These cuts probably displeased two Google audiences, one external, the other internal. For talented young engineers, who look to join companies that are rockets, Google’s actions might suggest a company that had reached cruising speed and might be descending. And as Google coped for the first time with saying no, there was frustration among Google employees accustomed to hearing yes. The founders had sold Google’s mission as making the world a better place, not just making money. While the Google rocket soared, hard choices could be avoided; now they would have to be made.
Soon after Google shuttered its office outside Phoenix, the closing was raised at the September 19, 2008, TGIF session. The complaint came in a text message from an employee in London, which Brin read aloud to the assembled Googlers. It said, “What of people in Phoenix who can’t relocate? If we don’t take care of them, shame on us as a company!” Brin allowed Alan Eustace, senior vice president, engineering and research, to answer. Google, he said, would strive to find openings for those wishing to relocate; for the others, Phoenix was “a robust area for jobs.” Brin and Page said nothing, but associates said they were increasingly distressed by Google employees’ sense of entitlement. This was a company, not a socialist paradise, and the Phoenix question—like the grumbling when Google pared cafeteria hours and no longer allowed employees to cart home dinners for the entire family—troubled them.
With a cash hoard of $14 billion, Google was better positioned than most companies to withstand the economic shocks, but this did not stop its stock from plunging from nearly $700 per share at the start of 2008 to $307 at the end. The value of Brin’s and Page’s stock holdings reduced their net worth to about $12 billion each, which they said did not faze them. Although the downturn hit most media companies hard, online advertising continued to rise. Google now claimed 40 percent of all online ads. Revenues and profits climbed more slowly, though, and the company warned in its year-end 2008 filing to the FCC, “We believe our revenue growth rate will generally decline” as the search market matures.
Despite the downturn and its own difficulties, in many ways Google remained a company apart. It did not slash its investment spending on research and development or its data centers, investing a total of $2.8 billion on these in 2008. Its fourth-quarter profit margin grew to a fat 37.6 percent. While much of the Valley was contracting, Google decided to set aside $100 million to start a venture capital fund, Google Ventures, to invest in start-ups. Yes, it pared free snack choices from about one hundred to fifty, but that was still fifty more choices than most companies offer.
YouTube was not contracting. “Display advertising and YouTube will be big in the next twelve months,” Schmidt predicted. He was encouraged that a combination of cost cutting and new advertising formats would slash YouTube’s 2009 losses from a projected $500 million to $100 to $200 million, according to a knowledgeable Google executive. He believed the unusual traffic YouTube generates will become a magnet for advertising. In March 2009, according to Nielsen Media Research, two-thirds of all Web videos were watched on YouTube, and that month ninety million viewers came to the site, streaming a total of 5.5 billion videos.
Schmidt also believed that Google’s Android investment would produce many more Google searches and provide opportunities to play a dominant role in all portable devices. He remained bullish that cloud computing would take off, particularly with the advent of four-hundred-dollar (and dropping) netbook laptops that could be powered by Android and store their data in a Google server rather than Windows. Between YouTube, Android, and cloud computing and its Chrome browser, Schmidt remained hopeful that Google was still on its way to becoming the first hundred-billion-dollar media company.
For its employees, Google did something else that defied the bleak economic times. The company had awarded a total of $1.1 billion in stock-based compensation in 2008; by the end of the year, those stock options had declined below the current Google stock price. So Google announced that any employee whose stock options were “underwater”—priced above the value of Google’s stock price as of March 6, 2009—was eligible to exchange this stock for new options pegged to the March 6 price. Although the founders and Schmidt declined to partake, this generous bailout cost the company $400 million. Google reported that 93 percent of employees exchanged their old options for new ones priced at $308.57. It was a magnanimous gesture, and also a way for Google to keep valued members of its team from fleeing to a start-up. Many on Wall Street saw Google’s repricing—Google was not the only company to do this—through another prism, as if Google were unfairly granting employees a benefit denied other shareholders.
Asked in April 2009 what he considered Google’s biggest accomplishment of the past six months, Eric Schmidt said: “Our safe landing. We want to be the least affected by the recession.” There was evidence that Google succeeded. Although it experienced its first quarter-to-quarter revenue decline since going public in 2004, its net income rose 8 percent in the first quarter of 2009; new cost controls sliced expenses by more than two hundred million dollars, and its profit margin swelled to 39.2 percent. Its 2009 revenues were projected to drop by 31 percent over the prior year, but were still projected to grow by 4 percent.
What gave Schmidt more angst was the management upheaval that loomed ahead. With a number of relatively young senior executives blocking the upward path of the next tier, what happened with Sheryl Sandberg was happening with others. In February, Tim Armstrong, thirty-eight, announced that he was leaving to become CEO of AOL. A popular figure at Google,with salesmanship and people skills that are uncommon at engineering companies, Armstrong’s departure was widely mourned. Soon after, Singh Cassidy, who also reported to Omid Kordestani and supervised business in Latin America and the Asia-Pacific region, also left. In April, Kordestani, the company’s longtime sales chief, stepped aside to become a senior adviser to Schmidt and the founders. He was succeeded by the president of international operations, Nikesh Arora.
Google was not accustomed to such management turnovers. But Schmidt knew he was sitting atop a bigger management powder keg. With the development of Android, and the ambition to expand to provide the operating system for not just mobile phones but also the new generation of lightweight, low-cost netbook laptops, Google was on a collision course with Apple. This risked turmoil at the most senior levels of Google. “Because it is open source, Android is a horizontal system,” explained a senior Google official. “It is not devoted to any one hardware supplier. Apple is a vertical system that serves one supplier”—Apple. Already, as we’ve seen, Schmidt awkwardly left the Apple boardroom during iPhone discussions. By the summer of 2009, Schmidt and Jobs agreed the situation was untenable because, as Jobs said in a statement released to the press, “he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest.” Schmidt resigned. Arthur Levinson, who is on both boards, will probably have to choose between them, as will Al Gore. Most disruptive of all, Coach Campbell, the colead director at Apple and almost a brother to Steve Jobs, has told friends he would regretfully choose to sever his ties to Google. Tensions between Apple and Google were simmering. By the end of 2009, it was likely they would come to a boil.
PART FOUR
Googled
CHAPTER FIFTEEN
Googled
M
edia companies can be divided into two broad categories: the few who create waves, and the many who ride them—or drown. The elite companies that generate waves are rare, the wave riders common. A company can be successful—Cisco, Dell, Oracle—yet not fundamentally alter the behavior of consumers or other companies. Dell’s approach to efficiently making computers was an innovation, not a disrupter; it did not alter the way consumers behave. Steve Jobs and Apple are wave makers; companies like Dell—or Quincy Smith’s CBS and Irwin Gotlieb’s GroupM—attempt to ride the wave; newspapers crash into them. The Apple wave started with the Apple II, which launched the PC era in 1977; followed in 1984 by the Macintosh, with its innovative graphical user interface; followed by Pixar studios, which transformed movie animation; followed by the iPod and iTunes and the iPhone. It’s probably safe to say that Intel and HP created waves. Ditto Amazon. There are those who say Microsoft doesn’t qualify because it rode the waves others invented, but it is inarguable that it has thrived for three decades and changed computing. It is much too soon to know whether companies like Facebook, YouTube, Twitter, or Wikipedia will have a lasting impact.
It is not too early, however, to call Google a wave maker. The planet has been Googled, with the company becoming, as Larry Page has said, “part of people’s lives, like brushing their teeth.” Google has eliminated barriers to finding information and knowledge. “The Internet,” Hal Varian said, “makes information available. Google makes information accessible.” The Google wave has crashed into entire industries: advertising, newspapers, book publishing, television, telephones, movies, software or hardware makers. Its power is measured by the companies that fear it and the public that adores it. Google has fostered the growth of the Web by nurturing Web sites with its AdSense and AdWords programs, which have delivered advertising dollars and enabled small businesses to reach new customers. Google’s way of building its business—make it free and attract users before figuring out a way to make money—became the template for Web start-ups from Facebook to YouTube to Twitter to Ning. Google is responsible for creating an entire new industry of search marketers and search optimizers who gather by the thousands several times a year under the umbrella of Search Engine Strategies (SES); these companies set out to outwit Google’s algorithms so they can advise companies how to jump to the top of search or advertising results. Google has created a new model for an innovative business culture. Its search results provide a graph of our times, revealing which subjects preoccupy us; by studying search data on Google Trends, economists believe they can spot trends and better predict consumer behavior. By making information available, Google has facilitated political participation, as YouTube demonstrated throughout the 2008 presidential campaign. It has made institutions, from governments to corporations, more transparent. And with its open-source Android phone and cloud computing and YouTube and DoubleClick, it threatens to extend its considerable reach.
“Fifteen to twenty years ago, entrepreneurs would have said, ‘I want to be the next Bill Gates and Microsoft,’” Michael Moritz said. “Today people’s great ambition is to be the next Google. They went from zero to twenty billion dollars in revenues in four hundred weeks! Google has become the front door to the world for many people, the place they go for information. They are probably the most visible service concocted by mankind. Was Henry Ford more recognized in 1925? I doubt it. Because of the Internet, Google has leapt geographical boundaries.” Perhaps the only company visible to more of the planet’s occupants, he guesses, is Coca-Cola.
During the 2007 Zeitgeist Conference, a prominent media executive in attendance whispered a question to me. He was clear, he said, about the immense value Google was producing for itself. What he said he didn’t understand was this: What value was Google producing for society, other than shifting money from the pockets of traditional media to Google’s? During a long interview with Sergey Brin that day, I relayed the question. Brin had an easy answer if he wanted it; on the front page of that day’s San Jose Mercury News was a story about the jobs his company had created and the auxiliary businesses that benefited from what the headline called “The Google Effect.” But Brin chose to make a broader point: “It’s very simple. People with the right information make better decisions for themselves. People presented with the right commercial opportunities will buy things suited to them.”
By way of illustration, Brin described a trip he and his wife had made to Africa. With sophisticated digital cameras in hand, the two of them often jump on the private, customized Boeing 767-200 or 757 that Brin and Page purchased and that transports them to different continents. “One day in Zambia the driver was telling me how he was trying to get all the parts to a computer,” Brin said. The driver couldn’t locate some parts he needed, and those he could find were five times as expensive as they were in the United States. “He was trying to get a DVD-Rom drive. I said, ‘In the U.S. they cost about thirty dollars.’ He said, ‘What?’ He was about to spend two hundred dollars on a DVD-Rom. Imagine if there was information there? He would have been able to get that DVD-Rom drive for forty bucks. He’d be more efficient at his job, and it would help communities as a whole. I certainly believe that information creates value, rather than displaces it.”
Google search is of enormous benefit to other companies as well. Referring to the Internet as “a magic box where whatever you want to do, it’s all there,” Marc Andreessen credited Google with making the box “more magical. Google makes the world a much better place because it makes everything findable. Many companies spend a lot of time and effort to make their stuff more findable on Google. It’s a huge source of traffic and income. Facebook used to be closed off from Google—you had to be logged into Facebook to see people’s profiles. But then Facebook started publishing public profiles so that when you search on Google for someone, their Facebook profile pops up in the search results. That generates additional incoming traffic and therefore money for Facebook.” Web site owners report that Google search often sends them 80 to 90 percent of their vistors. With Google as the Internet’s prime navigator, there still remains the question Nicholas G. Carr asked in a 2008 blog post: “Is the company an exemplar or a freak?”