Google's Varian: Search scale is 'bogus'

Google's Hal Varian would likely have raised an eyebrow at a term paper submitted by Microsoft CEO Steve Ballmer on the search market.

Varian, currently on leave from the University of California at Berkeley to serve as Google's chief economist, thinks a lot of the arguments advanced by Microsoft in justifying its 10-year deal for Yahoo search are, in a word, "bogus." Microsoft has said that it needs "scale" to compete in the search market against Google, saying that larger amounts of traffic and data allow it to improve the quality of its search experience.

As might be expected, that's not exactly the way Varian sees it. He's perhaps best known for perfecting the ad auction system that generates the vast majority of Google's huge profits, having worked for Google since 2002. But he also holds forth over the array of statistical data and processes that Google uses to make just about any decision.

Varian shared his thoughts on the Microsoft-Yahoo deal, the state of the economy, and the changing nature of innovation and Silicon Valley geography during a conversation at Google's headquarters in Mountain View, Calif., this week.

Q: One thing we've been talking about over the last two weeks is scale in search and search advertising. Is there a point at which it doesn't matter whether you have more market share in looking to make your product better?
Hal Varian: Absolutely. We're very skeptical about the scale argument, as you might expect. There's a lot of aspects to this subject that are not very well understood.

On this data issue, people keep talking about how more data gives you a bigger advantage. But when you look at data, there's a small statistical point that the accuracy with which you can measure things as they go up is the square root of the sample size. So there's a kind of natural diminishing returns to scale just because of statistics: you have to have four times as big a sample to get twice as good an estimate.

Another point that I think is very important to remember...query traffic is growing at over 40 percent a year. If you have something that is growing at 40 percent a year, that means it doubles in two years.

So the amount of traffic that Yahoo, say, has now is about what Google had two years ago. So where's this scale business? I mean, this is kind of crazy.

The other thing is, when we do improvements at Google, everything we do essentially is tested on a 1 percent or 0.5 percent experiment to see whether it's really offering an improvement. So, if you're half the size, well, you run a 2 percent experiment.

So in all of this stuff, the scale arguments are pretty bogus in our view because it's not the quantity or quality of the ingredients that make a difference, it's the recipes. We think we're where we are today because we've got better recipes and we have better recipes because we spent 10 years working on search improving the performance of the algorithm.

Maybe I'm pushing this metaphor farther than it should go, but I also think we have a better kitchen. We've put a lot of effort into building a really powerful infrastructure at Google, the development environment at Google is very good.

So, how's the economy look?
Varian: The news on the economy I'd say is pretty good. You look at the housing sales, they've leveled out, prices are up slightly. The auto sales and production are up, The financial markets have all stabilized, the initial unemployment numbers are down over 100,000. So everything is looking pretty reasonable, and it's somewhat earlier than expected.

That doesn't mean we're out of the woods, because we've got a long way to go to go back up. But you look at a most of the economic statistics, they have really turned around in the last couple of months, not only here, but in Europe and Asia.

Has anything changed fundamentally?
Varian: Well, the savings rate is up. People had a negative savings rate for several years and now it's more like 7 percent. In some sense, that's a good thing, I know people are complaining about it but you have to restore some reasonable balance. Maybe it's not so good that we had to get to it by going through this recession, but at least we're coming out at a more balanced rate than we were going in.

How do you see things in Silicon Valley? We've been wondering about the growing cost of living in this area and what effects that has on business development.
Varian: Well, there are some outposts: I've been telling Diana (Adair, Google spokeswoman) that she should go buy a house in Pleasanton. That's where PeopleSoft used to be, and Oracle has a big establishment there, it's a nice town....

It's 105 today in Pleasanton.
Varian: Actually, I live up that way, if you get hot, you jump in the swimming pool. Anyway, there are some outposts that are still closely connected to the Valley. I think it is getting awfully expensive to live here, and commuting is getting more and more unpleasant, so I think you will be seeing some expansion.

A year ago, I told Google they should buy in Stockton. But nobody listened to me. The deal is, you have to pay for your food but your house is free.

What did they say?
Varian: They said, nah, we couldn't get anybody to live there.

Is innovation in the Valley as high as it was 10 years ago?
Varian: I'll tell you an angle that I think is different from 10 years ago, and that's what I call the micro-multinational.

One day I bumped into a friend of mine, and asked what she was up to. She said, I've got a company. And I said tell me about it, and she said there are 12 people, three in New Delhi, two in Mountain View, and there's somebody in Spain.

And then two days later I ran into another guy, and he said I've got a company, and there are four people in Italy, two people in the Czech Republic, one in Spain, and three in San Francisco. And I said, whoa, what is this? A trend! It's two of them!

But you talk to them and it's amazing what you see in this area. I think the reason is that communication costs have basically gone to zero. We've got e-mail, Skype, Google Docs, wikis, doing round the clock continual communication and coordination that only the biggest multinational could have 10 years ago. The fact is that you have this essentially free communications and you've got entrepreneurs everywhere else in the world that can sync up.

So the question is, is it in the Valley? Well, in many cases, two or three of the people are in the Valley, but it's not limited to the Valley.

I think it's a crucial part because in a lot of cases you can find expertise, you can find venture capital. You've got the legal people to draw up the contracts, you've got the financing people, you've got the consultants and experts... But maybe it is part of the answer to this cost question, because you've got the expertise but the work can be distributed.