Google’s CEO Discusses DoubleClick, MicroHoo, Don’t Be Evil, Googlephobia, And Mobile Search

CNBC news anchor Maria Bartiromo interviewed Google CEO Eric Schmidt on Tuesday and discussed a wide range of topics, from MicroHoo to advertising on YouTube, mobile, and Googlephobia. There are no real surprises and nothing especially new (other than the statement about new ad products for YouTube this year). However, it you have time it makes for interesting reading.

Below are my edited excerpts of the lengthy transcript of the CNBC interview, which you can find in full, together with a short, edited clip of the interview, here.

On the weak economy and its impact on Google
CNBC: How insulated would you say is Google to the economic slowdown or recession?

Schmidt: Well, the numbers you’re using are year over year, quarter over quarter in the US. Globally, of course, we had good growth, and the US numbers are masked by the fact that, a year ago, we had a very strong quarterly growth of that quarter. So the real growth rate in the US is good, although overall growth rates are slowing, as they have for years. Just because of the scale and size of what we operate. The business has continued to be good.

CNBC: OK, because when you get to a certain size, it’s really hard to sort of grind down more market share when you’ve already got 70 percent or get that much bigger, given the fact that the company is getting–you’re a large business.

Schmidt: But we have–we have multiple ways in which we grow. Of course, more people use the Internet, more people are using electronic commerce on the Internet, more people are clicking on the ads, and also our ad technology is getting much, much better. And it’s really any one of those will push us over the top in any given quarter; sometimes they all come together. We don’t seem to be very sensitive to macroeconomics, at least right now. We don’t seem to be very sensitive to things like recession. But we’re very sensitive to how quickly do we bring in the new product improvement or something like that.

CNBC: The comScore data took everybody’s estimates down, and this whole debate about whether it was accurate or not. How can you ensure that the growth occurs, even if people pull in their spending, if perhaps advertisers slow down on the budgets? I mean, is it fair to say that the hypergrowth of 2004 to ’07 is–has been seen?

Schmidt: Well, as I said, if you think about it over a five- or six- or seven-year period, growth rates are slowing, as they have to. So I don’t think it’s a big shift. It’s not, you know, today it was one way and tomorrow it’s another. In our case, we focus on quality, and we have a very simple model. If we show fewer ads that are more targeted, those ads are worth more. So we’re in this strange situation where we show a smaller number of ads and we make more money because we show better ads. And that’s the secret of Google.

DoubleClick and display advertising
CNBC: Let’s talk about DoubleClick. You acquired the company. How’s the integration going?

Schmidt: Well, it just started. It started about three weeks ago. And what we’re doing is we’re taking their products and our products and integrating them so that people have better tools, advertisers have more, literally, ads, and publishers have more spots that they can publish information into. So it’s the combination of all that that we’ve been waiting for so long, and it’s under way. It takes six months to get all the products together.

CNBC: It’s no secret that Google owns search, but what about the display ads? Is it–is it fair to say that’s sort of up for grabs? You know, you’ve got DoubleClick, Microsoft has aQuantis. [sic] It’s up for–up for grabs, that part of the business.

Schmidt: Well, it’s fair to say that that Google is not the leader in display ads, but our customers want to be able to purchase text ads and display ads and other advertising in one purchasing bundle, and the combination of the tools that we’re developing, plus the DoubleClick integration acquisition and so forth, allows us to offer a single product for those advertisers. So we think that will help us with our display ads competitiveness. We think our technology is better. And so really now it’s a question of earning those customers’ respect and knowledge.

On Yahoo and paid search outsourcing
CNBC: Tell me what you’re doing with Yahoo! in terms of testing. On the earnings call last time, you said you’re setting up ads there. How’s it going? What’s involved?

Schmidt: Well, the long and short of it is that we did a test for about two weeks, which has since ended, where Yahoo! took a small percentage of their ads and replaced them by ours. We did this as part of a commercial conversation, which I obviously cannot go into, but it’s one of the strategic options that we believe Yahoo! is considering at this time.

CNBC: What kind of a combination would you like to see with Yahoo!? What kind of a partnership would you like to see?

Schmidt: Oh, well, we actually enjoyed working with Yahoo!. We also compete with them. They’re a well run and, I think, impressive company. We’ve primarily been concerned about the possibility of a Microsoft acquisition of Yahoo! because of Microsoft’s history and because of the assets that Yahoo! has are quite valuable. And we actually think that in the wrong hands, they could be used in the wrong way.

On MicroHoo and its impact on the market
CNBC: Tell me this. I mean, I know that, you know, we’re waiting on possible news from Microsoft, possibly, a hostile–we don’t know what’s going to happen next. But what kind of a challenge would Microsoft/Yahoo! be for Google?

Schmidt: Well, today we actually do not know what’s going on. We read in the press that there’s discussions and we’ll see what they decide to do. If they go ahead and the merger’s ultimately successful, it would be possible for Microsoft to integrate some of the properties and essentially eliminate consumer choice, particularly in electronic mail, instant messaging, the things where they have 80 or 90 percent market share, and that’s a sweet spot for Microsoft in its ability to eliminate choice.

CNBC: How will you respond if Microsoft goes hostile?

Schmidt: Well, a lot will depend on whether their strategy is successful. In the short term, we have pointed out the possibility of a bad outcome, but it really depends on what happens in the hostile.

CNBC: Do you have any sense of how these things go? I mean, can they go
in the open market, buy the stock, and then just create a proxy battle?

Schmidt: All I know is what I’ve read in the press, which is that essentially you replace the board and you force–you force the deal.

CNBC: Microsoft wants Yahoo!. How much of a disadvantage do you think Google is at if these two players get together, what…(unintelligible)…two and third player in the market?

Schmidt: Well, a lot of people debate this. There’s a big debate within the company. People say, on the one hand, that we stay focused, which, of course, we’re very focused, while they’re doing their maneuver. On the other hand, people are concerned about the history, as I mentioned, and the possibility of merger. So I don’t think we really know yet. We debate it all the time.

On YouTube and monetization of video
CNBC: Let me ask you about YouTube and MySpace. YouTube has these
phenomenal growth rates. What do you think is behind that?

Schmidt: Video is powerful. And it’s amazing. You know, we started off with Mentos and the other sort of fun videos, and now people, because they have so many digital cameras, are essentially uploading everything. Furthermore, we’re beginning to see glimpses of significant professional content on YouTube. People are using it–because there’s such a large reach, they’re learning how to reach that audience. We’re working but have not yet in my view gotten a breakthrough around monetization. So while we have lots and lots of traffic and we have lots and lots of interesting and creative people and all sorts of controversies–we’re blocked in countries, so on and so on–I don’t think we’ve quite figured out the perfect solution of how to make money, and we’re working on that. That’s our highest priority this year.

CNBC: Which is a huge priority, clearly. A lot of people feel like this is an amazing opportunity for you. So, as far as monetizing that business on YouTube, do you think that takes a year? Does it take the next five years? What’s your time frame on that?

Schmidt: We believe the best products are coming out this year. And they’re new products. They’re not announced. They’re not just putting in-line ads in the things that people are trying. But we have a number–and, of course, Google is an innovative place. The Yahoo! team are trying various new forms of advertising, ones which are much more participative, much more creative, much more–much more interesting in and of themselves. Google believes that advertising itself has value. The ads literally are valuable to consumers. Not just to the advertisers, but the consumers.

The challenges of monetizing social networks
CNBC: Some people feel like, when you look at the MySpace part of the business, that’s really where people are looking at, or feeling a bit of an economic downturn. Let me ask you about that. The deal involving revenue promises, is that going to impact margins in the coming two years?

Schmidt: Not materially in that sense. We have pointed out, and I’ll repeat again, that the whole social networking space has been harder for us to monetize–that is, develop advertising businesses again–than some of the other–than some of the other spaces that we’re in. It has to do what people are doing. When you think about it, you’re in a social network, you’re looking at people’s photos, you’re figuring out where your friends are. You’re not as likely to be purchasing a new car at the same time or purchasing clothes or purchasing a book or what have–whatever business that you’re in. So the development of the advertising tools and techniques, literally the platform, has been more difficult than we have thought. But we’re working on it, and we’re hopeful.

The mobile opportunity
CNBC: Mobile. A lot of people say mobility is where it’s at. You’ve said, actually, I’ve heard you on conference calls saying that this is one of the big priorities for the company. How do you envision this? Tell me what you’re looking for.

Schmidt: And most people in most developed countries have a roughly 100 percent coverage of mobile phones. So it really is a tremendous phenomenon. Over the next three or four years, there’ll be more than another billion or so mobile phones added. Eventually our numbers indicate that there’ll be five or so billion mobile phones in a world of six billion or so. People, this is a phenomenon. It’s an unprecedented reach, even greater than, for example, television, or even electricity in some cases. So that’s a platform that we can exploit. Our mobile phone, both search traffic as well as advertising is growing very rapidly, and we think people will do more and more interesting things in mobile phones. And, I mean, small phones, big phones, big screens, things that don’t look like a phone, things which are mobile.

Growth outside the US market
CNBC: Where are the biggest opportunities for Google right now outside of the United States?

Schmidt: Well, first place, the Internet is growing faster outside the United States than in the United States. Also advertising online growth rates are higher outside the United States than they are in the United States. You’ve got–and of course you have a weak dollar strategy–because the US has a very weak dollar–so that also helps. For all of those reasons, revenue outside of the United States should grow dramatically over the next while, and that’s great.

CNBC: So when you look around the world, what’s the most important, sort of richest area for you right here?

Schmidt: Well, for us, of course, Europe has been our stronghold for a long time. And Europe is just very, very strong for Google. They have relatively higher market share, they’re very sophisticated consumers, and a very mature advertising rate. If you look at the global advertising market, it’s the United States, Japan, China, Britain, France and Europe–and Great Britain. Those are the sort of the big five or six. Well, of course, we’re doing very well in Europe, we’re doing well in Japan, and we’ve been in the process of entering China for a while, and we’re growing there nicely.

Google’s biggest challenges
CNBC: Fascinating. So what’s the biggest challenge that you’re facing today?

Schmidt: In Google’s case, I think it’s internal. It’s the ability to manage the creative process, deal with the complexity in what is a relatively large company, in terms of people, who’s doing what. We have 50 development centers all around the world, people in different time zones, `Are you doing that? Are you doing that? Do I work with you? How do I check in my code?’ Those sorts of things.

CNBC: And for a long time, people were saying, `Look, you know, Google has this incredible campus, and, you know, spending money, and really showering employees, making sure that people are happy there.’ Are you beginning a new process of managing employee growth right now and managing expenses more aggressively than you have in the past?

Schmidt: Well, certainly not our benefits, per se. Every day I turn around, there’s some new benefit that we’ve come up with for our employees. It’s part of our culture; we’re happy to do that. And, of course, we have gross margins to afford it. So higher gross margins is one of the explanations. We have slowed our head count growth for a couple of reasons, but the biggest reason is it began to feel like we really didn’t have a good sense of what people were doing. The systems in the company, literally who’s doing what, what are they doing, seemed to lag our ability to hire these great people. So we slowed it a little bit. But we’re still going to hire some number of thousand people this year.

Diversifying Google’s revenues
CNBC: Are you seeing any pushback from some of the advertisers who say, `Look’–the ad agencies who say, `We’re already spending a ton of money on Google. Why do we need to spend more on all this other stuff away from search?’ How are you going to get them to devote more money to display, to audio, to print and TV ventures, which are–and everything else you’re—and the display ads, obviously.

Schmidt: Because we earn it. Because you can measure it. We never want people to give us–give us money that we don’t earn and that we can’t prove that they–that they–that it really provides value. That’s not a good business for us. So as we enter these markets, we hope to say, `We have the tools that can show you that if you put this display ad out there, you really will get the sale.’ And we have ideas, we have new research in how to do that in a closed loop way that is phenomenal. So our innovation model is in very category of ads, not just text ads, to show real return, real sales, and we think we can do that. And if we do that, we’ll get the business. And if we can’t do it, we shouldn’t get the business.

The “next big thing”
CNBC: As a steward of technology and innovation your entire career, what
would you say is the most innovative thing out there? What’s the next big
thing, from your standpoint?

Schmidt: I’ve always thought that the scariest piece of innovation is knowledge understanding and language translation. I don’t understand how it works, but to watch a computer–literally watch it–read something in English, dissect what it’s about, translate it into a language that I don’t speak and having that other person say, `Wow, that’s incredible,’ to me, that’s magic. And it isn’t magic, it’s just very good computer science, very good artificial intelligence, very good physics. And that’s where we are. So the things that are most impressive to me are the things where the computer does something that nobody could do, literally translate things 100 language in parallel, summarize something for me, take me to something which I didn’t know I was interested in but knows that I cared about it. And we’re right on the cusp of that.

Google’s big priorities
Schmidt: Well, our number one priority is end-user–end-user happiness. Literally, are people happy with the results that they get using Google search? So it’s literally search, and every day we bring out new improvements and indices that are–taxonomies that are understanding of language, more content, bigger–all of the things that make Google such a great search experience. That’s our number-one priority, even more important, for example, than advertising. The way we pay for it, of course, is by improving our advertising solutions, as you described. That’s what we do in the core.

Our next big play is in this applications phase, where we think people spend a lot of time online with information, and we can help them, whether it’s their e-mail, which is an easy one to understand, but what about their personal data? What about their spreadsheets and their calendar, keeping it all there? And we can help them search. We can solve the problem of `how do I live in this digital lifestyle?’ If we do that right, they can do it on mobile phones as well as at home, in their office and on a Mac and on a PC, and it all works great.

Google in the enterprise
CNBC: What about the corporate customer? I understand that there are tests going on right now. What are you hearing from that customer?

Schmidt: We’re working with the corporate customers to do the same thing inside their networks as we do with consumers. Now, corporate customers are not the same thing as consumer customers. Corporate customers have a much higher need for reliability, so we’ll sign an agreement that guarantees a certain level of service. But then we charge for it. So that’s a case where people are willing to pay for something which is free without the level of reliability. They also have other needs. They need greater security, for all the obvious reasons. And they also need better integration with all of the other services that their companies have. This is a long process. It’s not a fast process. But it’s very deeply valuable. And those customers we will have for 20 or 30 or 40 years as they build into our model. We like that model. It’s an enterprise play. It’s a business that I’ve been in for a long time, and one which will ultimately be very, very lucrative through Google.

Googlephobia
CNBC: Do you ever look back and think about what has happened to the
company? . . . [A]s the company got bigger and bigger, people started to get afraid of Google, they way they were afraid of Microsoft at one point as well. Do you worry that that’s the perception or that perception could take hold at some point?

Schmidt: We do worry about perception because we want to make sure that we are–that our perception is consistent with the way we way we behave. Google runs on a set of principles, and every company has their own principles. Ours are about doing no evil, it’s about trying to serve the end user. Larry Page, our–one of our founders, wrote a very thoughtful memo about what it’s like to be a big company. So, for example, he authored the rule that we’ll never trap people’s data. So if you become dissatisfied with us, we will make it easy for you to go to our competitor. Most companies don’t do that. So we’re trying to find that balance between the structure of a company and the need for predictability and so forth with our real mission, which is to serve you as an end user. And if you’re not happy with us, keeping you trapped, that’s a mistake. We want you to have another choice.

There’s more discussion of the interview and related issues on Techmeme.