April 17, 2007

Web 2.0 Expo
San Francisco, California
Conversation with Eric Schmidt
hosted by John Battelle
Eric Schmidt

John Battelle:

Now, before we start on the whole Q&A - this is our third or our fourth [conversation] and so we should be making this a semi-annual event, which I'm very pleased to do...

Eric Schmidt:

Well, congratulations on the success of Web 2.0 Expo.

John:

Yeah, it's great, thanks to everybody for coming. I understand that you have something that you want to announce?

Eric:

What we thought we would do is give you all a choice of what we're going to announce today. We're a very end-user focused company.

John:

Because they usually only have one or two announcements a quarter and... [laughter]

Eric:

So let's get the first slide out. This is choice one. (Slide: "Double secret beta" status.) Like it? Choice two. The Wi-Fi thing (in) April Fool's actually got some traction. People really like it. Choice three, [our] food becomes a revenue source for the company.

John:

That's already true, isn't it? When you think about it.

Eric:

Not really. Or maybe choice four is that none of these are really the announcement, but in fact, the thing that's doing the presentation is the announcement. This is a feature of something called Google Docs & Spreadsheets that will be coming out in the next couple months: a way of doing presentations.

We're very interested in collaboration. We've concluded that collaboration is sort of the killer app for how communities work, and so by adding the ability to share and generate presentations to our spreadsheets and our word processing and our calendar, which are doing extremely well, we can drive new level of user satisfaction. So that is in fact the announcement. [Applause.]

John:

I'll just take the segue there. ... I'm actually surprised that search isn't still in beta, and we're going to talk about that later. So the obvious next question is, this competes what most users of personal computers call the Office Suite. This sort of gives you everything that Google offers, presentation, mail, calendaring, word processing. So how do you think the folks at Microsoft are going to respond to this announcement?

Eric:

I don't work there.

John:

But you've spent a lifetime, almost ... I remember when we were talking early on for the book...

Eric:

This is the problem. He's done a whole book on Google, so he knows all of the secrets.

John:

Where we were talking in 2001, 2002, and you were saying, "I love being at Google because, man, I don't have to worry about Microsoft for the first time in my career - being at Sun, being at Novell - and I'm finally at this little Internet startup and Microsoft doesn't care about this space, thank God."

Eric:

I was obviously wrong once again.

John:

So let me rephrase the question. Is this a competitor to Microsoft?

Eric:

We don't think so, and the reason is that it does not have all the functionality, nor is it intended to have all the functionality, of products like Microsoft Office. This is really a different way of managing information. It's casual, it's sharing. It seems to be a better fit to how people use the web. We think it's an example of one of the applications categories on Web 2.0 framework that we think will be very successful. And my guess is that there are many companies represented in the room that are building products like this, or other variants of this, that are using this emergent architecture. This whole story about Web 2.0, which I view as a marketing term, is really an architectural transition from older architecture to this new web-based architecture. And that transition, which I think is what everyone in the room is part of, is a fundamental computer architectural transition. Google is one of the companies that's benefiting from it, but there are many markets.

John:

Let me just dig in a little on that. Come on - it's a competitor of Microsoft Office. [applause] I mean, as you pointed out to me, there's a whole ton of people who are currently spending a whole ton of money on Microsoft Office who use just a teensy, eensy little bit of the features of Microsoft Office. And this provides them a free alternative, which has got to be exceedingly threatening to the Office business and Microsoft. Acknowledge that.

Eric:

I'm sure Microsoft will have a response. They actually have a set of web-based products, which they can talk about. The important point here is that for people who are using products that are on the web, who need presentation access and do sharing, which is a huge driver, they're going to use this or something like this. And I think this is a testament to the strength of Web 2.0.

John:

I would agree with that. Let's pull back. There was a small little deal announced after market on Friday ... [to acquire DoubleClick].

Eric:

Because it was material, it was done after the market closed.

John:

This is the second time now that you've had a material deal, as opposed to your sort of snatching up really small minimal teams like JotSpot. Joe [Kraus, founder of JotSpot, which Google acquired in 2006] was here yesterday. This is a very big, very strategic acquisition.

So let's talk about that a little bit. Back when I was interviewing Sergey [Brin, Google co-founder] in 2004, he told me a story of the pre-revenue days of Google when Google was still trying to figure out whether or not, how, and/or how it was going to make money, and then the whole market fell apart. But they [Sergey on behalf of Google] said before the market fell apart, we could always do a deal with DoubleClick, because we had a ton of traffic and so we could just run DoubleClick banners - but man, they're not targeted ... you just have punch the monkey ... and, God, we'd never do that. So, now, (here we are...

Eric:

Well, I'm not sure what "punch the monkey" means.

John:

You know, punch the banners where you have to punch the monkey [for some interactive feature]. DoubleClick is a company that has evolved and so has the market - but it was seen [at the time] as a certain kind of advertising that was really the opposite of the Google approach to advertising. So what's changed in three years, both in Google's business and DoubleClick's business, that make this make sense for Google?

Eric:

Let me suggest that there are four sort of major thrusts around Google, and then I'll answer your question -- I wanted to get this out there for everybody to think about. One is that we're busy building the world's most interesting super- computers that are running new data services, search services and so forth. It's very interesting - very, very exciting technology being built at Google. Another has to do with end user solutions, how will users use information. All the global issues, all the controversies about that - a lot of people have issues and comments about that. A third has to do with advertising, and I'll come back to that. And the fourth has to do with the way Google is run and the way we make decisions and the culture that has grown around Google, which we're obviously very proud of. In the third category, or fourth, we decided over the last couple of years to try to offer a full-scale set of application services, not just text ads. So in doing this strategic analysis, we looked at text ads, display ads (banner ads, as you know them), we looked at radio, bought a company there [dMarc], television, we're doing a series of trials there, acquired YouTube. Part of the reason being user phenomena, which is extraordinary and we're very satisfied with that, but also because it's obvious that online video will have a significant advertising component. You put all that together and you think, what would the advertising customer like? And what they would like is they'd like a single way in which they can see ads and then have the computer do the allocation for them.

Advertising is really about relevance. It's really about efficiency. It's really about measurability, and there's not been a lot of technology applied to advertising over the last 10 or 20 years, except for a few companies, DoubleClick being one of them. What was interesting about DoubleClick, since 2004 they've made a lot of changes to the way they operate and worked harder getting better tools and many, many companies are very, very happy with their products. So when we looked at the business analysis, we thought a combination of the targeting that they do, the advertising and support tools that the targeting that they do, they built, combined with Google's technology, would produce a better experience for the end-user. So what we've said, and we've been saying this since Friday night, is that the user will be happier because they're getting more targeted ads that will be faster to load. The advertiser will get more efficiency, more measurability, more targetability out of the combination. The publisher will get more reach, especially globally. So the math works, is the important point.

John:

Well, I've never actually known you guys to do an acquisition where the math doesn't work.

Eric:

Maybe you can say that to some other people who have been criticizing us.

John:

Well, but the math was terrifying to a lot of other people in the market. So it's well-discussed that there were other bidders and that they dropped out because the price got just a little too nosebleed for them. What is it that allows you to pay $3.1 billion for DoubleClick when the whisper number was $2 billion five days before?

Eric:

I can't comment on any of the specifics of the negotiation by agreement, so one way to answer that question is to say that Google has a particularly strong advertising business - I think people here in the room know this, because our technology does a better job of targeting. There's a lot of evidence that we have more advertisers, we have a more global footprint. So we have, if you will, a greater cash flow out of that technology. When you marry that to the interesting assets and the technology and the people that DoubleClick have assembled, which is really quite impressive, that's how you get to the numbers.

John:

Now, one of the things you mentioned was that, and what Google is very good at taking in advertising is driving efficiencies through understanding behavioral data, conversion data, data generally, and creating algorithms that turn that in to a more efficient system for buyers and sellers, supply and demand and all parties involved in the transaction. But one of the things that strikes me that is very true about DoubleClick is that it's human beings - that there are ad buyers and ad sellers who are involved determining where they want something to be contextually. I want this on that site, because I like this site. I can't actually put an algorithm as why I like this site, I just want my ad there because I read it or I know people who read it. Are you going to get into that business?

Eric:

First place, the integration planning with DoubleClick is just beginning, and so during this period of legal review during the acquisition, we have an opportunity to figure out some of the details. We don't have to really answer to necessarily to every question people have been asking us. In the scenario you described, where humans are making good marketing judgments, it's one that can benefit from more automation. We can give that human more choices. The human still makes the decision, but they may be quicker. Their efficiency is faster. They have more information ahead of them. Advertising, again, is both an art and a science. We can provide the science to the artists.

John:

There's a couple other things you guys do that are interesting to this crowd, so I want to make sure we get to them, but one or two more things on DoubleClick. Number one, there are a few things that you acquired when you acquired DoubleClick that are businesses Eric that strikes me that may or may not make sense for you to own. One of them is Performics, which is a company that makes its entire businesses in optimizing websites to do better in Google. Which puts you into the SEO/SEM business, which is a very loud and very vocal community, as you well know. What's your long-term plan with a company like Performics, are you going to spin it out?

Eric:

First, this is a very important community, and we've not made that decision. Performics is part of the acquisition, because of course we got the whole thing at once, and we're going to take a look at that.

John:

One last thing is, in Google Pack which is a suite of software that you get the folks to download, it's very important to your distribution strategy - there's actually an application that deletes DoubleClick cookies. So is that going to end?

Eric:

The application is from a third party.

John:

It's a third-party application and you put in to Google Pack.

Eric:

We actually think that it's a pretty good application, so we'll figure it out.

John:

All right, let's move on. This is a bigger question: my company works with Google, we have a partnership with Google, and we have a partnership with DoubleClick. When this deal was announced on Friday night, I started to worry. Was I worrying unnecessarily?

Eric:

What were you worrying about, John?

John:

I was worrying that you had too much information about my business. I was worrying that all of a sudden all this stuff that I'm doing over here on DoubleClick and all this stuff I'm doing over here with you was going to be put together, and the wizards - the "nerd Nirvana," as Joe Kraus put it - were going to start asking interesting questions I wasn't capable of asking myself about my own business. And then determining, and getting ahead of me, in terms of how I ran my business. And I heard this from newspaper publishers, media companies and you name it, people are a little scared about - how much you could know. How do you address that?

Eric:

A couple of things. The first is that you're not forced to use DoubleClick. You choose to do so because it's a great product, same thing for Google. And the fact of the matter is that if you became unhappy, if after an appropriate due diligence you said, "I don't want to deal with these guys," you have other choices. So that's the first answer: you're not locked in. For that reason, it makes no sense for us to get you to that point. Because we had some deal [to announce with DoubleClick] on Friday night, we didn't have a chance to explain this, plus we're in an integration plan [now]...

John:

Well, I didn't get the phone call, Eric.

Eric:

I know. But the important point here is that these are issues that we're going to work out. We have to solve the problem of you being comfortable - not you personally, but you generically - because we need your business. We need you as a partner. There are a lot of ways of answering that. One is to keep the particular target information that DoubleClick uses completely separate from the Google ads system. A perfectly reasonable way of solving that problem, one of the options that are under consideration. There are others where you could choose to opt in - the default would be opt-out, you could choose to opt in.

John:

So it's the cost-benefit analysis.

Eric:

And from your perspective, what we found with a lot of advertisers is that people often express this concern, and after they understand what we really do, and more properly, what our computers really do, because there's no humans involved in this stuff, then they're quite comfortable.

It's a legitimate concern. When people have legitimate advertising privacy concerns, they also have legitimate end-user privacy concerns. If we lose our advertiser support or end-user support, the company is kaput. So we have to address this, and we have to address this so you're satisfied.

John:

I'm pleased to hear that. Microsoft starts stirring the pot with their pals at AT&T saying antitrust, antitrust.

Eric:

Microsoft? Did you say Microsoft and AT&T? [Applause]

John:

Did I just not put the golf ball on the tee for him there? I know they've had no history of antitrust and IBM is going to get pretty pissed off soon here.

Eric:

What is the year?

John:

I know. Well, that's the thing, it's a gorgeous story, isn't it? And you have Microsoft and AT&T complaining in the Washington Post and the Wall Street Journal about Google and antitrust. I mean it is sort of a beautiful...

Eric:

What's beautiful about this?

John:

Do you have a response?

Eric:

Yes, they're wrong. Come on, they're wrong, give me a break.

John:

Okay, note that they're wrong.

Eric:

It's false. Would you like a stronger answer?

John:

For the reasons that you just enumerated - in terms of choice, in terms of...?

Eric:

There's a long list of reasons that they're wrong. Advertising is almost a trillion- dollar business. The totality of what we're talking about here is about one percent of that. This is an emergent business with lots of different choices. End-users have choices, advertisers have choices - and these are people [from Microsoft] who were involved in the acquisition reviews, as best I can tell, who lost.

John:

Let's let that sink in for a second. Now I want to move on. Let's talk for a tiny bit about another - there's so many - but another controversial issue around Google. At least, this is - the controversy is magnified by the fact it involves the media, which is the media, so they cover it incessantly. YouTube, copyright, entertainment companies, Viacom, lawsuits. Do you believe that Viacom's approach currently is a negotiating tactic?

Eric:

For the people in the room who don't know the history of all of this, there is a law called the Digital Millennium Copyright Act, DMCA, passed in roughly 1996 ... so we're all covered by this law in the United States. And it roughly says that if somebody violates copyright and uploads or otherwise transfers a copyright violation, and they're violating the law, there's, roughly, a safe harbor if the company is involved quickly, if it can act quickly when notified to take it down.

The most recent problem we had is that we acted so quickly we did the wrong thing. We got a letter last Friday from the Australian Broadcasting Corporation asking to take out some copyright material, which we took down immediately. It was discovered that a 16-year old in Australia had actually sent the letter and, in fact, it was not a legitimate request. So the ABC people said, put it back in. So these are the problems of Google.

We at Google depend critically upon copyright law, and we depend critically that people who have copyrights get to decide what to do with the copyright. So in the Viacom case, Viacom decided to take down all the illegally uploaded content into YouTube, which is more than 100,000 clips. They gave us the proper take-down notices after a long business negotiation which was unrelated, but we immediately took it down. They sued us sometime later. The important point here is that one, we fully complied with the law, and the second thing is that YouTube traffic went straight up after that.

John:

As did your stock price in the fall [of 2006], after the acquisition. It was very well received.

Eric:

Yeah, I'm not talking about the stock price, I talking about the user traffic and...

John:

No relation.

Eric:

Well, hopefully they're not directly tied together. But any case, the user traffic grew very strongly because YouTube is a sharing and cultural collaborative phenomenon. It's really about user generated content. And I think what's happening - my own opinion is that everyone has decided that YouTube is the only messenger around online activity when I think that there will be many. YouTube looks like it's going to be the truly successful user-generated content platform. We think this is incredible, and we think it's going to be a wonderful place for people to take copyrighted information and with our support, build advertising support, copyright-based businesses. But the phenomenon of YouTube is independent of this, and this is what I think people are confused about.

John:

So if the Viacom suit is a negotiating tactic, what are they negotiating?

Eric:

We're bringing out a tool called CYC, Claim Your Content - one of the problems is that under this law the copyright owner has to actually monitor what's going on on their sites. And this is a reasonable amount of work for the people who have lots of interesting content. So we're automating that process with a tool called Claim Your Content. As that rolls out, the issues in Viacom become moot.

John:

All right. Let's switch gears here. Yesterday [Amazon founder] Jeff Bezos was here and he gave a demonstration of some of the growth in S3 and EC2. What do you make of that business? Are you watching it closely, and is it a business you're very interested in?

Eric:

S3 is a very good start. For those of you who did not see it, it's a good example of a platform business, it's a web-based platform business, and I think there will be many. In Google's case, we're focused on a somewhat slightly different component of that, which is offering Docs & Spreadsheets and other things like that for enterprise, for universities, in a product called Google Apps. We recently introduced Google Apps for the enterprise product, which is similar. So I think both companies have the right principles in mind and we'll see how successful they are.

John:

But are you going to do something like S3 or EC2?

Eric:

Well, we wouldn't do something like S3.

John:

It's a space you're interested in.

Eric:

Yeah, we're very interested in the space ...

John:

And you're doing it...

Eric:

We're doing it in a different way...

John:

You're doing it in a different way concurrently.

Eric:

And it makes sense that this emergent platform, of which Amazon is one, Google is another, Yahoo, eBay - this platform is very powerful. People in this audience are building - Ajax and other XHTML applications that are very, very powerful on top of this platform. And I don't think a single company will dominate the platform the way that previous ones did.

John:

That brings up my next question actually. In fact, yesterday, before Jeff [Bezos] came on, we were ticking off the number of companies with the capacity, the capital and the will to build massively scaled platforms that folks in this room can leverage. And it's a handful, maybe two handfuls. But there is one group that really hasn't been part of the conversation and that's the telcos and the cable companies, in terms of having a platform that anyone here can really plug into. Do you think they're going to change that stance soon, and are you concerned about that sometimes? Comcast just bought Fandango, for example, and made a very clear declaration that they are coming in this market.

Eric:

We're not thinking of them as competitors. We see them mostly as partners. If you go back to my first part, which is this discussion of Google building the world's largest super computer, we are investing literally billions of dollars of capital into very large, very powerful data centers that can serve as data platforms for many things. We have a set of APIs, something called the Google data API, and a number of other services that are exposed where you can build applications into that data service. We think that more applications using that are very good, and they're also similar advertising APIs which allow people to plug into our advertising systems to automate that as well.

John:

But when I asked you about the telcos and the cable companies, really, what I'm asking is they seem to have a different approach philosophically to the web than Amazon, eBay, Google, AOL, Microsoft, in that this swirls round the oft-misinterpreted term of net neutrality. Are you in any way concerned about that? I know that Google has been active in the Capitol on this issue.

Eric:

Again, we're not concerned about the telcos themselves. We see them as important partners at telco and cable companies, because we are critically dependent upon the infrastructure that they have built. Literally, customers go through those networks to get to the data servers that I was describing. That's true of our partners and competitors as well. We are very concerned if net neutrality gets broken, because net neutrality really does create the level playing field that created Google and many of the companies represented in this room. The bizarre thing is that if there's any company who could survive a loss of neutrality financially, it would be Google, because we could pay the fees, we could pay to get the kind of specialized service that the failure of net neutrality would mean. But from the standpoint of a business...

John:

... which is interesting to them, I would imagine...

Eric:

I'm sure it is. The important part of that is that's a business negotiation. It should not be enshrined in law. And net neutrality is very important for them. The next generation of entrepreneurs, the next young founders who come out of Stanford or Berkeley who want to create a new vision, they're going to need an end-to-end network that actually connects everybody. That's how they're going to become successful. That's how they're going to get funded. And it would be terrible if we lost this as a society.

John:

Excellent, I agree. [Applause] You bet.

You mention entrepreneurs, and we've got a ton of them in the audience here - or they work with and for entrepreneurs. So what looks interesting to Google in terms of companies you want to partner with or potentially acquire? Feel free to list as many as you wish, and what aren't you interested in?

Eric:

I'm trying to think, how can I legally answer a question that involves the word acquisition?

John:

Okay, let me rephrase it. What areas are you interested in where you do not have a core competence that may be interesting in the future, and therefore sparks at least a conversation?

Eric:

Let me answer the question that I think you're asking in a legal way. The biggest group here is clearly going to be in the mobile space. And the reason is that people treat their mobile phones as extensions of their persons. And those mobile phones are very personal, very portable, and have GPS information in them now. The next generation of wireless networks, 3G and eventually 4G networks, will have tremendous power. So if we look at the mobile space, it's probably the biggest wide open space. There are quite a few interesting companies that we can partner with and I won't say beyond that, which are building our applications or advertising services that use the targeting that's capable in mobile.

Another area is in the local space. The transactions that we do in advertising are really for local products - go down the street to buy a car, go down the street to go shopping, that kind of a thing. And most search engines don't really fully take advantage of the local information that's inherent in the web. That's another big opportunity. There are quite a few companies that have figured out how to mine, target or advertise in the local context. Those are the two that come to mind immediately.

John:

Great.

I posted on my site asking for questions [to ask you] and I got a bunch of them. One that really struck me was: what's the first thing you think of when you wake up in the morning?

Eric:

I get on my email.

John:

No, like when you open your eyes when you're lying in bed.

Eric:

I open my email.

John:

Are you announcing that product soon? Is it like a set of glasses?

Eric:

It's been awhile since (people have tormented me on) my glasses, John.

John:

At least they're clean. When I used to interview Bill Gates he was always had, like, smudging. [Laughter]

Eric:

Let's talk about what online meant. People are online all the time now and Google is a part of that. And the thing that I think about at Google is all about scaling. When the Internet really took off, the mid '90s, a lot of people talked about scaling and how big it would be, and it was obvious at the time that there would be a number of companies not yet founded that would become the defining companies of that period.

In order to win in the Internet, you have to have a scaling strategy. You have to be able to be global. You have to have a product that works across many sources of interest and information - and you have to execute very quickly. So what I worry about these days is scaling. And scaling for Google means more data centers, more fiber optic networks, more cash flow, more people, more training, more product announcements and things like that. The most amazing thing about that thought process is how early we are in the scaling of the Internet. When you think about how much has changed in your daily life, the search engines like Google, [RIM] BlackBerries now with Google Maps - you can see where you are when you get lost - all of Google Earth, all the platform things - we're just at the beginning of getting information that has been kept in small groups on to these platforms. And it has a tremendous impact.

Google Earth, for example. We became very concerned about Darfur. I think that people kind of know what's going on there, and it's very difficult to relate to a desert in the middle of Africa without some kind of imagery. So they added a layer [in Google Earth] which was to personalize it, so people could choose to go see the terrible devastation and destruction that's going on in that region. And it made a difference. And there are many, many such opportunities ahead for us, and I think they're good. I think it's good for the world to see what's going on.

John:

Now last question, because it actually follows from that. I agree with you about how much we have in front of us, and it strikes me how much information is going to be available. One of the largest questions that is facing this group now, is that of data portability and transparency and editing and rights and so on - we are all of us creating extraordinary clouds of data as we cruise around the Internet and do transactions in the local shops, and as the Internet then filtrates every edge of our lives these days. Pulling all that information together and organizing it is actually Google's mission statement. But can I pull it together and organize it and do something with it on my own as mine, and give it to someone else, perhaps to Yahoo! or Amazon and share it - are you, and is Google, committed to this idea of data portability?

Eric:

We are. In fact, we've made a commitment that we'll never trap user data. We think this is central to the way users view Google. If you felt that Google was doing something bad, we want to let you use somebody else's service. We want you to be able to take the information out of Google and go somewhere else. We're working on technology that will deal with search histories, personal information, Gmail forwarding...

John:

I know that they're not trivial technological things to do.

Eric:

Technologically, these systems are fundamentally successful because end-users choose to adopt them. And end-users are not going to voluntarily choose to use systems that they're trapped into.

John:

I congratulate you on that policy and plan to hold you to it.

Eric:

Absolutely.

John:

One last question. You're on the board of [directors at] Apple [Inc.]. Does that mean you get the iPhone before all of us?

Eric:

I'm waiting.

John:

You're waiting just like the rest of us?

Eric:

Yes, absolutely. As best I can tell, I don't get anything out of it. [Laughter.]

John:

Oftentimes the executives go on boards in order to see another piece of the world that helps inform their company. But what have you learned being on the Apple board?

Eric:

Well, Apple is an amazing story, as a company, as a technology, as a technology supplier, as a product company. Some of the best people in the world work at Apple building the kind of products that they do. So for me personally it's fascinating to watch how those decisions were made in a different context and in a different culture, one which I have a tremendous amount of respect for. There have been a number of collaborations between Google and Apple, the most recent one being Google Maps, inside of the iPhone, which was just an amazing, amazing combination. And I'm sure there will be even more.

John:

Apple has an Office suite. I like to go full circle, you know. Any tension on the board around the fact that you guys are starting to get into this business - iTunes, YouTube...

Eric:

No, the answer is no. There are very important laws around director rules, and it's very important to follow them, and we had a long conversation to make sure that I could actually serve the shareholders of Apple while doing my primary duty which, of course is serving the shareholders of Google.

John:

Well, Eric, thank you very much for your time. Join me in thanking Eric. [Applause.]

Eric:

Anytime.

end of session