March 26, 2001 3:00 PM PST

Novell's Schmidt joins Google at critical time

Novell's outgoing chief executive Eric Schmidt said Monday that he has invested an undisclosed sum in Web search engine Google and signed up for a part-time gig as chairman of the up-and-coming company.

Google co-founder Sergey Brin, 27, will relinquish his chairman title, although he will remain as president. Co-founder Larry Page will remain in his role as chief executive.

Analysts said Monday's announcement indicates that the closely held company is beginning to leave behind its image as an immature dot-com.

"Now, more of a core business person is running the show, rather than a technologist," said Rob Lancaster, an analyst at the Yankee Group.

The appointment comes at a critical juncture for both Schmidt and Google.

Two weeks ago, networks software provider Novell acquired a new chief executive with its purchase of Cambridge Technology Partners. The $266 million deal will hand the reins to Cambridge Tech President and CEO Jack Messman, with Schmidt hanging on to roles as chairman and chief strategist.

Meanwhile, privately held Google is weathering an industrywide storm of doubts over the effectiveness of online advertising and fresh demands for companies to show profits. Despite the sharp downturn in the fortunes of online companies in general, Google has been steadily gaining traction for its search technology and is now poised to post its first profit, according to executives.

"We thought that several quarters ago that we would be profitable this year, and we still think so," Brin said.

The new head of Google's board will play a significant role in the search company, but it is unclear if Schmidt will have operating responsibility. A Google representative said the company has not announced any plans for him to take a more day-to-day role. Those details will likely come once his departure from Novell's CEO post is final, pending the closure of the Cambridge Tech acquisition.

Schmidt may be eager to associate with a less-entrenched company such as Google. He had traversed a rocky road as chief executive at Novell, briefly laying a smooth path for a renaissance at the aging network software provider before succumbing to strategy issues that have plagued it for years.

The former Sun Microsystems technology guru came to Novell in early 1997 in the hopes of making the company's software Internet-friendly. The company has fallen on hard times in recent quarters, however, as new products have been slower to take off than expected.

At Google, Schmidt joins a board composed of some of Silicon Valley's most influential powerbrokers. Along with Google's Brin and Page, venture capitalists John Doerr of Kleiner Perkins Caufield & Byers and Michael Moritz of Sequoia Capital sit on the board. Former Amazon.com executive Ram Shiram is also a member.

Schmidt also sits on the boards of Siebel Systems, Integrated Archive Systems and Tilion.

Google ogles profits
Founded in 1998, Google has gained popularity primarily through word of mouth for its no-nonsense search technology, which ranks its results based on how many sites link to a particular site. For example, a search for "real estate" results in a list of sites topped by an online real estate library, followed by Realtor.com.

Compared with other search services, Google is sitting pretty, analysts say.

Because it's not concerned with becoming a destination site like Yahoo or others, the company can focus on its search technology, which is noted in the industry for its speed and accuracy, according to analysts. AltaVista, with its newly refocused emphasis on search technology, may go head-to-head with Google on licensing deals, but analysts say Google has the superior product.

"They're doing extremely well. The best way to look at them is by the major customers they've won, such as Yahoo," said the Yankee Group's Lancaster. He added that the company has gained some of its advantages by maintaining marketing costs.

One challenge Google faces, Lancaster noted, is its lack of search technology for audio and video files, an area he predicts will become highly competitive in coming years.

Google's business model, which hinges on advertising sales and licensing its search services, is gathering steam while other dot-coms are choking on fumes from an online advertising slowdown.

Going against the grain, the company has been one of the few to eschew banner ads on its home page in an effort to maintain its easy-to-use search service. Selling only text-based ad space, the company targets messages to specific keyword searches, placed in either a "premiere," top-of-the-page location or in boxes running the length of the search pages.

Through its Adwords program, the company charges customers $8 to $15 per 1,000 impressions for placement in eight positions alongside its search results. Unlike competitors such as GoTo.com, however, Google does not allow marketers to influence its search result rankings.

According to Google, such spare ads pack a punch, garnering "click" rates "four to five times higher" than traditional banner advertising, which typically only draw five of 1,000 Web surfers to click on an ad, according to the company. They can also be ultra-convenient for advertisers because the creative details can be changed easily and can be purchased without the help of an ad sales staff.

To ensure such high rates for the premium ads, Google employs a handful of ad sales pros, called "maximizers," to tweak ad copy when it's not performing well.

"Even with a dot-com advertising slowdown, our ad program is doing well because ad buyers are focused on their return on investment," Google's Brin said. "There are certainly a lot of companies that are reducing their online advertising budgets, but not with us. They're spending more of their budgets with us.

"Knock on wood, I guess," he said.

The company has also signed deals with more than 100 customers to use its search service. For example, Google powers the search feature on Yahoo, the Web's most-visited site. Through such deals, sites pay Google per search, typically after a volume of searches have been bought. The Yahoo deal alone pulls in "on the order of a couple of million (dollars) per quarter," said Brin, noting that licensing deals comprise a little less than half of the company's income.

In addition, Google performs searches just for company Web sites, including Cisco's Web site. It has also made great strides to deliver its search pages to wireless devices. Last month, Google said it would support NTT DoCoMo's wireless Web service, I-mode, which has about 19 million wireless subscribers. The search service has done the same for WAP (Wireless Application Protocol), the language used by mostly North American phone customers to view Web pages.

Brin said the key to the company's success has been its frugality in marketing spending and the quality of its site. While other Internet companies were spending $100 million on ad campaigns, Google spent $1 million on targeted marketing last year, Brin said.

"The way we attract users to our site just through the quality of our site, and we've spent almost no money on marketing," he said, adding that Google performs 70 million searches per day primarily through word of mouth.

Despite the company's positive financial outlook, Brin said a public offering isn't on his mind right now.

"It's a good time to be private, but some time we might have (a public offering). It's nice to have a company where people aren't all concerned about stock price," said Brin.

News.com's Ben Heskett contributed to this report.

 

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