The Google Guys (10 page)

Just to bait them, he asked, “ ‘Why hire me? You seem to have everything under control.' Larry looked at me and said, ‘We don't need you now, but we will need you in the future.' Which I thought was the right answer.”

Ask Schmidt how two young men with no business experience developed such keen corporate instincts, and he says, “I think they were born with it. They had remarkably good judgment for such young people. It's intelligence, but also street smarts, insight. It's very impressive. It took me twenty years to develop the insights they had learned in two or three.”

Schmidt has made a lot of progress in turning Google into a more professional organization, but without losing the ideals that make it unique. In his first year at the company, he wrote a list of standards and goals for himself that closely matched the ideals of Larry and Sergey: end-user happiness is defined by the quality of the search results. End-user happiness over advertising is defined by the quality of the ads. He also set the goal of developing Google's partnership programs to get others to use its search engine, and creating the corporate infrastructure to support a billion-dollar company.

Schmidt turned out to be exactly the right person for the job—mainly because his ego was sufficiently in check to allow Larry and Sergey to continue their radical ways. Few CEOs recruited to a small company would take a backseat to the founders, but Schmidt did. There are plenty of CEOs in Silicon Valley who will modestly assure you that they're not very smart, but most of them think they're lying. Schmidt doesn't play the part of a disarmingly underrated executive, he's the role model for the real thing. For the first couple years he acted more like a department head than a CEO. He saw no need to interfere.

Schmidt liked the fact that Larry and Sergey took an analytical approach to decisions, were proud of the company's technology, and knew that it was not possible to spend too much on building the technical infrastructure to support their ambitions. “I didn't need to overshadow them,” he says. “I'm a collaborator, and I didn't need the validation. It was their company and I didn't in any way want to take away from the perception that it was their company.”

And besides, he did not think of his position as that of the ultimate boss. As major shareholders, Larry and Sergey control the voting rights of the board of directors, including the ability to fire the CEO. “Who works for whom?” Schmidt asks. “Do Larry and Sergey work for me or do I work for them? On the organization chart they work for me. But at the time I joined, they owned more than half of the company. Any CEO who walks into a company where the founders own half of the company and thinks those founders work for him is not paying attention to how a board of directors works.”

The most important result is that Schmidt did not screw up what Larry and Sergey had started. Too many start-ups have been destroyed by CEOs, brought in as hired guns, who start conforming to conventional wisdom. “I think Eric is the only guy who could be CEO of that company,” says Anker. “They are so overoptimized for technology. A standard CEO would be rejected. Eric can play both sides of the coin.”

The venture capital rumor mill also says that Google's board was frustrated with Schmidt's refusal to rein in Sergey and Larry, but Schmidt denies that this was the case. In the end, it didn't matter. The three executives have learned to work together smoothly.

Today, Schmidt has become the public face of Google, while Larry and Sergey have retreated into the background to run Products and Innovation, to decide where to expand into new markets and when to retreat. Larry is now president of Products, while Sergey is president of Technology, roles that keep them heavily involved in Google's future as the main arbiters of Google's technology. Larry and Sergey almost never give interviews or attend conferences. And Schmidt rarely attends the Friday technology review meetings headed by Larry and Sergey. Which is just fine with Schmidt.

Schmidt has still not managed to get Sergey and Larry entirely under control. They can be almost impossible to work with, especially when dealing with business partners. They're known for their reluctance to meet with other executives, showing up late for meetings and changing terms that others negotiate. “As negotiators, they are horrible to deal with,” says an executive at another company. “Their approach is to push you to the point where you will walk away. They'd hold you over a barrel because they had the power to.”

Not everyone at Google is difficult to deal with. Most of the people there responsible for relationships with others have a great reputation for being helpful and thorough. CEO Schmidt is highly personable and is involved—along with Larry and Sergey—in important negotiations, such as licensing the search engine to others and providing companies with ads. But Larry and Sergey can be stubborn. They know what they want, the ideals they wish to stick to, and the value of what they have at Google. “They're impossible to deal with because they're so convinced they are right,” says a former Google executive.

It can be frustrating, to be sure. Some companies, such as Verizon Wireless, have a huge reluctance to deal with Google and are more apt to sign deals with Google's competitors. This could limit Google's future potential as it becomes increasingly dependent on partnerships in order to expand into new markets.

So, the more amenable Schmidt is taking on more and more responsibility for working with third parties. “Larry and Sergey are good at anything they choose to be good at,” the CEO says. “Their role has evolved. Before we went public, they were doing everything. After going public, they retreated to work on the product side and the innovation side. Today, that ballet works.”

It is, however, a dance that is still evolving.

I have never made but one prayer to God, a very short one: “O Lord, make my enemies ridiculous.” And God granted it.

 

 

I
n June of 2000, Larry and Sergey had a meeting with America Online. AOL had recently merged with Time Warner, creating what most observers believed to be the most important Internet property in the business. The AOL executives wanted to get to know Google better and were considering licensing its search engine. Google had already garnered rave reviews and, in terms of users, was growing faster than a baseball player on steroids. But it had officially been on the market for only a few months, and the AOL deal was huge for Google. It made sense to link the two companies; KPCB was an early investor in both Google and AOL. Although licensing their search engine was the primary means of getting revenue at the time, Larry and Sergey were reluctant participants in the talks.

“Sergey and Larry were mad that they had to go to the meeting,” says an employee who worked at Google for most of 2000 but who, like most former employees, refuses to let his name be used. “They only wanted to talk to technology people. They were really socially awkward.”

The AOL executives started talking about all the potential opportunities in the two companies' working together. Then one of the AOL business guys in the meeting talked about how Google was “stupidly” refusing money by not accepting paid placements—i.e., ads slipped surreptitiously into the search results. This was one thing that Larry and Sergey considered evil. Says the former employee, “Sergey walked out of the meeting and started screaming so that everyone in the meeting could hear him, ‘Someone get me a can of gasoline—I have to light myself on fire to get rid of the scum of those people.' ”

So much for getting AOL's business—at least that time. In 2002, Google returned to the negotiating table with AOL to discuss the possibility both of AOL using Google's search engine and of Google enhancing AOL's advertising system with its own. This time Schmidt took charge of negotiations, and this time he was the one reluctant to sign a deal. AOL wanted a guarantee that Google would provide it with at least $50 million in revenue over the length of the contract. At that time, Google was bringing in only a total of $80 million in revenue annually for itself, was just breaking even, and had net cash assets of zero: $9 million in cash and $9 million in debt. “I thought we would go bankrupt,” Schmidt says.

This started the first huge argument between the founders and the CEO, one he describes as “a significant marital spat.” Larry and Sergey were ready to take the deal, and ended up arguing with Schmidt every day. Eventually Schmidt decided to schedule an argument every afternoon at 4:00 P.M. The scheduled arguments included Larry and Sergey, sales executive Omid Kordestani, corporate counsel David Drummond, and Eric Schmidt. But Larry and Sergey would not give in.

Finally, Schmidt decided to take his case to the board, certain that the venture capitalists who had backed Google would share his reluctance. He was wrong. By that time they had learned to trust the seeming recklessness of the founders. “I called the board members, and they said, ‘Oh, take the deal. We can always get a loan against your receivables.' So we signed the deal on Larry's and Sergey's terms.”

As it turned out, within six months it was apparent that Google would have no problem meeting AOL's demands. The relationship continues to this day. With that deal, Schmidt learned how influential and how right Larry and Sergey could be—although that hasn't ended the occasional closed-door arguments over important issues.

In early 2000, though, alienating AOL seemed like a stupid move. Google's primary approach to generating revenue at that time was to license their technology to others. AOL was the biggest deal Larry and Sergey could have made. But the two had very specific ideas about how advertising should be done, and these did not include giving advertisers preference in search results—a practice known as “paid inclusion.”

Since Google's inception, Larry and Sergey have adamantly kept ads separate from search results, while others have not. They regard it as deceptive to users, something that falls into the category of evil. It might bring in revenue, as users are fooled into clicking on them, thinking they are pure search results, but Larry and Sergey were determined never to pollute their search engine in that way. In 2004, Yahoo announced that companies would have to pay a fee if they wanted to be certain their sites were included in its index of search results. In an article in the
New York Times
, Larry compared search results to newspaper articles, which are supposed to be free of influence from advertisers. “Any time you accept money to influence the results, even if it is just for inclusion, it is probably a bad thing,” he said.
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Google didn't have to even try the practice of paid inclusion. Revenue growth was fine without it, and as a private company, Google did not have to succumb to investor demands that it pursue every penny of ad revenue possible. By contrast, in 2002, all other Internet companies were hurting like kicked dogs. Yahoo stock was down to about $5 a share. Ask—then called Ask Jeeves—had seen its stock drop to 83 cents. At that price, someone could have bought the company for $30 million, shut it down immediately, and still made a profit, since Ask had $100 million in the bank.

“It's easy to say we should have been doing what Google did,” says Jim Lanzone, a former CEO of the search engine Ask. “But it was fundamentally prohibitive to do that at the time.”

The irony is that paid inclusion didn't even do much to help the bottom line. “The dirty secret is that it's not just bad for users, it did not make you that much more money,” says Lanzone. “The chance of someone clicking on the sixth or eighth listing on a page was so unpredictable and infrequent, it turned out to be a long walk for a short beer. It turns out there's a place for ads, and it's in the ad section, not the search results.” Ask later dropped the practice of paid inclusion and put the ads only in the separate boxes where they belonged. Yahoo still offers paid inclusion.
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The important point is that Larry and Sergey never considered the practice.

This dedication to clean advertising was a key part of Google's success. In life and in business, change comes in waves, pushed along by major shifts in the environment. To evolutionary scientists, the impetus for species change is known as punctuated equilibrium, a response to rapid changes in the environment. To science historian Thomas Kuhn, progress in science comes in leaps, the result of a paradigm shift caused by scientific revolutions dreamed up by the Einsteins of the world.
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To Harvard Business School professor Clayton Christensen, technology advances through the power of disruptive innovations.
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In each case—evolution, science, or business—different entities are selected as having the right phenotype to prosper.

Larry and Sergey provided Google with the DNA that allowed it to thrive and become destined to reside at the pinnacle of the Internet food chain. Just as organisms that have evolved for a particular environment lose their advantage once the environment changes, existing corporations tend to follow the same path into obsolescence. In fact, many of the ideas that Google developed were simultaneously being explored at other companies. Those ideas just never went anywhere, their significance poorly understood at the time. When it came to advertising, Larry and Sergey got it. Their advertising plan was developed—or at least considered—before Google was even launched. In a January 1999 interview conducted by Karsten Lemm, Sergey stated that they were in the process of “preparing” ideas about how to make money: “One thing is we can put up some advertising. Another way would be co-branding. Provide the back-end search engine to other sites.”
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