Eric Schmidt at Morgan Stanley Technology Conference

>>KRISTA BESSINGER: Thanks, everyone,
for joining us today.

I'm Krista Bessinger, the Director of Investor
Relations.

I'm just very quickly going to cover the Safe
Harbor statement,

and then turn it over to Mary and Eric.
So, before we begin, I would like to note

that our comments
and answers to questions may contain forward-looking

statements
regarding Google's business outlook.

Our actual results may differ from those made
in any

forward-looking statements due to a number
of risks and uncertainties.

These risks are detailed in our public filings
with the FCC.

Also, please note that a web case replay of
this session

will be available on our investor relations
web site in a few hours.

We routinely post important information on
our investor relations web site,

located at investor.google.com, and we encourage
you to make use

of that resource.
So, with that, I'll turn it over to Mary.

>>MARY: Thank you, Krista, Maria, Vic, David,
and Eric for coming.

We've moved the schedule back 10 minutes.
Eric's been in the building for 15, but we

finally got him in the room.
For my disclosure, go to our web site for

all information you need to have.
So, Eric, thanks for coming.

You did take away the glowing introduction
with a moderately light start,

so it was glowing.
But, with that said--

>>ERIC SCHMIDT: I'm much more interested in
my criticism than my successes.

[laughs]

>>MARY: We can do that now, or we can do that
later.

[laughter]

So, one of the things I just want to start
out with--there's been

a lot of chatter in the media and other places
lately that the search market

is settled and done.
What's your view on that?

>>ERIC SCHMIDT: Well, there's obviously a
lot of innovation ahead of us.

If you look at what happened, we had a bug
where we put

a malware statement out for users, and in
that time Yahoo searches

gained very, very quickly.
It looks like people will move very quickly

from one search engine to another,
for any one of reasons.

We've looked at this pretty carefully.
A majority of people actually say they use

more than one search engine,
and of course Microsoft is working very hard

to build a competitive search engine,
and of course recently leaked more details

about what they're doing.
So, we have all of that activity, and then

of course we have other activity as well,
including a new entrance we're trying to combine

search with other things.
So I think search as it's defined right, as

Google has historically defined it,
or defined by Google, is not settled at all.

It's interesting to note that people said
the same thing 10 years ago

about search with a different company.

>>MARY: Yep. And they've said it about operating
systems today, and we had

an interesting panel a moment ago.
It leads to a question that, you worked at

Sun where the network was the computer.
You competed and partnered with Oracle, which

believed the network computer
was the future.

Netbooks are getting a lot of traction.
What's your view of how that market plays

out?

>>ERIC SCHMIDT: This is all part of cloud
computing--whatever term you want to use--

let's use cloud computing.
Cloud computing is one of those changes that

is going to happen
regardless of whether the companies that are

participating
in the ecosystem allow.

Because the technology will make it happen.
I think everybody here knows what cloud computing

represents.
You can think about it in all the obvious

ways, right?
So, for example, rather than buying a piece

of software for a client,
the Java Script and Ajax Code comes over to

your browser
and makes it very powerful.

All of that technology is getting much more
mature.

But it is a fact that we live on very high
performance wireless broadband networks.

And that's not going to go away any time soon,
because networks

are getting much, much stronger.
To me, the more interesting question is, what

can you do,
as a consequence of cloud computing, that

you couldn't do before?
A way of thinking about that is that IT systems

today are so--
and excuse the broad overstatement--are so

slow in the way in which they evolve.
They're so stuck in the systems and parameters

and architecture
that they were built, that you have an opportunity

to build
a whole new generation of applications which

cycle much faster
for IT that integrate information in ways

that could never been done before.
In the same way that you can do this for the

web, we're now,
because everybody's on line, you have a lot

of information
that you can get about user behavior, that

you can either mine
or build products for, or do new interesting

things for.

>>MARY: So I'm going to--

>>ERIC SCHMIDT: I didn't really answer your
question about netbooks,

if you want to talk about netbooks for a sec.

>>MARY: Yep.

>>ERIC SCHMIDT: Netbooks are the next generation
of the small device

that the OL PC was trying to talk about.
What's particularly interesting in netbooks

is the price point that they talk about.
It makes sense that eventually it will make

sense for operators and so forth
to subsidize the use of those books, because

they can make services revenue
and advertising revenues on their consumption.

That's another new model that's coming.
Products today are not completely done; there

are things that are missing.
It's perfectly possible that operating systems

that are Lynux based
will become a significant player in that space

where there historically
have not been significant players in the PC

space.

>>MARY: Okay. One of the things we might want
to talk about is how carriers

end up playing--how the financials end up.
But we can get there.

I want to ask a couple of questions about
search, a couple of questions

about financials, one or two on video, one
or two on mobile,

and just turn it over to folks in the room.
But on the search side, and this is an economic--an

economy question--as well.
Query growth has remained strong--high teens--15%

or 20%--for a while.
Our data--for what it's worth--indicates it's

still there.
Cost per click has been declining--it was

negative in the last quarter,
but only by about 2%.

Any trends you can update, or you can get
us to update it, on how you play

through a more difficult economic environment
and any real time information.

>>ERIC SCHMIDT: Well, in the first place,
I don't think I need to talk to this audience

about
the state of the global economy.

I view the situation as pretty dire.
The combination of everything that we have

seen does not appear
to have a current bottom.

I worked hard to promote the stimulus package,
not because it was perfect,

but because I thought that the government--and
I believe government

should act very broadly to address the sort
of historic issues everybody is aware of.

So during this time, what's happening is people
are using the Internet more.

It obviously will affect the on line advertising
market, simply because

our systems are so tightly tuned, that if
customers are buying less it will eventually,

we don't know exactly when, it will eventually
be reflected in CPCs and CPMs.

So it's important, I think, to say right up
front that we are not immune;

we Google and the on line advertising market,
are not immune to this.

We may be better positioned from an advertising
perspective, and other advertisers, because

our advertising can be sold to a salesperson.
But ultimately the confusion in companies

that are saying,
"Oh my God, you know, what are we going to

do?"
The sort of real pain that is being felt by

corporations worldwide,
will translate to our world.

>>MARY: What are some of the--we know what
the negative issues are with the economy.

We know what the negative issues are with
regards to on line commerce

and off line commerce.
What are some of the positive signals that

you are seeing on the core search business
that might relate to increased queries; using

the word coupon; or increased products
being liquidated and people finding bargains;

or any data points that are,
while they may be small in total, are positive?

>>ERIC SCHMIDT: Well, every data point that
we have is obvious.

So what happens is that when the query shift
shifted from, basically,

mortgages, to mortgage help, to mortgage refinance
help,

to lawyers to help me prevent my house from
being foreclosed.

I don't know if that's a good story, or bad,
but it's all obvious,

it's all playing out in real time.
Another way of saying it is the things that

you see on television are really true.
That's another way to say it, because we see

it. [laughs]
So the areas that have been most hit on the

on line world are the same
as the ones that you'd imagine in the off

line world--things like travel,
and automobiles, and financials, and so forth.

And consumers are smart, so they use the Internet
to, now, then,

look for bargains in that space.
So they do, in fact, look for discount trips

if they're going to travel,
although that volume is off, and so forth.

We haven't seen anything unusual, and what's
interesting about it is that,

from our perspective, aside from running the
business much more tightly;

in other words, trying to actual make profits
for a change in some of these businesses,

we haven't fundamentally changed our strategic
view, which is that the Internet

is a part of everybody's life and that innovation
in terms of new products will really enable

people to do some amazing things.
We've taken a position, for example, that

the person should really be the search.
It should really not just be a search that

you do, but really about
your viewpoint or history and, again, with

your permission,
we can store that kind of information.

>>MARY: You mentioned you're trying to make
profits from businesses

that hadn't been profitable before.
You have a new CFO; it seems like right guy,

right time.

>>ERIC SCHMIDT: Very much so.

>>MARY: If you could provide us any thoughts
on the kind of changes

he's been able to make to obvious observations
on the financials;

opex per employee went down 6% last quarter.
It's still high, relative to a lot of other

companies.

>>ERIC SCHMIDT: But our profitability is,
too.

>>MARY: Your profitability is still high.
So there. Touche.

And capex per, as a percent of revenue, was
down dramatically.

How should we--and free cash flow was up 70%
during your last quarter.

>>ERIC SCHMIDT: Well, for instance, we like
cash--we like to generate cash.

A good metric in any situation is if you can
grow your profits at an absolute basis,

and if you can generate pretty good free cash
flow, you're going to get through this.

So we've taken that position internally.
Patrick is--Patrick is our CFO--is particularly

at doing business reviews,
and so we've been going through systematically,

business after business.
And it won't surprise long term followers

of Google that in our,
sort of, hyper growth period, we did not have

the necessary systems in place--
budgeting and the sort of estimation.

We're putting those in place today.
And, in fact, they are in place.

So, Google management spends most of its time
doing business reviews today.

Looking at new products--how will this new
product really change user behavior?

What are the new ideas around advertisers?
And we have a lot of that coming.

When we finally get through all of the fear
and the sort of concern that advertisers

have about the world around them, I can tell
you that they understand the notion

of a guaranteed sale.
They understand that if they put money into

on line advertising that's measurable,
they understand that we can prove to them

they'll get their sale.
And, by the way, in this economy, you need

sales.

>>MARY: You did an exchange program with P&G
in the, call it October, November,

time frame of last year, where you said these
guys--these are my words--

P&G doesn't get what we're doing.
Maybe we don't fully understand their wants

and needs.
Let's do a pen-pal employee slot.

What were some of the learnings from that?
How important was it?

And have you been able to translate it into
anything either with P&G,

or with other large advertisers that spend
95% of their budgets off line?

>>ERIC SCHMIDT: The larger--in a case that
consumer packs his goods--people are trying

to figure out how to use the Internet to achieve
their objectives.

Many of the organizations don't fundamentally
understand, at some level,

how to use the emergent on line communities
to market within those communities.

So the project that we did with P&G was really
about getting--and we literally

put people in their buildings and they put
people in ours--was to exchange,

sort of, how to do that, because they're one
of the innovators in that space.

So based on that, we changed the way we market
to, sort of, consumer goods companies, by

talking to them not so much on traditional
text queries, which we'd been saying,

you know, if somebody types in "diapers,"
you should advertise against that

because everybody sort of understands that.
But how you can use targeted on line advertising

within the communities--
the blogging communities, Facebook, and those

sorts of groups--
that fundamentally are where your customers

are getting information.
The fact of the matter is that these days,

if you're a consumer,
the sophisticated consumers spend a lot of

time on line
before they make a purchase.

And even if they make--they don't that in
the first purchase--

once they have the product and once they're
using it, they tend

to join affinity groups that are part of that
product.

Diapers being an obvious example as a metaphor
for new mothers

who are interested in learning about new products
and new ways

in which they can take care of their new family.

>>MARY: But have you been--anything--has P&G--I
don't want to pigeonhole P&G--

you got insights, but have you seen any translation
yet?

Are you doing the employee swap with other
companies as well?

>>ERIC SCHMIDT: We're going to.
We're doing it carefully because you have

to be careful about intellectual property.
And I don't want to talk about the specifics.

That's their data.
But we like that model.

One of the ways that you can sort of effect
change is, sort of, direct contact.

Literally put the people together.
And that's new for us.

>>MARY: So if we look at the average company
and the average consumer--

spending has been slowing down for a yet.
There's a bit of a--there appears to be a

bit of a freeze right now on action
for a variety of reasons--but to your point

because companies really do
need customers, at some point this becomes

unfrozen, theoretically,
the on line medium becomes unfrozen faster--any

thoughts on how
that might play out when it plays out?

Let's say, the economy turns in quarter "X."
When we come out of it, are the indications

that you're seeing positive
in the direction of on line gaining more share

from off line than it has over
this long period when it should have been

gaining more share than it has?

>>ERIC SCHMIDT: Well, in the first place,
on line continues to gain share in many, many

ways.
Share of mind--share of dollars--and so forth.

I don't think there's any new news there.
And there are more and more on line choices.

It's worth trying to figure out when this
will occur.

And for the next few quarters, things are
going to be very, very tough.

So we're talking about 2010, I think, in talking
to CEOs or talking to customers, everybody

is sort of assuming that 2009 is a tough,
tough year.

So the first question is, what can you do
in 2009?

And our sales force goes in to the customer
and says, "You need revenue now;

this is the quickest way to get revenue now."
In many cases, customers are struggling with

contractual commitments
to off line advertising, for example, where

the overall advertising budget
has been cut so dramatically that they really

don't have a lot of room.
And so there's a political dynamic that goes

within the customers.
Hopefully that'll resolve fairly quickly.

It's obviously in their interest that it does.
The other thing that's going on is that there's

an increasing willingness
to try new systems in the enterprise.

We have a set of enterprise offerings which
are around information, mail,

applications, and documents; and we've been
pleased with the willingness

of customers to now accelerate their trials.
Now, I'd like to think this is because our

products are brilliant, clever,
and wonderful,l and consistent with cloud

computing.
Another possible explanation is their budgets

are very, very tight
and our stuff is just a lot cheaper.

Either one of those is acceptable from our
perspective, because we'll earn

the right of the customer over time.
So the answer to your question is, what does

2010 look like?
A lot of that depends on what the growth rate

of the recovery will look like.
And nobody at this point knows what a global

recovery is going to look like.
But it's reasonable to expect that now that

we've gotten off of the
on line penetration, we'll get back to that.

Because the trends are still all in that direction.

>>MARY: On that cheery note, let's talk about
music videos.

>>ERIC SCHMIDT: Okay.

>>MARY: The You Tube, to me as a consumer,
is sort of like MTV was 20 years ago--

15 or 20 years ago.
You haven't monetized it yet the way you are

starting to.
There are initial signs, or I don't know how

many instances you're doing this
and where you're selling the music--either

MP3s via Amazon or I-Tunes via Apple--with
some of your most used videos.

How do you see both the artists using that
venue over the next one to two years

as they're dealing with their contracts with
the industry?

And how do you see the monetization for the
artists and for You Tube play out,

just as one example.
You may want to focus on another way that

You Tube is increasingly going
to be monetized.

>>ERIC SCHMIDT: Well, You Tube is--You Tube
is slowly getting the monetization right.

It's taken us much longer than we had hoped
to get it right.

I've always been concerned that the aggregate
monetization of on line

does not replace the lost revenue for off
line.

That's the fundamental conundrum of music
industry.

It's a potential conundrum for the video and
movie industries,

and everybody is very worried about this,
so we're working hard on that.

The music industry as a whole has the following
problem.

In the 1980s, they believe--their self view--is
that they helped create MTV,

which is a very successful property, obviously,
by giving them licenses

to music videos "too cheaply," according to
their view.

And so there's an ongoing battle, business
discussion, whatever term you want to do,

about how do you compensate the music industry
for the use of the music

in things which are promotional?
I don't know how that's going to resolve itself.

Apple, and I think you know, as you know,
I'm on the Board of Apple--

successfully has worked that out with I-Tunes,
after a lot of arguing.

And I think I-Tunes is a very positive example
of this.

We need an analogous example of the way music
videos will work on the Internet.

You Tube is very successful with music videos.
It's also very successful with sports, comedy,

and other sort of humor.
And we are working hard on longer form content

and HD content.
Because You Tube has so many viewers--literally

this huge audience--
if we can get even small amounts of profit

because of the scale,
add the big numbers really quickly.

>>MARY: Some of the obstacles in the way with
regards to getting more content

on You Tube have been the Viacoms of the world,
and then the major media companies.

>>ERIC SCHMIDT: That would be a one billion
dollar lawsuit.

>>MARY: That would be a one billion dollar
lawsuit.

Anyway, I'm not going to go down that path.
But if we look at the financial results for

those media companies
in the fourth quarter, using News Corp as

an example, they're local
TV review was down 30% plus.

They may--They, meaning--and I mentioned this
earlier today,

but the trajectory that the local TV and broadcast
TV is on is sort of similar.

It's just that you look at a chart, to where
newspapers were a year ago,

is it possible that that group of players
who have been stand-off to you

and not wanting to participate, may change
their view, simply given

that their economic situation is different
than it was before.

>>ERIC SCHMIDT: I would hope so.
And, you know, they see the same numbers that

we do, and we understand their problem.
And we are critically dependent on the creation

of this high quality content.
There's only so much user-generated video

that everybody is going to want.
And there's a real reason why professionally

produced narrative is so successful.
You know, just watch the Oscars and get a

sense of how important it is to society.
My view is that--you asked the question, if

I may answer it at the wrong order.
The right way to answer the question is, What

does the future look like?
And then, How does everybody's models adapt

to that?

>>MARY: Well, we know what the future looks
like.

>>ERIC SCHMIDT: Well, let's say it, because
I think people are often, are a little confused

about it.
The fact of the matter is that mobile devices

are going to be the majority
of the way that people get information.

And the argument is relatively simple.
You already have them.

They're called your phones.
And over the next five or 10 years, these

phones, if you just--
a simple Moore's Law calculation--will have

the capacity to do much of
the entertainment and communication and so

forth that you use in other media.
And you're seeing that today.

So you have a business model issue.
But there's not a question of how people are

going to spend their time.
So let's go through what these devices look

like.
They've got a GPS on them, so they know where

you are.
They're personal, so they know what you've

seen and they don't show you
the same thing over and over again, like my

television.
You know? The same show over and over again?

Show it just once.
It's highly, highly personal.

It can do excerpts.
And, of course, it's also summary form.

So the combination of all of that means a
huge change in the business model.

And I don't think we know exactly how that'll
monetize.

What we do know is those products are getting
built.

And so the challenge and the opportunity is
to figure out how to make money in that.

But, you won't get there by suing your end
users.

You won't get there by preventing this technology
from happening.

It's going to happen.

>>MARY: What was that again?

>>ERIC SCHMIDT: It's going to happen.

>>MARY: Two last questions from me, and Vic
did a great job on the panel

on the mobile Internet a few moments ago.
Would you be willing to opine in your lifetime

when mobile-related
revenue search might surpass PC-based revenue?

Given that we now know where the future is
going?

>>ERIC SCHMIDT: It clearly will.
It's a question of the growth rate of data-capable

mobile devices.
The reason it clearly will is that the monetization

of the ads should be higher,
because they're even more targeted.

So we have a lot of evidence, and Vic talks
about this in his speeches,

where when you have a powerful browser, whether
it's the I-Phone,

is a good example, the Blackberry now has
one, obviously the Android phones,

as they come out.
People spend many, many more searches when

they finally have a capable browser.
And so one of the things, one of the questions

is what's new
in the technology sense, as opposed to the

financial market sense,
and the development of this new, open source

browser that all these things
are based on, really does create that first

step of a whole new platform.
So how long does it take?

The answer is, a few years.
But not a few decades.

>>MARY: One last question from me, and then
I'll turn it over to others.

You have been a great partner with your revenue-sharing
agreements

with thousands or millions of other players.
You don't necessarily get the credit for it

that, in my humble opinion, you should.
But you're offering those sorts of compelling

deals to content providers.
You're offering an Android operating system

to the mobile device market.
And this goes back, it's the same question,

slightly differently,
do those offers become more compelling to

standouts in the next six to 12 months
than they have been in the past?

>>ERIC SCHMIDT: Do you mean people who have
previously said no?

>>MARY: Yep. Yep.

>>ERIC SCHMIDT: Well, I think one of the first
principles of business is that they say no

this year
and maybe they'll say yes next year.

We're working really hard to create ecosystems
that have

enough differentiation and enough innovation
that people want to play in them.

And we're also trying to do business terms
that are non-exclusive,

so that everybody has access to it.
So there's certainly no prohibition from people

doing it.
In the Android case, it was discussed at the

3GSM conference
that there are quite a few partners that have

pre-announced their intent
to offer Android-based devices of one kind--and

some of these things
look like phones but some of them are, in

fact, not phones.
And that obviously, then, creates the cycle

for more applications.
And that'll bring more people to the party.

I think people in the room here understand
how platform businesses work,

and it's fundamentally about momentum.
Can you get enough players?

Can you get enough of the pieces to go?
And if you offer a sufficiently compelling

value proposition
and a real differentiator, these things can

grow big very quickly.
I think the lesson of the Internet is that

new businesses can grow
very, very quickly when you get just the right

combination of things
and you get scale.

>>MARY: And in the mobile internet, we have
it.

>>ERIC SCHMIDT: Yeah. We clearly have had
that this year.

And, by the way, we've been waiting for years,
so we've talked about this

for a long time.
So, again, in the ‘What's New,' I think

it's finally there.

>>MARY: Who would've thought that the best
signet that could've ever happened

to the mobile Internet is that the growth
was constrained by the carriers

in their decks for so long and that it would
happen to get traction at the time

when the economy was very tough?

>>ERIC SCHMIDT: And one of the interesting
things about the carriers is the carriers

are looking
for new sources of data revenue and, you know,

you asked earlier about the netbooks?
Some of the carriers are saying, "Well, why

don't we subsidize all of these
different kinds of devices in the same way

that they do with mobile phones today?" Everybody
understands the mobile phone plans, and they're

subsidized,
and so forth, to get those things out of there.

And, again, that's another new thing that
I think will serve as an accelerant

to an already exciting industry.

>>MARY: Any questions?

>>SPEAKER: Thanks. Greg sort of crossed specific
capital.

Mary mentioned Japan as really leading in
the mobile Internet.

And I wanted to understand what you're optimistic
about in terms

of other countries that are coming along.
Certainly it's not this country.

But other countries that you think would follow
the footsteps of Japan

with mobile advertising, other revenue?
Second question is what is your venture capital

and M&A strategy going forward?

>>ERIC SCHMIDT: With Japan, we have now partnerships,
I think, with two of the three,

or the three, depending on exactly how you
define the leading mobile providers.

And the monetization is excellent.
And so when you get it right, when you have

the right ad product
and the right search product on the right

device and, of course, Japan,
the products themselves are all different.

Anyone who has spent their, tried to get your
own phone to work

on their networks, so we know that as a proof
point.

And that's been true for a couple of years.
So, we're now attempting to replicate those

kinds of deals.
The obvious prize will be China because of

the simple volume there.
There's enough growth in CPMs and, basically,

application use
and wireless data networks in China that that's

sort of the next really, really big one.
The penetration for mobile devices in Europe

is very strong,
but the economies are not so strong.

We'll wait and see what happens there.

>>SPEAKER: You mentioned--

>>ERIC SCHMIDT: I'm sorry--second question.
I apologize.

You asked a question about the venture arm
and M&A strategy.

We have largely been waiting for prices to
get better.

A lot of--the good news is we have lots of
capital.

And the bad news is we're still trying to
get everybody into the model

that we really want in terms of M&A.
And I think it'll start soon, but it's pretty

inactive right now.
Sir, go ahead.

>>SPEAKER: You mentioned in your, a few minutes
ago here, that you were

in strong support of the new increases in
the government spending

and the stimulus program.
Could you explain a little bit, perhaps, how

you expect to benefit
from the new stimulus program?

And, what do you say to the argument that
if government spending

were the answer, the Soviet Union would have
been the richest country in the world?

>>ERIC SCHMIDT: I have a very long and strong
answer to the last part of the question but,

in the interest of time, I'll say that we
benefit when our customers have jobs,

because they buy stuff.
So any solution that gets the middle class,

if you will, to feel more confident,
benefits Google--our advertising revenue,

our customers, our partners,
and our shareholders.

So, we can debate the specifics.
As you know, the current stimulus package

is--no one has ever done it
at this scale before--it's two-thirds as directed

spending and one-third
is tax credits of one kind or another, much

of which goes to the state and local governments
and for extended unemployment benefits, and

then various things
involving the AMT.

With respect to how Google would specifically
benefit beyond that,

it's more a question of how does the Internet
benefit?

And the stimulus package has on it on the
order of 20 billion of essentially

payment subsidies and credits that cause the
build out of the fast internet,

the Broadband Internet, to occur more quickly.
It also has about $20 billion in increases

in science funding,
which we believe will go into universities

that will then help with the lag.
They'll build some of the new and creative

applications that we depend on.

>>SPEAKER: In the past, you've talked about
where you were in terms of monetization

of existing properties and existing applications.
I was wondering if you could, sort of, give

us an update on where you think you are?
I mean, of the things you can control, monetization

of your properties is one of them.
Where do you think you are at this point?

What this downturn means in terms of accelerating
monetization?

Thanks.

>>ERIC SCHMIDT: There's always a danger, when
you have a web site, that you temporarily

over monetize?
In other words, that you take your page and

you fill it with ads.
And that works for a quarter or two, and then

your customers say,
"Well, heck, that's an ad page rather than

a content page."
And then they move somewhere else.

So, we at Google are roughly at our monetization,
or what we call coverage,

level, of about a year ago.
And that feels about right.

It's, frankly, a judgment.
There's some science behind it, but it's within

a range of what we have historically done.
We have looked at other properties that have

a lot of page views,
and much of the social networking things,

for example.
And they don't monetize that well.

And they don't monetize nearly as well as
text search.

So we're unlikely to do major changes there,
although we're trying a few things.

The next--another way of asking your question
is, where is the next source of revenue?

And the next source of revenue is the current
business functioning better

with better conversion, more traffic, more
advertisers, which is our core business.

The next, and adjacent, business, is a set
of display businesses

and an exchange that are being built as a
consequence

of the Double Click acquisition.
The display business is as large as the text

search business.
It's relatively balkanized?? (30:39).

It's not a uniform in any particular way.
The systems are complicated, the way the display

ads are managed,
is done, in many cases, by hand or by poor

quality spreadsheets.
So we see an opportunity to apply the Google

magic, you know,
the measurement and the scaling, in that business.

And that's probably the next big one.

>>MARY: Any other questions?
Yep, right here.

We'll move beyond the first three rows at
some point.

>>SPEAKER: Thank you.
I wanted to get your thoughts on Twitter.

There's been a lot of discussion there that
potentially it evolves

as a real time search engine, and in an un-Google-like
way,

you haven't really responded with any sort
of application or product there,

outside of, maybe, Blogger.
How do you foresee that product in the next

few years?
And is that a potential or a threat for Google?

>>ERIC SCHMIDT: We're in favor of all of these
new communications mechanisms.

Google just put up a Google Twitter site.
Google can tweet to you.

It's called At Google.
And so you can go ahead and listen to our

ruminations as to where we are
and what we're doing in 160 characters or

less.
Speaking as a computer scientist, I view all

of these as, sort of,
poor man's email systems.

In other words, they have aspects of an email
system, but they don't have a full offering.

So, to me the question about companies like
Twitter is, do they fundamentally

involve as sort of ‘note' phenomena?
Or do they fundamentally involve to have storage,

revocation, identity,
and all the other aspects that traditional

email systems have?
Or, do email systems themselves broaden what

they do to take on some
of that characteristic?

I think the innovation is great.
In Google's case, we have a very successful

instant messaging product.
And that's what most people end up using.

And having said that I think it's wonderful,
Twitter's success is wonderful,

and I think it shows you that there are many,
many new ways to reach

and communicate, especially if you are willing
to do so publicly.

We're moving to the fourth row, third row.

>>SPEAKER: Another big picture question, if
you don't mind.

You said the economy is dire, and that you
don't see a sign of a current bottom.

But, as you look around the world, do you
see many regional differences

in how badly areas are affected, and then
in general, just as a world-wide view,

how do you feel about broadband penetration
rates, especially in Latin America,

but elsewhere around the world, and whether
the economic slowdown

is going to dampen that move toward broadband
penetration in other countries

aside from the U.S.?

>>ERIC SCHMIDT: What's interesting is Latin
America is doing so well.

I was joking with my friend who lives in Mexico
that maybe Mexico

should bail out the United States.
The fact of the matter is that Latin American

economies are now
in a position of having higher growth than

many of the other countries world-wide.
I don't think we see anything different than

what's been publicly reported,
which goes something like this.

The United States, because of our economic
structure, is likely to both have

a quicker descent and a quicker recovery than
Europe.

That Europe is offset by some number of quarters,
and we believe

that all of that is true, based on the data
that we've seen.

We also believe that India and China are being
affected, but to a lesser degree,

for all the reasons that have been said publicly.
What we don't know is, what does this do to

the long term capital structure
of these economies?

I don't think anybody knows, when all of the
government stimulus is done,

and remember that the government stimulus
in crisis here is not as bad as,

for example, as what we're seeing in Britain
or, for heavens sakes, Iceland.

We don't really know what the extent of that
will be in terms of both

the nationalization questions of the institutions
of those industries,

and consumer confidence in savings rate.
There's sort of negative examples if you look

at Japan, which is,
after 13 years of recession, Japan went from

essentially a culture
that was at least interested in brands and

at least interested in
real consumer behavior as defined by America,

to a country that was
sufficiently traumatized that they are now

very, very heavy net savers,
because their economic structure and labor

markets also changed
to also favor much more at risk employment.

Those are big changes if you're Japanese.
And I don't think anybody knows to what degree

that will affect the United States.
My personal view, and I've said this very

strongly, is that Americans
love their credit cards.

And that if you think about what we have to
do in our country,

we basically have to solve the credit problem,
we have to get the job situation

at least stable so people are not afraid of
losing their jobs,

and we have to do something about the housing
crisis.

All of those issues are being worked on now.
When those things are done, it's a reasonable

bet that Americans
will go back to what we do best, which is

to spend money.

[laughter]

>>MARY: Just one non-Google question, Eric.
This question made me think of it.

You talked about the stimulus package, and
as consumers on Wall Street,

we don't see a lot of the impact of the stimulus
package with any immediacy,

but that's not the point.
The point, or that's not the question.

On the academic side, the institutions that
are going to get some

of the spending now--have a good sense of
when they're going to get it.

But who's going to get it?
They're prioritizing--they're really excited.

You grew up in your business career in Silicon
Valley.

You grew up in an industry and with a company
son that might not have existed

but for government funding and AT&T support,
and I'm stretching the facts

here a little bit to make a different point.
Are you confident, given what you've heard,

given where you've been
over the course of the last several weeks,

that the American economy
will see some good things come out of that

directed spending that is going
into academic institutions, as unlike what

we have seen in a very long time?

>>ERIC SCHMIDT: I am, and I think there's
a lot of reasons to be very optimistic.

I know everybody is sort of depressed when
you read the headlines

and watch the television, and so forth.
But, the American story is a story of innovation.

And the system of universities that we have,
the young founders

that come out of universities that form great
companies, the ability

to do quickly the capital formation and the
venture industry,

and so forth, is unparalleled.
If you look at where jobs come from, they

come from the private sector.
And high-paying jobs come from people who

work in knowledge-intensive
industries that are sophisticated, or very

high in manufacturing jobs.
So it seems obvious to me that part of the

way to get this fixed for the longer term,
and I'm not talking about the regulatory failures,

which is another separate
and long conversation.

It's to make sure that the necessary pre-conditions
are present for entrepreneurs

and existing businesses to either re-use existing
capital plants to build,

for example, the classic example here is batteries
for hybrid cars

in the United States, as opposed to in Korea
and in Germany.

And, basically, get those jobs in the United
States.

That's ultimately the answer to all of the
incessant criticism

that you hear about jobs moving to India and
China, and service wages,

and so forth and so on.
It's ultimately about the extraordinary asset

that we have in our universities
and our research labs to, essentially, create

the next Google.
And not just in our industry.

>>MARY: We have time for one more question.
Yeah, go ahead.

Eric will repeat it.

<[inaudible] that you talked about.

What are the three things that need to happen
for it to become

a material part of your business?

>>ERIC SCHMIDT: The question was what are
the three things that needs to get done

to become a material part of our business?
Let me answer your question without the word

‘material' in the middle of it,
because ‘material' has a very specific

meaning.
The first problem, if you're a display--if

you have essentially a display property--
you know, you want to sort of show ads, it's

very difficult to figure out
which ad to show.

Because there are multiple vendors who show
you these ads.

And we're in the process of building the equivalent
of an ad exchange,

which will allow you to do that automatically.
You do it with scientific measurements.

So, today what people do is they use heuristics.
And the heuristics in that space are terrible.

The second issue in display has to do with
standardization of ad formats.

So, again, here you are--you have a property,
you have a place for display.

And there's not agreement at the level that
it needs to be on the standardization

of the delivery of the display.
And especially around interactive and video

ads.
If you think about it, the future of display

ads is not a static picture,
but rather an ad that brings you in--that

tells you a narrative.
The best ads add real value to the consumer's

experience.
We take the view that ads are valuable if

they're targeted and are information-rich.
And the most information-rich, by obvious

argument, is something
which involves video and a story, and a narrative,

and more references.
And the technology will enable the creation

of those.
And then the third, in our case, is the construction

of the business relationship
with the large advertisers we're still working

on.

>>MARY: If there's a 10 second question and
a 20 second answer, fire away.

has been [inaudible]…
You're potentially on the horizon to have

a consolidation of searches
if two competitors merge with a much better

capitalized capital structure.
How do you see any potential impact should

Microsoft and Yahoo come together,
given you started off the conversation talking

about consumers can be fickle
switching search engines?

Thanks.

>>ERIC SCHMIDT: I don't know if that scenario
will occur.

We did our best attempt at a deal with Yahoo,
and as you know,

we had to cancel it at the very last minute.
We wish them the best of luck.

And Carol is a fine and able CEO.
What do I really think will happen here?

I think that the problem has to do with Microsoft's
ability

to use its Windows monopoly to restrict consumer
choice.

That's not a new subject.
It's been discussed at great length.

So anything that Microsoft would do that would
eliminate consumer choice

with respect to search engines, Internet browsers,
distribution--

for which it was previously found guilty--are
of concern.

And there's a history of that.
So that's what we worry about.

I think as long as the technologies are competing
on a fair to fair basis,

I think that's great.

>>ERIC SCHMIDT: Well, thank you.

[applause]