It was in May 2008 that Eric Schmidt noticed something rather odd happening in the world of Google. His analysts could not quite pinpoint what it was, but the all-important “metrics” measuring advertising revenue from each click on a Google advert were travelling south.
“The sequence for us started in May — we started seeing some strange things in Britain,” the Google chief executive said. “In particular the way that our ad system auction was working was not quite right. It was as though we weren’t making the right amount of money on every one of our clicks. We measure the amount of revenue we get per click. What was happening was we were getting the same number of clicks and less revenue.
“We couldn’t figure out why. Was it that people weren’t buying? We initially thought it was our error. Was it possible to make a mistake? Through the summer it was obvious that something had changed. It started in Britain in late May and I remember sitting there thinking what the hell is going on? Is this a trend, is this something unique to Britain? We now understand that it was a shift in consumer behaviour that was an early indication of what was to happen in banking.”
That early warning system is one reason why Google has become a lodestar to the economic world and why Schmidt, one of the most powerful CEOs in the world, will be listened to more intently than most when he arrives at the World Economic Forum in Davos at the end of the month.
Schmidt is co-chairman of this year’s Forum — the meeting of the very, very great and very, very good that reads like a Who’s Who of global business. Among those meeting in the Alps will be Bill and Melinda Gates, Howard Stringer, CEO of Sony, Sir Martin Sorrell, chief executive of WPP, Larry Page and Sergey Brin, Google’s founders, Lloyd Blankfein, chairman of Goldman Sachs, a sprinkling of royalty, a whole cadre of economists and academics and a fair few politicians including David Cameron and Tony Blair.
As co-chairman, Schmidt, along with Peter Sands, the CEO of Standard Chartered, will be expected to lead on the key themes of 2010 — a world coming out of the deep freeze of the financial crisis and looking to see how robust the green shoots of recovery really are.
But, first things first, to understand the future you must first understand the past. Otherwise, the danger is you simply repeat it, not as farce but as further calamitous mess. And no-one can afford that. Schmidt says he knows who should be in the cross-hairs of those who seek to pinpoint blame — his own country.
“I want to be clear here that the blame, to the degree that there was, is largely in the United States, not in Europe, not in Britain,” Schmidt said. “And it was fundamentally because a low-interest policy created too much money. It was an easy-money policy and eventually an easy-money policy catches up with you.
“Remember what happened. Through a series of events in the mid-1990s, Congress increased the supply of credit for home mortgages, through the institutions Fannie Mae and Freddie Mac. They were essentially given too much money for political reasons.
“And then that was followed in New York by the repeal of Glass-Steagall which then allowed banks to use investment equity vehicles to create liquidity which creates very large amounts of money. So the banks are busy creating money and making a lot of money on that creation of money and the regulators were either, depending on your point of view, asleep at the wheel or did not have the tools to understand what was going on.”
Schmidt has little time for those who complain that we are now entering a dangerous period, a period in which market freedom is replaced by state and regulatory intervention. For every moan the bankers utter there are a million people who have lost jobs, or livelihoods or businesses, he argues. Bankers should stop shouting into the wind.
“The number of people who were hurt by the activities of the financial industry is so large, it is very hard to have a lot of sympathy with that industry given the high-flying nature of its behaviour,” he said.
“Remember, many of these institutions privatised the gains and socialised the losses. [You could say] that the banking industry should not be regulated but it should also be able to fail — that’s called capitalism. It is very easy to understand. You’re a banker, you make a loan, and if you screw up you lose your job and the firm is liquidated.
“But if you pick any one of the financial companies [involved in the crisis] that is not what happened. What happened was the regulators decided that the pounding of the financial industry would have paralysed the world because of the inter-linking. I think that argument is correct.
“If your assumption is that there is a greater and greater concentration of large financial institutions that are too big to fail, well, they need to be more regulated. You cannot have a situation where you only win and do not lose in capitalism. At Google, if I lost $10bn in one day I would like to lose my jacket.”
Gaining $10bn in one day is more likely for the American technology company which has admitted it is in “acquisitive mood” following robust third-quarter results. Google declared itself pretty happy with its performance last October, reporting 7pc year-over-year revenue growth. Schmidt told investors on a conference call after the results had been announced that he was “very optimistic about the future” and that the figures were “all good news”.
He then proceeded to run through the holy trinity of shareholder contentment — tight control over costs, plans for new “small and large” acquisitions and the development of new products and markets supporting growth in operating profit margins.
Last week, Google launched Nexus, its mobile competitor to the iPhone. France also announced it was considering a “Google tax” on tech companies such were the positive nature of their profit margins.
It all seems a long way from the gloomy prognosis a year ago, when, Schmidt admits, Google was suffering.
“From our perspective we didn’t know what was going to happen [after the financial crisis and government bail-outs]. So we battened down the hatches, we stopped hiring for a while, we cut down our spending and we waited.
“We had a reasonably good quarter in December and we took our salesforce and we told them: ‘Go out and talk to the CEOs of your customers and say the way to get more revenue is to advertise on Google’. It was very self-serving.
“The low point for us, psychologically, was in fact in February and March 2009 because of the slowdown, and the money stimulation had not really happened yet and economic activity was continuing to slow, and then somewhere in March and April things began to pick up.”
2009 has been the year when the consumer has confounded the economic gloom. We have carried on spending, as last week’s record retail figures from Waitrose and Sainsbury’s, particularly online, revealed.
“What was interesting about the recovery was that I figured Britain and Europe would lag our recovery by at last six to nine months, historically that has been true,” Schmidt said. “However, that has not been true this time. We saw pretty good results out of Europe.
“There are a couple of explanations. One is that the euro is strong relative to the dollar. Another is that the Europeans are smarter and moving to more online — in other words, the pie is not getting bigger but there is a shift in the pie. And then the third reason is that there is a consumer recovery happening in Europe.”
Schmidt sees a global recovery in 2010 that will be patchy and will affect different sectors in different ways — with technology leading the pack. He believes President Obama (Schmidt is a close ally) took the only option available, pumping billions of taxpayer dollars into the economy to shore up the financial sector.
“I am a supporter of President Obama, so I am biased,” Schmidt said. “But I think he has done very well given the challenges he was handed in his first year as President.
“Think about the problems he inherited — Afghanistan, Iraq and the financial crisis, the worst since the Second World War. He manoeuvred through that about as well as you can, he did a stimulus package which I supported.
“So the question is — with the patient out of the emergency room — now what happens? And what happens when the stimulus money is withdrawn? I would assert to you that no-one knows. There is no precedent for the amount of capital that has been put into these markets. That doesn’t mean it is going to be bad by the way, it just means we don’t have any metrics.”
He says there are still great swathes of America “severely injured” and they will take a long while to recover.
“The next stage depends on where you are. Hi-tech has been doing reasonably well, so in California and the places I work and live, the mood is reasonably good. But much of America, if you will the heartland, was severely injured by this with very high unemployment and no short-term recovery, it is going to be a while [getting to recovery].”
Schmidt says it is a complex picture (“America is a big place”). He pauses for thought. And although he says that Europe has picked up more quickly initially, he has a stark warning for the UK and continental Europe. At its most basic they lack one key component in the battle to contain the huge public deficits being run in many Western economies.
That one missing component is called the dollar.
“I do think the situation in Britain is worse than in the States and the reason is that the US can inflate its currency and Britain can’t. It is easier for America to adopt permanent immense spending — the deficit that you can see — because of the role of the dollar as the world’s reserve currency.
“This is the benefit in the post-war world that America has — we get to play by different rules. In Britain, you don’t have the ability to run enormous deficits for the next 10 years so whatever government comes in, they have a much more severe spending problem, they just can’t do it [run a deficit] at the level that America can.”
Of course for Schmidt his business is the technology business. One of the big themes for Davos will be the role the digital world plays in boosting recovery and how politics and business are now intertwined like never before. Both camps, often twitchy about the other’s motives, are warily picking their way to a new consensus in the relationship with the citizen — the consumers that all markets ultimately rely on for growth.
“If you are a politician and you are able and honest and trying to do the best you can, and I think the majority are, you will have better [technological] tools to understand what is going on than you did five years ago or 10 years ago.
“But you will also have people trying to use those tools to misinform you. So, you have better access and because it is public you also have people who are trying to create dissent. And it will be in the interests of businesses to create waves of falsehoods — the term we use is spin.
“It is very easy — let’s say for example you and I believe that the following special thing should occur, with some work you can probably convince a politician that there are a lot of people like you and I. And the easiest way for us to do this is we just pay them. In case you’re wondering if this is true there is evidence that these types of campaigns are being fought in a number of industries in the United States. Lobbyists and so forth are trying to create social movements to mislead and misinform politicians.”
Politicians and business have to grab this new era of transparency and protect themselves from the downsides, he says.
“It will be possible for citizens to understand what their governments are doing much better. Here’s an example — I feel very strongly that the British Government should publish what it’s doing. Where’s the money going? There is no reason why the British government shouldn’t say every day, ‘this is what we did, this is where the money went’, it’s your government.
“It is possible that level of oversight will help transparency, which will make the Government more responsive.
“On the financial crisis, why didn’t we realise how bad it had become? Well, the answer was a lot of information was not publicly available. So, what I would hope as part of the changes in regulation is that it won’t be a closing off of information, it will be an opening up of information about what the financial industry is doing, in aggregate form, while protecting privacy.”
What about the newspaper industry, which has been struggling to find a new economic model? Rupert Murdoch has launched a very public war with Google, describing its approach to news as parasitical — distributing for free newspaper content that media companies have to pay to produce.
Schmidt doesn’t want to get into a slanging match with the boss of News Corporation, but to him the revenue model the newspaper industry will have to use comes after a pretty simple, and essentially binary, decision.
“The simplest model to think about is that your readers are eventually going to consume the majority of your products in online devices. The fact of the matter is that is what the reader is choosing.
“The problem is how do you monetise that reader? There are two choices. One is that you can do a subscription and the other is to use advertising.
“We are in the process of trying to develop very powerful display advertising solutions that will work in those categories. That is the way it is going to happen.”
Schmidt ends on the usual issue for Google — is its “Do No Evil” just so much PR now, that it is just too big with too many fingers in too many pies to be a truly “good” company? Does the detractors’ image of ‘Google the Ugly Giant’ worry him? Or that Google is now just big and boring?
“I do and I have felt that since the day I started at Google,” Schmidt said. “Basically Google has always had that narrative — amazing and creative, and [then] middle-aged, boring and predictable.
“To fight that you have to actively manage the company. You have to take an aggressive position on investment, invention and innovation. And there are companies that have done this very well, for example Apple, which had a near-death experience and has come back with a tremendous performance, so it is possible to do it.
“We suffer [because] we are global, we touch a lot of things, we are disruptive, and we operate in information and people have a lot of opinions on that. I don’t think that will change. I think we have adapted to the role that we now play in the information industry that the role is one of innovation, disruption and still making the world a better place.”