Original URL: http://www.theregister.co.uk/2011/01/22/the_schmidt_decade/

That's Schmidt: So long to the Google chief who wasn't

The end of a troika

By Cade Metz

Posted in Media, 22nd January 2011 00:54 GMT

For six years, Larry Page and Sergey Brin told Eric Schmidt that Google should build its own browser, and for six years, he resisted. "Google was a small company,” Schmidt remembered. “Having come through the bruising browser wars, I didn’t want to do that again.”

So Brin and Page hired some ex-Firefox developers and had them build a prototype. When they showed Schmidt the browser that would be Chrome, he relented. "It was so good that it essentially forced me to change my mind,” Schmidt told The Wall Street Journal after Google revealed plans for Chrome OS, the still-gestating operating system that moves all data and applications into the Google browser – another idea heavily pushed by Larry Page.

"I think we just wore you down,” said Page.

“I just gave up,” said Schmidt.

Eric Schmidt has served as Google CEO for nearly a decade, but by all accounts (including a 2004 Google filing with the SEC), he, Page, and Brin ran the company together – or not together, as the case may be. Brin and Page didn't just hire those Firefox devs on their own. They acquired entire companies on their own. "One day Larry and Sergey bought Android, and I didn’t even notice," Schmidt said in 2009. "Sergey found Google Earth one day while he was surfing on the web. And then he walked into my office and told me he bought them."

On April 4, Schmidt will step down as a CEO, handing power to Larry Page. But Page had ample power to begin with. According to Ken Auletta – the New Yorker journo who penned Googled, the 2009 tome on the Mountain View Chocolate Factory – the decision to replace Schmidt as CEO is rooted in the first days of 2010, when Page and Brin decided to leave China – against Schmidt's wishes.

"According to close advisors, the Google CEO was upset a year ago when co-founder Larry Page sided with his founding partner, Sergey Brin, to withdraw censored searches from China. Schmidt did not hide his belief that Google should stay in the world’s largest consumer marketplace," Auletta writes. "Schmidt, according to associates, lost some energy and focus after losing the China decision."

Even if you believe that Schmidt's "adult subversion" got the best out of Page and Brin, his success as CEO is somewhat limited. Google is often called a one-trick pony, with its AdWords advertising platform continuing to generate most of the company's revenue.

But as Schmidt himself has said, it's quite a trick. "If you’ve got a one-trick pony, you want the one we have," Schmidt told The Journal last summer. "We’re in the ad business, and it’s growing rapidly. We picked the right trick."

And Google picked the trick on Schmidt's watch. Ot at least the watch he shared with Page and Brin.

AdWords debuted in 2000, before Schmidt joined the company. But in those early days, the platform priced the company's search ads like traditional display ads. Advertisers paid a flat CPM fee (cost per thousand impressions). Schmidt joined Google's board of directors in March 2001, and that August he took over the CEO post previously occupied by Page. The next year, Google relaunched AdWords, switching to a cost-per-click setup that both priced and placed ads according to an Overture-like second-price auction. But there was one crucial change: ad placements weren't determined by bids alone. Ads were also ranked according to click-through-rate.

This is what ultimately turned Google the search engine into Google the money-making machine. With Overture – the search outfit eventually purchased by Yahoo! – the highest bidder always received the most prominent spot on the page. But in ranking ads, Google multiplied bids by something it calls "quality score", calculated using click-through-rate and various other measures of an ad's "quality", some of which remain a mystery to the outside world.

Google will tell you that its quality-score setup improves the "relevance" of the ads posted to its search engine. And it does. But it also ends up making Google much more money. Later, the company introduced a minimum bid, to similar effect. A minimum bid protects the user against cheap, useless ads, and at the same time, it boosts the Google bottom line. By 2007, Yahoo! – Overture's owner – was mimicking AdWords with a new ad system it called Panama.

Makes AdSense

While Schmidt was CEO, the company also introduced AdSense, which brought the AdWords model to third-party websites. And though AdSense doesn't bring in nearly as much cash as Google's search ads, it accounts for the second hefty slice of the company's quarterly revenue. In the fourth quarter of 2010, Google-owned sites generated 67 per cent of sales, while partner sites pulled in 30 per cent through AdSense.

Eric Schmidt

Eric Schmidt

Schmidt may have laid the groundwork for other big revenue sources. But maybe not. Android – meant to fuel the company's mobile ad ambitions –  is now more popular than the Apple iPhone, and in the fall Google said it was on pace to collect a $1bn a year in mobile ad revenue. But that's still a fraction of the company's overall sales – $29.32bn in 2010 – and for what it's worth, we know that Android wasn't Schmidt's baby – at least not when Page and Brin purchased the project without his approval.

In the fall, Google also said it was on pace to collect $2.5bn a year in revenue from display ads, so that's at least showing some serious growth. And the company says YouTube revenue doubled in 2010. But it won't say what it doubled from. YouTube boosts the company's bottom line in other ways, but it's not yet the advertisers' dream Google has long said it would be.

It's hard, however, to criticize Schmidt for the financial performance of services such as YouTube when the company is pulling in $29.32 billion a year. In 2010, Google's net income hit $8.51 billion. Where Schmidt deserves criticism is in the way the company approached so-called social networking and, well, PR. According to Ken Auletta's sources, Schmidt's appetite for the job waned not just because of the China decision, but because Google was struggling to deal with the success of Facebook and increased scrutiny from regulators.

"Google was becoming defensive. All of their social-network efforts had faltered. Facebook had replaced them as the hot tech company, the place vital engineers wanted to work," Auletta writes. "Complaints about Google bureaucracy intensified. Governments around the world were lobbing grenades at Google over privacy, copyright, and size issues. The 'don’t be evil' brand was getting tarnished, and the founders were restive."

For a company whose ultimate aim is to serve up "The Perfect Ad" – to use your online behavior to display the ads that you most want to see – Google's inability to land a serious foothold in the social-networking space can only be described a major failure. There's a reason Google is fighting so hard to pry user data out of Facebook. In a way, Facebook is beating Google at its own game.

And then there's the PR issue. If Google's image has been tarnished over the last few years – and it certainly has – much of the blame falls on Schmidt. His haughty, creepy, and occasionally insulting way of addressing the company's approach to privacy is notorious. "Google policy is to get right up to the creepy line and not cross it," he once said, unwittingly showing that Google's policy is just the opposite. His efforts to paint such comments as humor only made the situation worse.

The irony is that when he steps down as CEO, Schmidt will concentrate on communication with the outside world. "As Executive Chairman, I will focus wherever I can add the greatest value: externally, on the deals, partnerships, customers and broader business relationships, government outreach and technology thought leadership that are increasingly important given Google’s global reach; and internally as an advisor to Larry and Sergey," he said in a blog post.

And in Schmidt's old job, we have Larry Page, who's famously disdainful of PR. In 2008, according to Auletta's book, Page told the company's PR team that over the course of the year he would spend no more than eight hours on press conferences, speeches, or interviews. This stance – which has, on some level, pervaded the company – is one reason the company is facing an antitrust investigation in the European Union. Schmidt says that people are critical of the company because they doesn't understand how Google works, but the company has hardly made itself easy to understand. And that alone makes the investigation worthwhile.

In recent months, Google has begun to open a bit – to its credit. But one wonders how far the company will go with a CEO who sees so little value in communicating with the outside world. And it isn't exactly comforting to watch Eric Schmidt morph into the company's master of public relations.

But that's the way it is. On April 4, Google's Eric Schmidt era ends. And though we can't say what the next ten years will bring, we can say that Schmidt's reign will ultimately be remembered for three things. He reigned only in part. He partially reigned over the rise of AdWords. And, yes, he creeped people out. ®