Eric Schmidt on Where Google Is Headed

The news on Aug. 3 that Google (GOOG) CEO Eric Schmidt was resigning from the board of Apple (AAPL) took many by surprise. For others in Silicon Valley and on Wall Street, the question wasn't why—but why it took so long. The Federal Trade Commission has been casting a quizzical eye on Schmidt's role as an Apple director, and the two companies seem to be on a competitive collision course. Schmidt was unavailable to talk about his decision, but extensive and previously unpublished discussions we had last month illuminate where Google is going and why it is headed in some of the same directions as Apple.

MARIA BARTIROMOWhere is the growth coming from in the next 5 or 10 years for Google? Is it more search opportunities? Is it mobility?

ERIC E. SCHMIDTProbably a combination. It's obvious that the highest growth is in our core business as we get better and better at targeted ads, and those ads become more valuable. Our whole theory about advertising is that an advertisement that's not targeted—just a random ad that you just walk by—is a waste of somebody's money because you're not going to buy. It wasn't relevant to you.

Aren't there three times as many phones out there as there are PCs now?

More than that. The rough number of PCs is around 800 million; the rough number of mobile phones is on the order of 3 billion. Even more important, the growth rate of mobile phones is quite a bit higher than that of personal computers. There's an estimate of about 600 million mobile phones that are data- and Internet-capable. And that is the group that we really care about because those are the ones that are able to run powerful browsers. This was all kicked off by the iPhone. The iPhone sort of showed what you can do with a very powerful browser. Now there are many new kinds of devices with powerful browsers where you can have very high-quality ads, new applications, and, of course, the phone.

So how do you get to the next step in the mobile business? Do you need to partner with other companies to make sure that the speed is there, that the connectivity is there?

We're doing that with our telecommunications partners. We actually share in the revenue for the ads that show up on the phones. So the advertiser pays us, and then we share it, literally, with the handset and mobile operator. And often we divide between both. And that seems to be the only way to really get money into that system. It's very, very important that the telecom operators have enough capital to continue the build-outs of the so-called 3G and 4G networks.

What are the biggest challenges the mobile Web presents?

Let's start with the fact that the phones are not fast, the networks are not as capable, the ad formats are not standardized. But on the other hand it's very, very important to solve those problems because a phone is very personal. And so if we know a fair amount about a person, with their permission we can target a useful ad—you know, "It's Eric. You had a hamburger yesterday, do you want pizza today? There's a pizza store on the right." That kind of ad is likely worth a lot of money to an advertiser because it will generate a sale.

In other words, you send a message to the person's cell phone, saying: "Look, we know you had a burger yesterday. If you want pizza today, just go around the block"?

Right. It may sound creepy, but it might also be quite valuable. People could use advice as to what to eat and where the food is—and of course you can turn it off. So the important thing here is advertising that has value to the person is advertising that is a valuable business. That's the business we're in.

Google is now the subject of intense government scrutiny, just as Microsoft (MSFT) once was. Is it three investigations that are going on now?

Probably, and perhaps more. Can you tell us where those investigations stand?

As far as the investigations I'm aware of, we have very good answers. And what's happening is people are comparing us to other companies, in particular Microsoft, even though our behavior, our principles, our practices are quite different.

Obviously you've been in discussion with various government regulators.

Yes. But we've deliberately not slowed down the kind of consumer changes we think are important to make the world a better place. And I would never want to slow that down because of fear, if you will. Still, we are much more sensitive. We spend a lot more time thinking about how will we communicate, what will be the knee-jerk reactions, what will be the sophisticated reactions, how will people perceive what we're doing. Because we understand the rules are different for us.

How about Android? What's the strategy going forward?

Android is many things. First, it's an operating system for a mobile phone. It's particularly powerful because of the way it was built. The software is free, you can extend it, you're not locked into any applications vendor or any network. What we like about Android is its perfect expression of openness. A next generation of [Android-based] phones will be coming out in the fall. They won't necessarily displace other [phones] because they're also doing well. But we will have a significant bet in mobile phones. So from our perspective it looks like Android is going to be a success.

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