Recipe for Profit
With its party line of "do no evil," Google
calmed investors concerned that its altruism might get
in the way of its business.
Financial analysts convened on Mountain View on Wednesday
for the search giant's first Analysts' Day. A subtext
of the day was reassurance that Google is not too untraditional
to keep making money. Wall Street investors criticized
the company for its initial public offering prospectus
that proclaimed that it wouldn't explain itself to The
"There's a big secret about Google," Schmidt
told the analysts. "We're not quite as unconventional
as we seem. In many cases, the things we do are unique,
but the rest of the business is run in all the traditional
ways. We have all the normal financial and IT systems
and an independent board of directors."
While not an entirely false statement, Google's board
is in fact packed with insiders.
Executives addressed concerns that it could do more
to bring in revenue. The main search service will remain
free, Schmidt said.
"We believe the simplest way to overcome a pricing
issue with end users is to have the product be free
and make money through other model like advertising,"
Schmidt said, noting this end-user focus creates more
traffic that can then be monetized.
Neither does Google believe it should show ads whenever
possible in an effort to maintain growth. Showing a
chart linking quality of search results to revenue,
Jonathan Rosenberg, vice president of product development,
said, "We don't show ads when the query isn't commercial,
so that we don't reinforce the behavior of ignoring
ads." He admitted that Google could do more to
raise the visibility of ads in some cases and pointed
to partners as a good source of innovation.
For example, AOL, which uses
Google AdSense to place contextual
ads on content pages, recently added a link to lets
users see more ads related to a query.
"A testament to the kind of advertising we're doing
is that users actually click on it," Rosenberg
Schmidt explained that the company
uses a 70-20-10 rule for allocating resources: 70 percent
goes to the core search and advertising business; 20
percent go to related projects that extend the core
search, such as Google News, the
comparison shopping service, and the
Web mail service; and 10 percent of work is exploratory,
including the Orkut social network and the recently
acquired Keyhole geospatial mapping technology.
Google employees are encouraged to devote 10 percent
of their work hours to personal projects of interest,
and many Google services began this way, co-founder
Sergey Brin explained. To reward innovation -- and keep
employees from leaving to found their own potential
money machines -- the company instituted Founders' Awards
in the form of restricted stock grants vested over four
years. The two awarded to date have totaled around $12
million, Brin said.
"Even though a lot of Google's innovation comes
from individuals in a bottom-up process," co-founder
Larry Page told the analysts, "this doesn't mean
we don't structure the company, have strategies, and
decide what we're going to work on."
Page said the company is "pretty ruthless about
prioritizing, so analysts shouldn't attach much importance
to which products Google is now profiting from. Perpetually
short-staffed, the company has to choose between improving
existing services or monetizing new ones.
"We're not necessarily going to try to make money
from all the things we do now," he said. "We
know we'll eventually make money off [Google] News."
In response to complaints that Google services never
get out of beta, Page said, "Part of our brand
is that we under promise and over deliver. Being in
beta is part of that." He explained that Google's
engineers prefer to leave things in beta if they expect
to make major changes. "We could take all our products
off beta tomorrow," he said.
Schmidt said Google might instate registration for some
services to increase the opportunity for personalization
of results. "A Google that knows you and more about
you," he said, could lead to "a much deeper
In the final moments of the presentation, CFO George
Reyes warned that Google won't be able to sustain its
profit levels -- then backpedaled a bit.
"Very few businesses can maintain such large margins
over time," he told the analysts.
Schmidt added that, while Google is committed to optimizing
its capital expenditures, it will continue to invest
heavily in engineering, which will drive down profit
margins. "You shouldn't think about these things
as happening tomorrow or next quarter," Schmidt
said, "but they're trends that will happen over
Looking on the bright side again, Reyes added that growth
in the advertising base might well mitigate that downward
Finally, Schmidt defended the unusual "triumvirate"
management structure, where Schmidt, Page and Brin share
typical CEO duties. Referencing the book The Wisdom
of Crowds, Schmidt said having several people in
the room to argue about decisions produced better results
-- as long as there was a deadline. "Often,"
he said, " the outcome is not what we expect."