further, for example, than the music industry which over the last 10 or 15 years the recorded music industry has really declined quite precipitously as the lek strongic dissemination of music has created a market that's quite a bit smaller than the former market, you know, in the

cd, cassette and before that lps. same thing is true in the newspaper business, for example, if you look at where newspapers are today versus where they were 5 or 10 years ago, their revenue model is under serious threat from internet advertising being somewhat more effective and news being commoditized digitally so people are not reliant on the paper for the consumption of news. in many cases they've consumed it already online, and that industry has not figured out the right revenue model to kind of recover its economic position, you know, in such a way it can sustain its. that's why you've seen a lot of newspapers already succumbing to this particular economic circumstance. what we're trying to do is make sure that the media we are most closely involved with don't suffer that same fate, and we were in the music business, you know, until fairly recently, and we had a firsthand ringside seat

of what that fate means. >> host: well, mr. sarnoff, isn't there a whole generation of folks growing up expecting free music, free television, free newspapers or free information online that it's going to be hard to kind of corral that back in? >> guest: well, i think consumer expectations and habits are at the core of, you know, everything that we do and everything we discuss for the future. there's no question that consumers as of this point have gotten inured to certain levels of free content for music, in many cases, for news in almost every case except, perhaps, "the wall street journal", and that has led to a kind of self-reinforcing behavior where the industry really could not adapt because you really can't compete with free. in other industries it's not yet decided. so, for example, in the book industry we find, you know, enormous numbers of people that are interested in buying books legitimately and reading them on

their kindle device or even their iphone and, you know, are finding the same kind of benefit from that experience that they have when they buy books physically in bookstores, and we don't necessarily see that industry transforming into the kind of priers-oriented atmosphere we might have seen in the music space. in television the model is not yet broken at all. we still have a robust television atmosphere in this country and other countries, and advertising, you know, on-network television is still -- although it's not perhaps at its highest, it's still an enormous business, and it's not clear whether flanker brands such as hulu and others that you can see will become more prevalent or similarly ride along with the core broadcast business over time. i think there is an expectation that television will be free, but at the same time if you look at the cable penetration in north america, you can see 80 percent of households, you know, pay a fair amount per month for their television, so there are

different models that you can apply to get economics into a business. only one of which is you pay each time you watch something or pay each time you want to read something or you pay each time you want to listen to something. a subscription model such as cable as, you pay all you can eat type of payment every month, and you watch as much as you want, or for a music subscription you listen as much as you want. it could be in the future there'll be a book subscription, although i think that's somewhat more doubtful. >> host: why? >> guest: well, the book business, you know, has some special characteristics. the first is that the cohort, the audience that consumes books is, perhaps, as broad as any that you can find. it goes from age 0 to age 99 through every kind of walk of life. they like different kinds of books, some religious books, nonfiction, self-help, literary, mass market, etc.

there's just a huge variety which means that spectrum that we have in publishing also means that it's somewhat slower to change radically as the music business did which had more or less a single cohort, let's call it 15-25-year-olds. and so the audience changed, and the tastes changed fairly rapidly, and trends could reinforce themselves fairly easily. second reason that books are different and this is, also, not a subtle reason is that the reading of books on devices is going to be a kind of slow transition over many, many years in this country and other countries. hasn't really started in other countries. and that is because as, you know, as i've certainly heard a lot of times there are a lot of devices when you read on them, it's like looking into a flash light, you'll get some eye strain that's more significant than the eye strain from a normal page which has almost

optimal clarity and contrast. many of the devices coming out have very, very low eye strain but also not the same contrast so that you need decent light to read it in. also people like to have books. you know, it's a very sticky medium. you've seen this medium, obviously, be sticky since about the, you know, 15th, 16th centuries. and the, there are a lot of psychological reasons for that one of which is i find books are the intellectual furniture of your life, and when you move, you move with that furniture. you want it to be an heirloom product for you personally, and digital media it's harder for that to be true. you can't be proud of a book shelf that is a memory stick and no one can see the intellectual furniture of your life easily. so i do think we're going to have a very, very long hybrid period where there will be an

awful lot of reading electronically and an awful lot of read anything print. the difficulty for the book publishing industry is that we have to support both simultaneously for a long time, and that can get expensive. >> host: what's the risk of the book publishing industry turning into the music industry insofar as you may be reliant on one provider? i itunes very tightly controls pricing and the terms of use, and the music industry's tried to create alternatives to itunes to create competition there. are you afraid that amazon or perhaps another company that's come up like scrips is going to become a dominant player and really put terms on you you're not going to be comfortable with and you're going to find yourself for the next 5 to 10 years trying to get out of this monopoly relationship? >> guest: well, it's a fair question. we're in a different situation from where the music industry is. although amazon is a very strong

player today, we also see a number of other strong players as current or potential competition, and we think it'll be a vibrant, competitive atmosphere. >> host: such as who? >> guest: we can start with sony which is already out with its device and has a fair amount of digital readers, then you go right to apple with which the iphones, you know, as a fairly well distributed medium, people are starting to read on that medium. i think you'll find enormous numbers of other cell phones over time become reading devices as they have, for example, in korea and japan. >> host: but do you think -- >> guest: and i'm not done yet. >> host: sorry. >> guest: we have google waiting in the wings, other consumer electronics companies that may see this as a vibrant enough market, and then we have one other thing that's important here which is in music there had been standardized pricing for a really long time. in other words, when you guys were buying lps when you were

perhaps growing up, not that you're that old, they tend to have a very, very narrow band of pricing priced at by the industry. singles whether those are itunes singles or before that singles that were playing on fixed media also had very, very uniform pricing. so when itunes came out with a 99 cent price point for a single track, that ended up sticking fairly quickly and becoming quite standardized. in the book business we don't really have a history of that. if you look at hard covers they might be $25, paiberback -- paperbacks might be $14, children's books at 4 or $5 or up to $15 for illustrated books, and we have pricing if you back into a bookstore that is truly all over the map. now, we may have some condensation of pricing, but i don't see the uniformity of pricing and, therefore, you

know, i'm somewhat less concerned although still generally concerned about pricing but somewhat less concerned that we are going to be locked in by a single competitor to a single price point as the music industry has been. >> host: when you said at the world copyright summit where you were speaking that you saw some consolidation of around $10 for books, let's say, coming through kindle, is there any reason to think consumers won't get used to a lower-priced book just as they've gotten used to the highs of $18 in cds, maybe $10 through itunes? how much control do you have here, and what kind of expectations are you trying to build in consumers that this digital file is worth somewhat more than the price it's coheading around? >> guest: when i mentioned that at the summit today, i think the coalescing price is more of an average price. you can see amazon pricing almost every best seller at

9.999, there are a large vary that are priced above, and i still think you're going to find price variability in digital formats because if we're publishing roger penrose's mathematics of physics at 600 pages, that's not a $9 or $10 book. never will be digitally or in print. but, you know, if we're doing a 192-page category romance, that may not be a $10 book either, you know, it may go the other way. these aren't like songs where they're typically one length and even songs now you can sew that itunes has basically agreed to break the 99 cent model, and they now have 1.29 for certain songs and 79 cents for others. so i think we're in a place where it's not going to be a single price point for the publishing industry. i don't fear that.

i do actually support to some extent consumers understanding what the prices are and understanding that they are a good value in the electronic formats. in other words, i would hate to have everything priced at $30 for an electronic book and have people think, hey, you know, $30 i'm not willing to pay that, let me find out if there's any way i can get this for free. and we really have to establish a habit of consumer behavior that's legitimate here because we, like all media, the book industry has this, the television industry's going to o have this, the music industry's already had this, you have two really bad outcomes on either side you're trying to navigate through. the sill la is piracy which means everything's going to be free, the crib discuss on this side is you're pricing too high, and you're going to force people over this way. so you have to have enough,

enough revenue volume to maintain your industry, so you can't price too low because then you have no industry left, there's no money for the creators, they stop creating. but you can't price so high that you're forcing them to the ore side -- other side, you have to navigate this thing very, very carefully. i think, you know, over time the music industry has kind of come back and is going to get it right. i hope the book industry gets it right from the beginning and when we get into movies and television and other kinds of media, i hope they're able to navigate this fairly well as well because the outcome here is a very negative outcome if we get it wrong, and that is if there's really no economics in these creative content industries, there are going to be no industries which means the best creative talents and minds that we have are not going to, they're not going to find this to be a particularly attractive industry to participate in. so we really need to make sure that consumers whether this is

through copyright enforcement or education or other reasons, you know, or other methods that consumers understand the value of content, they don't expect it to be free, and i would submit that sony's reader and amazon's kindle are examples of that in the book business, and there are other examples and plenty of them in the music business as well now. >> host: is the google book settlement a way to navigate between the piracy and the too high prices? >> guest: yes, i believe it is. the google settlement which is a settlement between the authors represented by the authors guild, the publishing industry represented by the american association of publishers, and google itself and on the side the libraries from which google copied all of these materials is an important settlement as a kind of precedent for our media markets here because it does allow for a brand new market to

kind of come out of nowhere for the content creators and for publishers and for google, frankly. in other words, they were engaging in a behavior which we from a copy right stand point thought was illegal. they were copying books in libraries, and they were taking those copies and making snippets out of them so people could find the books, and they were giving copies back to the libraries. all of this copying is exactly what copyright is about in our view, you know, you really can't make copies of these whole works for any commercial purposes whatsoever without the permission of the rights holders. so we engaged in a lawsuit that ended up being a class action, the authors voted class action format of a lawsuit, and we joined in that, and together we sat around a table and this wasn't quick, it took years, and tried to figure out how could we take this situation which is going to end badly for all of

us, in other words, if google had won the day, what it would be able to do then was take all these books, copy them, give them back to the libraries and then serve out snippets to the public to show what pieces of these books were to the public so you could search and find little pieces of your books. that's all they would be able to do, however, and we viewed that as unlikely because we felt we had the better of the argument that, no, they would be prevented from doing such a thing, they would not be able to make these copies available to the public. but that's a loss for us, too, because what these guys were digitizing and have digitized, you know, millions of books already, are many, many books that are out of print and essentially inaccess bl to the public, inaccessible to researchers at universities and inaccessible, you know, to the world in general. and so at least for the united states which is the only place the settlement could be effective if it is approved by

the judge, we will allow for all of these books that are digitized to have a kind of new life in our culture, in our society, in our educational institutions where once digitized you will be able to have access to these as a consumer and browse them, see if you're interested in buying them and if so, you can purchase them, access them electronically. in the case of institutions, you can get a subscription to all of these works so that your students and faculty have, essentially, the world's greatest library, in some ways the library of al alexandria, ultimately, every book you could ever want would be available to their students and faculties not just by going to the library and taking a physical copy out, but in their dorm rooms, in their offices, pulled up by search engines. it would be an absolute revolution of scholarship and a really big change for american educational institutions to have that capacity. married to that, we would create

an economic model so that was, that would be available by subscription to these universities so that all the creators of that content and the publishers of that content can be compensated for these, essentially for these subscriptions that the institutions would be engaged in providing to their audiences. that's a brand new market for us and allowed us to do this settlement. >> host: but there have been serious antitrust concerns about google's having exclusive rights to all these books in copy right because owners can't be found, and this may actually tie up this settlement, so i'm wondering from you were these conditions avoidable? things that have been raised by people who may want to get into the same business but will be precluded by law because they don't have the same exemption that google's going to have to write all these works? >> guest: is so-called exemption applies only to works whose owners cannot be found. any works that are claimed,

those works can be licensed by the book rights registry to any competitor who would want to provide the same service as google. you are right when it comes to the so-called orphan works, works that are never claimed by anyone, the class action mechanism gives google a capacity to do certain things with those works that will be difficult to replicate unless someone else had a similar class action result. however, we think that's quite temporary and not particularly meaningful. let me explain why. >> host: okay. >> guest: not particularly meaningful. these books that we're talking about, these orphan works, you know, there's a concern that google will have a monopoly on these works, but there is no one exploiting these works, there is no one who could possibly exploit these works. these works are sitting there not find bl, in general not findable or accessible to anyone. in order to have, you know, in

my view to have google servicing these works is a societal good, and it's a good for the rights holders, and that's who we're trying to service here, the rights holders, the general public and, of course, the communities of scholars that may want access to these works. so the settlement does provide that. the second reason it's not particularly germane is in my view the settlement for the first time provides an economic incentive for people to claim these works when they're theirs. hey, my father wrote this thing, i hear there are payments being generated, i'm going to claim it. so we'll have fewer and fewer of these orphan works over time because there's a mechanism for payment, and the last thing is -- and i believe this will come to pass, maybe not immediately -- there'll be new legislative impetus to deal with orphan works so that others can be enabled to have the same kind of licenses that google has legally without the class action mechanism. we couldn't do that as we saw it

today, but certainly with the legislative action that could be contemplated, it would be very, very easy to do. >> host: mr. sarnoff, why did you say that the benefits of this deal would be limited to the u.s.? >> guest: because this is a u.s. lawsuit, and the only use by whether it's consumers or institutions would be in the u.s. outside the u.s. none of these files would be usable by anyone, including google. >> host: let me ask you about these two differing approaches that have emerged in the print world for dealing with piracy. you have several media organizations whoever recently created this group called the fair syndication consortium who are trying to get basically advertising networks to share some of the revenue that's being generated from the unauthorized use of their articles, their news stories, and on the other side you have mainly the associated press which is taking much more of a kind of recording industry-style campaign to actually go after and try to prosecute some of these places

that are running their articles without permission. do you see either of these approaches as more likely to work? is there any kind of history from the past 10 years with the recording industry versus some of the other copyright industries that have tried to be more cooperative and as you've tried to actually co-opt a pirate service? >> guest: well, it's a complicated issue. as to, in the news business as to whether there can be a kind of forced sharing of advertising revenues from sites that are not legitimately paying anyone, i mean, that is a whole enforcement regime that is pretty hard to figure out how it'd work. i think it is possible, i'm not sure it will be desirable. i think the more desirable way to go is the internet, you know, there's actually in the congress today we had france there which is pointing in a different direction which is to say, hey, there's no god-given right that everyone has to use the internet exactly as they wish to use it

if it's violating someone else's rights. so, therefore, you know, there are certainly possibilities because of the nature of the internet to figure out where all of these things are posted and to make sure that they're posted, you know, legitimately and sharing revenues over time. i'm not sure either of the two extremes that you outlined are the best way to go, and i'm not sure if france's methodology of withholding internet service for those who engage in piracy is the right way to go for this country either, but i am sure there are technical solutions. >> host: and unfortunately, we have to leave it there. greg piper of washington internet daily, thank you very much, and mr. sarnoff, thank you for joining us on "the communicators." >> guest: it was a pleasure. >> host: the name sarnoff is a name that's known in communications, why do we know that name? >> guest: well, going back a couple of generations, my grandfather's brother, david sarnoff, was head