With Google, Netflix, Apple, and others having a stake in how ratings are calculated, it's another sign that television will forever change.
FORTUNE – A decade ago, in the year before Google went public in 2003, then-Viacom VIA CEO Mel Karmazin, a legendary (if not Don Draper-like) ad salesmen, visited Goole’s corporate headquarters, the Googleplex. Nancy Peretsman, the deeply connected and trusted Allen and Company investment banker, had set up the meeting between Karmazin and the Google management troika of Eric Schmidt, Larry Page, and Sergey Brin.
At that session, the Google team explained how cost per click worked for the veteran outdoor, radio, and television salesman. Google GOOG advertisers only paid when somebody clicked on their ad. According to Ken Auletta, longtime New Yorker media correspondent and author of Googled: The End of the World As We Know It, Karmazin was dumbfounded by the presentation. Eventually he grew angry as he realized how threatening Google was to the historically under-measured television and radio industries.
At that point, Karmazin turned to Google founders and summarized the growing tensions between traditional and digital media:
“You guys are fucking with the magic,” Karmazin said, according to Auletta’s book.
Perhaps no sentence better encapsulates the defensiveness of the traditional media business more than Karmazin’s colorful observation. The executive provided ample commentary to support his thesis through additional quotes that Auletta meticulously documents in his book.
“You buy a commercial in the Super Bowl, you’re going to pay $2.5 million for the spot. I have no idea if it’s going to work. You pay your money, you take your chances.”
On the topic of pay per click, Karmazin concluded:
“That’s the worst kind of business model in the world. You don’t want to have people know what works. When you know what works you tend to charge less money than when you have this aura and you’re selling this mystique.”
While synonymous with the search business, perhaps Google’s most significant legacy will be its organizational obsession with data-driven decision-making. Google’s intellectual and strategic impact has encouraged the measurement of — well — everything. Today we count our steps, measure our investments, and create “advanced” statistics for our sports. How often do you and a colleague talk about how to measure the effectiveness of that deck, this meeting, or that conference?
Google measures everything; the world has followed. Still not convinced? Consider how Nielsen NLSN , among the world’s oldest media companies, has changed.
Long known as the officials ratings firm, companies and careers have lived or died based on Nielsen’s ratings. The Internet caught the company by surprise, creating room for upstarts like Comscore GE legend David Calhoun as CEO. In 2009, Calhoun hired Steve Hasker, the top partner in McKinsey’s media practice, to reinvent the Nielsen’s measurement service for the digital age.
Five years later, Nielsen has emerged as a digital trailblazer. The corporate strategy remains intact: Be the third-party measurement standard for the global $212 billion video advertising industry. However, technology has forced significant changes for the 40,000-person firm, given that there were only a mere four channels 30 years ago; 30 channels 20 years ago; 300 channels 10 years ago; and video programming everywhere today.
The overwhelming share of global video advertising is purchased for traditional television programming. Nielsen’s ratings have been the subject of frustration for decades of television history.
Hasker and his team undertook two major initiatives to create more precise numbers.
First, Nielsen created deep data partnerships with Facebook FB , Twitter TWTR , and Experian to make their panel reporting considerably more accurate. Among the original big data companies, Nielsen integrated massive new data sets by negotiating a Facebook partnership that validates the age, gender, and location of their panelists by accessing Facebook’s 1.2 billion profiles worldwide. Nielsen maintains its representative panels (a notion that critics continue to loathe), but they now validate panelists with a variety of partnerships.
Second, according to Hasker in an April talk at New York University, Nielsen is nearing the conclusion of a four-year odyssey to set measurement standards for video — a kind of Gross Rating Point (GRP) across all media and devices that measures the size and engagement of the viewing audience. In the past, television networks have more easily agreed to standards in order to create third-party validation mechanisms. But the old boy networks that exist on Madison and Vine have been disrupted by entrants from the technology sector. Now Google, Netflix NFLX , Apple AAPL , and others have a stake in how video GRP will be calculated. Because of YouTube, Google has a particularly substantial interest in this debate.
Google’s founders love data and despise the unmeasurable. Paid search came about largely because Larry Page and Sergey Brin simply would not allow banner advertising on Google.com. Compare that sensibility with the imprecision of traditional media measurement and conflicts arise. Google, Facebook, and the Internet industry overall continuously challenge the efficacy of traditional television by insisting that individual streams and video views be watched to be counted.
Historically, Nielsen’s most important customers have been television networks and their advertisers. For Nielsen to stay relevant, it needs a common GRP standard to maintain its dominance in measuring video across the globe. Reaching consensus among stakeholders with trillions of dollars in market value has taken years of product development and diplomacy by the ratings firm.
Countless critics of Nielsen long have believed the company was so dependent on network television fees that their measurements could not be trusted. In Ken Auletta’s guest appearance February in my class at NYU, “The History of Internet Media,” he expressed significant concerns about Nielsen’s legitimacy, citing the company’s highly controversial DVR ratings as another example of the company’s coziness with the television industry.
Two months later, I asked Hasker about Auletta’s observation, and he responded as if he were giving a stump speech. However many people may not want to believe in Nielsen, he argued, advertisers trust his company more than they do any individual media company’s numbers.
In the end, he maintains that the advertising marketplace needs a “referee” or measurement service. Investors rely on Moody’s or Standard & Poor’s to rate debt. The EPA measures the fuel efficiency of automobiles. Hasker claims that Nielsen has no vested interest whether an ad runs on NBC or Twitter — cable or mobile. The company wants to measure whether programming and advertising are watched and by whom.
The implications for the television industry are massive. Nielsen has reinvented the GRP, a standard that has been the source of much of the television market’s hegemony in media. If television continues to aggregate huge audiences with highly immersive advertising units, then it will remain difficult to unlock the enormous flow of dollars that support NCIS, The Voice, and dozens of other shows on the evening television schedule.
But in partnering with an array of digital data providers, Nielsen looks, feels, and acts more and more like an Internet company that measures with substantially increased precision. The company is preparing to measure the behavior of billions of people across millions of devices within a continuously evolving distribution environment with one common GRP standard.
In this exponentially fractured media landscape, television audiences will likely get smaller. (They have been for decades.) Marketers will struggle to justify their upfront advertising purchases because content will be consumed at time-shifted moments using a panoply of devices and distribution services.
Tech investor Marc Andreessen once wrote, “Software is eating the world.” Software will now eat television advertising as the video content industry reaches a programmatic tipping point. Consumers watch on digital devices across millions of channels. Nielsen will measure every stream, and advertisers will finally receive exactly what they order. Advertising will be bought using algorithms, data, and exchanges.
The amazing Mel Karmazin’s Houdini-like tricks are as doomed as the classified ads you once perused or the CDs collecting dust on your shelf.
Aaron Cohen is chief marketing officer of Yashi, a New Jersey-based adtech company. He is also an adjunct professor at NYU, teaching the history of Internet media. Follow him @AaronCohen