70-20-10: vital statistics that helped

Yahoo! and Microsoft want a piece of the action, but Google will always outsmart them, its boss tells Stephen Pritchard

Even in post dot-com San Francisco, a relatively modest home can change hands for over $1m (£545,000). But Eric Schmidt controls a much more valuable, if virtual, piece of Silicon Valley real estate.

Even in post dot-com San Francisco, a relatively modest home can change hands for over $1m (£545,000). But Eric Schmidt controls a much more valuable, if virtual, piece of Silicon Valley real estate.

As chief executive of Google, Dr Schmidt is in charge of one of the internet's hottest properties. A site that started out with the mission to make searching simpler has become the world's largest virtual shopping centre, advertising vehicle and knowledge base.

Google claimed to have indexed a staggering 8,058,044,651 web pages as of last week; yet a typical search takes no more than a few seconds. The technology is based on complex mathematical algorithms developed by Google's co-founders, Sergey Brin and Larry Page, when they were graduate students at Stanford University.

Mr Brin and Mr Page are both still on the staff at Google, but Dr Schmidt, a former Sun Microsystems and Novell executive, handles day-to-day management. He steered the company through its flotation last year, but must now see off a challenge from Microsoft and Yahoo!, both keen for a slice of Google's core search business.

With Google's turnover pushing $5bn a year, driven mostly by advertising, this competitive interest is inevitable. But at the San Francisco spring conference of IT research firm Gartner, where he gave a speech last week, Dr Schmidt was dismissive of the threat posed by Microsoft. He sees Yahoo! as the more potent competitor.

Microsoft is a new entrant, he says. "We are solving the problem of search. Microsoft also has a product in that space. The challenge is to make it deeper, faster and more integrated. We alone have the footprint, with the Google tool bar, and with our search appliances, it's automatic."

Google is best known as a consumer website. But the company has been steadily investing in products aimed more at business. It launched an enterprise desktop search product last week. As well as searching the web, this delves into desktop files and corporate messaging systems, typically running IBM's Lotus Notes.

The company also sells two Google "appliances", a corporate search system aimed at larger businesses and Google Mini, a self-contained, search-engine computer for just short of $3,000. It is proving popular with law firms and other companies that need to search large volumes of documents.

Much of Google's success lies in the speed of its searches and the simplicity of its interface. The Google home page is clean to the point of starkness. Yahoo's appears cluttered by comparison.

But Google is expanding its range of services. It has added image search, Froogle (a shopping engine) and local and mobile searches. It has a maps service for the UK and the US, and a service that lets consumers search through photos on their PCs and one that lets them upload video images to the internet. Another search engine trawls the internet for TV listings and film schedules.

Google does not charge for these services, relying instead on advertising for its revenues. Those revenues are growing steadily, driven especially by bookings from small businesses.

The company is at the forefront of targeted advertising. Through a system called AdSense, Google matches advertising on screen to a user's search. This leads to click-through rates that are understood to be far above those for standard internet banner ads, although Google does not publish click-through statistics.

"Google runs on end-user satisfaction," says Dr Schmidt. "If you can solve issues of scale for end users, there are many ways you can use advertising networks to deliver value to those advertisers and give revenues to companies."

Since it introduced its ad matching system, Google has become a life blood for thousands of small businesses. Companies that could not afford even a local newspaper campaign can buy click throughs from Google for a modest sum. The targeted nature of these adverts means that they are often highly successful in driving sales.

Andy Kyte, a research fellow at Gartner, cites the example of a small T-shirt company that signed up for Google ads and had to take on three extra staff within weeks. "Small businesses are using Google as a way to find markets they would not have been able to find any other way," he says. "These people think the sun shines out of Google."

Google ads have also boosted the blogging phenomenon. Website owners can put Google ads on their sites and take a share of the click-through revenues. Even the smallest and most personal weblog can gain some income from advertising, without the need to employ a sales force. "It's scary to understand that we are a fundamental revenue stream for small business," says Dr Schmidt.

Unlike competitors at Microsoft Network (MSN) and Yahoo!, however, he is ambivalent about advertising. "We would like to be less dependent on it, but the model is so deep and broad that there is little chance that it will shift," he says.

The potential to push advertising click-throughs drives almost every new Google consumer service, however. Even Google's email service, GMail, is based around context-sensitive advertising.

It is this business model that might, ultimately, prove to be the limit on Google's ambitions. Industry observers have suggested that GMail and desktop search take Google into head-on competition with Microsoft. It has also been suggested that Google might develop a web browser or possibly even an Office-style desktop software suite. Dr Schmidt, however, says that his focus is "on making GMail successful".

He does, though, try to foster a culture where Google's engineers feel free to innovate; this goes beyond providing benefits such as wood-fired pizzas and a grand piano in the lobby of the Googleplex, as the company's headquarters is known.

Every engineer has what is known as "20 per cent time", when they are free to work on projects that interest them personally. Many of Google's ideas originate from 20 per cent time.

As a manager, though, Dr Schmidt stresses the importance for Google of staying true to its core competence of search. "We look at every project in terms of expected value, risk and return," says Dr Schmidt. "We apply the 70-20-10 rule developed by Sergey Brin. Seventy per cent of time is spend on additions to the core business. Twenty per cent is on adjacent products like [Google] news, which are not search but near search. Then 10 per cent is on other areas. We don't know what they are but we think they are interesting.

"In a normal company, we would have a five-year plan," concedes Dr Schmidt. Google, though, does not have one. "But in five years we expect to out-innovate our competitors."