View from the Top: Eric Schmidt of Google

Chrystia Freeland, US managing editor, interviewed Eric Schmidt, chairman and chief executive of Google, in London. They discussed the future of newspapers, developing online advertising and antitrust issues. This is a transcript of that interview.

Financial Times: Thank you for joining us, Mr Schmidt.

Eric Schmidt: I’m happy to be here.

FT: You’ve recently, at a conference, told newspaper owners, newspaper editors that they need to be more innovative. But is there really something more that we should be doing?

ES: I think there’s a lot that we should be doing. The most important thing is that people are now reading the news on all sorts of devices in all sorts of different ways. The newspaper is only one of the many ways in which they get information. So my view is that newspapers need to connect all of that together; they need to get that information in every way they possibly can. They need to explore new ways of advertising with Google and with our competitors and, ultimately, I think the sum of all of that will produce a vibrant newspaper industry.

FT: What about charging for online content? There’s a bit of a vogue now for doing that? Is that going to work?

ES: I think it’s unlikely to work although people will certainly try it and they’re welcome to do so. And the reason is that for most content people are preferring an advertising model. There will be some very specialised content, you know, high-quality newspaper articles, magazines, that sort of thing, which I suspect subscriptions will work for. But for the average news that everybody gets today they would prefer an advertising-supportive model.

FT: And when you say, high quality, would something like The New York Times fit into that area? Or are you talking about more specialised content?

ES: Without commenting about a specific paper, the specialised reader is going to pay, and they’re willing to do it with subscriptions or micro payments. For average news even the best quality, but common news – what is the President doing, what happened in the Senate – it’s highly unlikely, I think, that the people will pay extra for that because there will be so many free versions.

FT: Even as all the metro dailies go broke? Isn’t there a possibility that high-quality, general news becomes sufficiently scarce that people can charge for it online?

ES: Most people think that there will always be enough competition at the centre of our government, at the most important cities and so forth. The real loss that we’re having right now is the loss in the secondary markets, where there was not that much money to begin with, there were not that many newspapers to begin with and reporters. And I’m concerned that the reporting that keeps the Mayor honest, that kind of local is largely going to be gone. They don’t know how to fix that.

FT: Would you ever consider buying a newspaper; they’re cheap right now?

ES: We’ve actually looked at this and we’re trying to avoid crossing the line between the infrastructure and technology that Google provides and the content that our partners provide. There is a line and we’re trying to stay on our side it.

FT: And so the Harbinger stake doesn’t hold any appeal for you?

ES: I don’t want to comment about a specific stake and ownership but, in general, we have done well by letting content people do content in their own terms and in their own way, and working with them to try to make some significant money for them.

FT: Just as an observer, do you think that David Geffen is serious about buying The New York Times? And would he be a good owner?

ES: I’m sure he would be an excellent owner. As you know, the actual owners of The New York Times are the Sulzberger family and by virtue of a voting control, I’m not sure what the structure would be after that. But in any case, I don’t really know what David is up to.

FT: And what about you? What are you up to in these talks that you’ve been having with The Washington Post?

ES: With a number of newspapers, and The Washington Post being an example, we are very interested in trying to develop online news versions that somehow address the immediate needs of people and for which advertising works better. Without commenting specifically about products it seems to me that the newspaper that I read online should remember what I read. It should allow me to go deeper into the stories. It’s that kind of a discussion that we’re having.

FT: So it’s not about a device? It’s not about figuring out the brilliant iPod or the brilliant newspaper-adapted Kindle? It’s about actually changing the way newspapers present themselves online?

ES: Google is, at this level, a software company, not a hardware company, and we have hardware partners. So our primary interest is in expanding the web newspaper reading platform.

FT: And if, as a result of these collaborations, you do come up with the magic, the secret sauce that makes newspapers online really a commercially viable proposition, is your plan to share that industry wide?

ES: We typically don’t do exclusives because everybody benefits from innovation. And we don’t know how to schedule innovation so we try very hard to try this and that and sometimes they work and sometimes they don’t. But absolutely, if we come up with a great product in this area we’ll make it generally available.

FT: And what do you think your chances are? How likely are they to come up with this product?

ES: Eventually high.

FT: This year?

ES: I don’t know when. Eventually, because it’s too important; it’s too important to our users who we celebrate. It’s too important to the industry. It’s too important from a technological perspective. How do you make something which is so infinitely satisfying that people cannot put it down in the new form?

FT: Apart from The Washington Post what the other main people you’re working with?

ES: I’d rather not talk about specific companies.

FT: Some people, in their concern about the sorry financial state of a lot of American newspapers, they’ve talked about the idea that some papers should become not for profit. Do you think that’s a good idea? Is that going to be the model for the future?

ES: There’s an old joke about newspapers – that some of them have been not-for-profits for many years. So I think the reality is that news gathering and the profitability model was always an uncomfortable relationship because it’s very difficult to make money from a story about a tragedy or murder or so forth - and yet it’s enormously valuable. So the structure of newspapers that evolved, where the majority of the revenue came from classifieds and these big, untargeted print ads, the content was fascinating but they were not connected to…it was ultimately destined to be challenged by technology and that’s indeed what happened.

FT: So is that a yes? Should not-for-profit structures be created, trusts or something like that to preserve big news organisations?

ES: I don’t know how to solve the problem of taking for-profit structures and transitioning them to a non-profit world without some very generous pushing in-between.

FT: The Google Foundation, for instance?

ES: Yes, the Google Foundation is busy doing other things. I understand there were suggestions, I think they’re clever ideas, but they’re unlikely to happen without some massive, massive set of corporate bankruptcies.

FT: In their quest for revenues newspapers have started talking about trying to persuade you, Google, and specifically Google News, to share a little bit more of the revenue, specifically from their stories that appear on Google News. Wouldn’t that be a good idea?

ES: We’ve decided that the value we provide to the partners is the traffic. So we want to provide incredible numbers of users going to their sites, their content, which is why we urge them to make it deeper, stronger and use better tools and so forth. From our perspective, that’s where the real source would be. In our model, and what we’re doing today, the vast majority of the revenue that comes directly from reading newspapers, in fact, goes to them through all these mechanisms. The real issue here is that when people are reading the news online, we’re not monetising it in aggregate, so if we were to transfer money we would be taking money from something unrelated to newspapers and just paying them, which doesn’t seem like a good sustainable model for anybody.

FT: And don’t you think that there is a risk for you, as well, if you fail to find, perhaps, more of a revenue-sharing model, say, with something like Google News? Your sources of news for that service that you provide will just dry up? You risk killing the goose that’s laying the golden egg?

ES: This is the co-dependence that we were talking about earlier. From our perspective, we depend on the production of very, very high-quality content. If the people who are producing that are getting laid off, it’s really a tragedy for both. So we need the high-quality content. There’s a debate in the industry of exactly how to get it but, ultimately, the problem is not us taking money from some other pocket and subsidising it, ultimately the solution is to build products that really are so good that we make enough money from advertising and subscriptions, to a degree, that they make sense and that there’s enough money to pay for the construction of this high-quality content.

FT: Do you think that all of these current debates will lead us to rethink rules on fair use?

ES: I think it’s unlikely because any attack on fair use affects so many different examples of copyright agreements, copyright-enabled industries that any gross attack on that is not likely to really succeed. We have evolved in the United States a fair use doctrine that’s pretty broadly agreed to. And my experience with lawyers is that they’re always arguing on the corners of, you know, is it 30 seconds or is this 15 seconds? But there’s clearly a document for use that’s been around for a very long time; it’s unlikely to be changed.

FT: Google seems to have gone lukewarm on its experiments with radio and print advertising. Why is that?

ES: In both cases they didn’t work well enough. We measure our businesses very, very carefully and in both the print and the radio businesses we could not seem to invent or get enough of a signal back to make the network or value really spin – that’s one way to describe it. In our model what happens is as people click on ads and as they use our services we get all sorts of ways to improve our products. And with all that customer feedback we can make it better. But because of the unique structure of radio where it’s a broadcast to a relatively unidentifiable radio, there’s not very much information of what the radio is doing, and similarly for print ads, we could not get that signal. And that’s, ultimately, I think why we have moved on.

FT: And are you going to revisit that or have you just decided it’s not going to work?

ES: We have a couple of teams that are experimenting in the spirit that we’re always trying new things but, I think, it’s going to be some time before we come up with something that’s of the scale of what we tried before.

FT: Are you concerned that with the new administration and the wider new mood in Washington there might be a new attitude towards antitrust issues and that that might be an issue for Google?

ES: I think, when you’re a large company like Google you’re always going to have these concerns. From our perspective, we work very, very hard to stay both within the law and also not make the mistakes, which in my view were quite tragic, that Microsoft made and which we know a lot about, obviously, based on its history.

FT: Tragic but perhaps you can’t be a little bit happy they made those mistakes?

ES: I’m not going to pass judgment on Microsoft. They are where they are and they suffer from the mistakes that they made. But from our perspective, the fact that we’re large and we do something important, which is information and is not in itself a violation of law. It has to do with how you behave when that occurs. And we operate under a set of principles which we hold very dearly, which focus on end users, and to do so without regard to the other constituents of our business. So for example, we make a commitment to our end users that we’ll let you take your personal information with you if you become dissatisfied with Google. And the good news is that most people don’t and most people stay with Google and, in fact, they get happier and happier and happier. But the fact of the matter is, since we don’t trap you, it is a more competitive environment. An even easier way to see how competition will play out is understand how simple and easy it is to switch from Google to one of our competitors, in particular, to switch from Yahoo and Microsoft, it’s literally one click away.

FT: With hindsight, do you regret your mooted…your discussions with Yahoo in that they may have turned the attention of antitrust people towards you a little bit more?

ES: I do not; we knew that there was a danger of that. You’ll recall that at the beginning of last year, at the beginning of 2008, Microsoft made an unsolicited bid to purchase Yahoo and we then reacted by trying to create an alternative for Yahoo, which ultimately they considered through a long and complex process and they ended up deciding not to go through with Microsoft. From our perspective, a merger between Yahoo and Microsoft would have very significant competitor concerns. Because with Microsoft’s dominance with respect to both the browser and the Windows platform they could really tie all that together in ways that were not even conceivable ten years ago in the antitrust settlement. So we have no regrets at all about that. And heightened interest in these things is probably a function of just the success of all the companies involved.

FT: Including Yahoo?

ES: Sure.

FT: Could you foresee revisiting that idea?

ES: We’re happy to revisit any idea; you never say never in business. Carol [Bartz, Yahoo chief executive], of course, is a very, very able and strong CEO and my sense is that she’s very focused on getting Yahoo back to its former glory, which is as great project.

FT: You’re also on the Apple board – apart from recusing yourself from the mobile discussions are there any other areas that you feel it’s inappropriate for you to participate in?

ES: We’ve talked about this and it’s possible to be on multiple boards quite successfully and serve the interests of both shareholders, which is what the law requires. I’ve chosen to recuse myself from some of the iPhone things because of the Android issues, but not other areas, because there seems to be so many areas where the two companies have common interests and just in this one interest where there might be the appearance of competition.

FT: You’ve talked about your focus at Google on the end user. Can you think of any ways in which the end user could be hurt by your membership of the Apple board?

ES: It’s important to understand how boards work. The companies are not run by the boards. So the presence of me on a board or not probably has nothing to do with what either company is doing and serving in their interests.

FT: I’m sure you have a great impact on the Apple board?

ES: I think the management team at Apple runs Apple extremely well and I think their performance proves it, starting with Steve Jobs and working from there.

FT: Some analysts have estimated that YouTube will lose as much as $600 million this year. Are you starting to reach the point where it’s time to just throw in the towel and write off the YouTube investment?

ES: Certainly not. Who would suggest that?

FT: I just did, I guess.

ES: Okay, certainly not. No, we love YouTube. We think YouTube is a huge success. If you look at the roughly 15 hours of YouTube videos uploaded every minute, which is very difficult, if you look at the rate at which users are coming to YouTube globally, if you look at the controversies that YouTube is spawning, all of those I think, show you the sense of impact that YouTube is going to have. It’s an audience far larger than what traditional television sees; it’s a global audience. And we will, over time, develop the advertising models and subscription models eventually that will make that a very good business for us.

FT: And are you at all concerned that Hulu seems to be having more success than YouTube at attracting professionally-created content?

ES: Hulu has a very different structure because it’s owned by its constituents, which is a more familiar model. And we actually think it’s good to have choices. We actually like the Hulu structure, we’re glad that the industry has such a structure and we think that the more players getting content online, even if it’s not something that we directly control, that’s good for the industry.

FT: And what about Twitter? Do you think it has staying power? And would you consider buying it?

ES: I can’t comment about buying anybody; we certainly think Twitter is very successful and people are using Twitter in the most amazing things. The most obvious use of Twitter is everybody is watching a play and are busy talking about the play while the play is underway. So this notion of real-time updates from people is very, very powerful.

FT: You do have an $18 billion cash pile at a time when a lot of companies are very cash short. Is this the time to go shopping?

ES: Internally, we say that the cash is not burning a hole in our pocket. The fact that we have all that cash does not mean that this is a great time to go blow it on billions of dollars of acquisitions that don’t work. We have looked at a few things but nothing has really struck our fancy. The prices are too high.

FT: Still? You don’t feel that assets now are really cheap?

ES: Prices are still too high. The corporations or institutions come with liabilities that we don’t want to take on. Google is a pretty unique place and we wouldn’t want to significantly change its culture through a major acquisition unless we really knew what we were doing. We are very happy with the DoubleClick acquisition because, again, that became part of our display ads product. We’re very happy with YouTube for the reasons that I said so we want to keep that success going.

FT: You’ve been doing your current job for eight years. Do you think you want to have a second act? Are you thinking maybe of moving on? Governor of California maybe?

ES: I can assure you I’m not going to run for politics. There is no second life after Google.

FT: This is forever?

ES: This is it.

FT: Final question. And what’s your outlook on the US and on the world economy?

ES: The US appears, as a general…let’s say it again …with a disclosure that I’m one of the economic team with Obama, so I may not be the most unbiased reporter. There’s a lot of evidence that the Obama Administration strategies are working and that the monetisation of the banks and the recovery that has occurred in the banking sector, will now begin to affect the broader economy. This doesn’t mean that unemployment will immediately improve because it’s not; it does take months for this to work through the system. But overall, I think the stimulus package and the other things that have been done recently look like they’re working pretty well.

FT: And you’re a believer that this is sustainable?

ES: I am. What I certainly do not know, and I don’t think anyone really knows, what does 2010 look like? What does 2011…? But it’s clear to me that the most acute period is now behind us and that’s great news.

FT: Thank you very much, Mr Schmidt.

ES: Thank you very much.