Schmidt: It's Google's duty to help fix ad business

SAN FRANCISCO--Media companies should see Google not as an enemy but as an ally that's trying to make advertising work on the Internet, Chief Executive Eric Schmidt said Wednesday.

Google has a financial incentive to make sure advertising can support companies that supply high-quality content, Schmidt said during an on-stage interview here with Ken Auletta, The New Yorker's media reporter. But Schmidt said there's another dimension to Google's motivation, too, one not often figuring prominently in business affairs.

"It's a huge moral imperative to help here," Schmidt said of publishers' problems making advertising work on the Internet.

Happily for Google's moral compass, the company's effort to make money is pointed the same direction. The company is trying to solve the online ad problem in part with DoubleClick, the display-ad company Google bought earlier this year. Google's cash cow is selling text advertisements that appear next to search results, but with DoubleClick, Google hopes to tackle the graphical ad side of the market.

DoubleClick will let advertisers tackle the market for both search and display ads with a unified interface, Schmidt said. "By combining DoubleClick with that (search-ad) architecture, we can provide a single platform for publishers that over time will begin to generate significant revenue for publishers," Schmidt said.

Display ads are a business in flux on the Internet, though. A new study showed that growth slowed for display ads on the Web, hurt by a weakening economy. Revenue increased 8.5 percent annually to $2.9 billion in the first quarter of 2008; the year earlier, the growth rate was 16.7 percent, according to TNS Media.

Viacom has sued Google over copyrighted material on its YouTube site. But, Schmidt argued, media companies attack Google for helping to usher in the digital content era.

"There is a sea change from one model to another. Many of the criticisms I see seem to be merely about the change, and Google happens to be the messenger," Schmidt said. "Those changes are going to occur independently."

Google itself is a publisher, at least in one sense: it offers countless videos through YouTube service. So Google has more incentive than just its DoubleClick division to improve display advertising.

People are consuming more and more media on the Internet but paying less and less, Schmidt said. "That's bad for Google. We are critically dependent on high-quality content," he said.

A key part of making advertising work is making sure ads are targeted at people who are actually interested, Schmidt said. Searching for a subject on a Web site makes targeting easier, because a search engine can infer people's interests through their search queries, but for display ads, it's not so simple. As advertisers figure out how to target ads better, though, they'll curtail spending on general ads, Schmidt predicted.

"Why does my TV show me ads I couldn't possibly be interested in?" he asked, saying it's a waste of advertisers' money.

Schmidt insisted that profitability is only a useful tool that's subordinate to Google's true agenda.

Morality in the driver's seat
Schmidt touched on the company's principled agenda several times during the talk.

For example, he said, "The goal of the company isn't to monetize everything. The goal is to change the world." Could you pin that down a little? Sure: "For the better," he said.

In addition, he said Google's "don't be evil" motto is real, though often misunderstood.

"We don't have an evil meter we can apply," he said, but it is a real part of company discussions.

"I thought when I joined the company this was crap--companies don't have these things. I thought it was a joke. It must be a Larry and Sergey thing," Schmidt said, referring to Google co-founders Larry Page and Sergey Brin. "So I was sitting in a room six months in, and an engineer said, 'That's evil.' It's like a bomb goes off in the room. Everybody has a moral and ethical discussion that, by the way, stopped the product."

In addition to trying to better the world, Google has other motivations that don't necessarily rate highly on Wall Street's priority list.

Criticism from Wall Street is "not the signal we respond to," Schmidt said. "We respond to end-user satisfaction."

But Google can afford to pay less attention to the quarterly earnings imperatives that often drive publicly traded companies, Schmidt added.

"We have enough leverage that we have the luxury of time," Schmidt said. "Most businesses can't invest for scale. They have to make money now. That short-term focus does make people sometimes make the wrong trade-off."

At the same time, money still obviously matters: The company decided to move YouTube into a money-making phase. "In January or February we had a big meeting," Schmidt said, at which he delivered the "Come on, guys" message, Schmidt said in remarks to reporters after the talk. YouTube has been a "huge success," but monetization is now the priority

He didn't elaborate on specific YouTube revenue plans, though. "We have a revenue plan, a usage plan, a scale plan, a bandwidth plan," he said, but wouldn't discuss any of the points besides saying YouTube "is now the majority of outbound bandwidth. We had to retool the network."