Digital Media

In a move that comes as little surprise, Apple announced Monday that Google CEO Eric Schmidt is resigning from its board of directors.

"Eric has been an excellent Board member for Apple, investing his valuable time, talent, passion and wisdom to help make Apple successful," Apple CEO Steve Jobs said in the release. "Unfortunately, as Google enters more of Apple's core businesses, with Android and now Chrome OS, Eric's effectiveness as an Apple Board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest. Therefore, we have mutually decided that now is the right time for Eric to resign his position on Apple's Board."

Google CEO Eric Schmidt

(Credit: Elinor Mills/CNET News)

Schmidt had been on Apple's board for almost exactly three years, since August 2006.

In May, Google confirmed that the Federal Trade Commission (FTC) was planning to hold discussions concerning potential conflicts of interest related to Schmidt's presence on both companies' boards of directors. Google's chief legal officer, David Drummond, said at the time that Google did not believe there was a problem with the situation.

Schmidt has said repeatedly that he recused himself from Apple board discussions pertaining to areas in which the companies' interests overlap--the iPhone, for example, given Google's work on the Android operating system for smartphones. But the similarities grew more difficult to reconcile when Google announced the development of its Chrome operating system, which will compete directly with Apple's OS. (The companies already own competing Web browsers, Apple's Safari and Google's Chrome.)

Last month, Schmidt said that he was planning to discuss the future of his role on Apple's board given the advent of Chrome OS.

More recently, potential competitive turf became evident when Google's third-party applications for the iPhone--which comes preinstalled with Google Maps--started to get well-publicized scrutiny from Apple. Google's location-aware service Latitude, for example, has been restricted to a Web-based app rather than an installable one, and a Google Voice telephony app was outright rejected by Apple.

Last week, a report surfaced that the Federal Communications Commission had sent letters of inquiry to Apple, Google, and iPhone carrier AT&T concerning the blocked app.

The Federal Trade Commission, meanwhile, is also looking into the relationship between Apple and Google. On Monday, the FTC said it would continue that inquiry even with Schmidt's departure from Apple's board.

"We have been investigating the Google/Apple interlocking directorates issue for some time and commend them for recognizing that sharing directors raises competitive issues, as Google and Apple increasingly compete with each other," Richard Feinstein, director of the FTC's Bureau of Competition, said in a statement. "We will continue to investigate remaining interlocking directorates between the companies."

Last updated Tuesday at 4:38 a.m. PDT with FTC statement.

Google CEO Eric Schmidt confirmed speculation that his company had been considering the possibility of acquiring a newspaper, the Financial Times reported Wednesday.

CEO Eric Schmidt

(Credit: Google)

However, in the same interview, Schmidt quickly added that the company has since decided against the idea because potential acquisition targets are either too expensive or have too many liabilities. Schmidt said Google was "trying to avoid crossing the line" between technology and content and was instead working with struggling publishers to make their Web sites "work better" for online advertising, according to the story.

Schmidt also dismissed what he called "clever ideas" suggested about sheltering newspapers in nonprofit structures through the Google.org foundation. "They are unlikely to happen without some massive, massive set of corporate bankruptcies," Schmidt told the Financial Times.

Two reports earlier this month--by Fortune and The Washington Post--suggested that Google has been talking to both The New York Times and the Post about possible areas of collaboration, or even investment. Schmidt's statements to the Financial Times suggest it was more the former than the latter.

Of course, given the contentious history between Google and traditional news outlets, which have never liked the idea of the search giant making money off their content without paying for it, the idea of Google buying a paper had some scratching their heads. Then again, Google does have deep pockets and a keen interest in the health of the news business when it comes to generating online content.

Is anyone else reminded of the adage, "Why buy the cow when you can get the milk for free?"

MOUNTAIN VIEW, Calif.--Google shouldn't be surprised to face government scrutiny as it continues to grow.

CEO Eric Schmidt held court on a wide range of topics Thursday at Google's annual meeting.

(Credit: Google)

At least, that's what CEO Eric Schmidt thinks. In a wide-ranging discussion with reporters prior to Google's annual meeting at the company's headquarters, Schmidt deflected questions about reported government inquiries that have surfaced in past weeks by saying "we should expect governments around the world to pay attention to what we do, and hold us to the principles that we've articulated."

The Department of Justice is reportedly looking into Google's settlement with publishers over the rights to display book content online, which Schmidt called a "historic" agreement. And Google confirmed that the Federal Trade Commission wants to talk to Google about Schmidt's role on Apple's board of directors, which could be seen as a conflict of interest given Apple's iPhone business line and Google's Android project.

Schmidt said such scrutiny is to be expected as Google expands its reach into areas that were previously the domain of other interests.

"We continue to believe the mission of the company is important, even if there is pressure from other industries. (But) we are more careful about when and how we do things that are going to raise the concerns of any party," he said. Rachel Whetstone, Google's vice president of public policy and communications, has been leading efforts in this area, he said.

Other items discussed during the day:

• Susan Wojcicki, vice president of product management, said Google is looking hard into ways to make money off social-networking services, as there there has been an "explosion" in potential ad inventory. "We believe there are ways to monetize it over time, but it will be different from search because the nature of intent is different."

• Fresh off her trip to Washington, D.C. to testify before a House subcommittee, Marissa Mayer, vice president for search products and user experience, said Google is looking at how news coverage will evolve in the future, including possible changes to the way news stories are presented. Mayer is also in charge of thinking of ways to improve the relevance of "microblogging" (read: Twitter) into both Google's regular search results and blog search, she said.

• Speaking of Twitter, Schmidt said that Google was "waiting for the right opportunities at the right price" when it comes to making acquisitions. Twitter, of course, has been the subject of countless rumors regarding acquisitions from the likes of Google and, most recently, Apple.

• Schmidt declined to comment on the possibility of Android Netbooks, such as appeared to surface earlier this week with regards to Dell. But he did say that he believes "the Netbook phenomenon looks very real," and that it fits well into Google's notions of cloud computing.

Correction at 2:50 p.m. PDT: This story initially misquoted Kent Walker. He confirmed that Google was aware of a "pending FTC discussion" into Schmidt's board seats.

MOUNTAIN VIEW, Calif.--Google confirmed that the Federal Trade Commission plans to hold discussions with the company over a possible conflict of interest due to CEO Eric Schmidt's participation on both Google and Apple's board of directors.

In response to questions posed by reporters during a lunch meeting with Google executives--including Schmidt--Google vice president and general counsel Kent Walker confirmed that Google was aware of a "pending FTC discussion" into Schmidt's board seats, which was reported earlier in the week by The New York Times.

Google does not believe Schmidt's role on Apple's board presents a problem, and encourages company members to participate on boards, said David Drummond, Google's chief legal officer and senior vice president for corporate development.

Schmidt reiterated that he recuses himself from discussions inside Apple that involve areas in which the companies overlap, such as the iPhone. When asked if he recuses himself from any other discussions inside Apple, he said "not that I recall."

It took awhile, but the recession has definitely sunk its teeth into Google's financial performance.

"No company is recession-proof. Google is absolutely feeling the impact," Google CEO Eric Schmidt said in a conference call Thursday after reporting first-quarter financial results.

Google's revenue growth rate has been slowing, but for the first time since it went public, the company's quarter-to-quarter revenue declined. (Click to enlarge.)

(Credit: Google)

The company, as is customary, reported results that most business only dream of, recession or not. Its net income grew 8 percent to $1.42 billion and its revenue, excluding commissions paid to advertising partners, grew 10 percent to $4.07 billion. It generated free cash flow of $2 billion for the quarter, the vast majority of it derived from money advertisers pay Google when people click on ads next to search results.

But everything is most definitely not coming up roses. Google's revenue, after ascending steadily quarter after quarter, peaked in the fourth quarter and declined 3 percent in the first quarter. Google's business is still relatively strong, and it's been hit by the recession less than many in the tech world, but it's been hit nonetheless.

Curtailed clicks
Why? In short, because people are buying less and advertisers consequently are advertising less. As an Efficient Frontier study released earlier this week showed, advertisers are getting more conservative by bidding for search terms where there is a proven return on investment (ROI).

Here's Schmidt's explanation, including his assertion that the company's overall business of showing ads next to search results is still intact:

Users are still searching, but buying less. What that means is the ads are converting less. There's more window- and comparison-shopping, purchasing lower-priced goods. In other words, users are doing the right thing. They're doing what you'd expect them to do given the enormous economic changes around us.

Advertisers are still spending, but they're lowing their bids to manage their ROI. They're behaving correctly in our view. One way to say that is our advertising model is working. The user and advertising behavior we're seeing is entirely rational, and the auction model is working for both.

In short, Google Chief Economist Hal Varian's "Wal-Mart effect," in which people under financial pressure would steer more of their purchasing behavior through search engines in an attempt to get the best deals, has its limits.

Creeping pessimism
To put this in context, let's retrace some history over the previous four earnings conference calls. The company's statements have grown gradually more pessimistic:

First quarter 2008: "We've looked at this really carefully, and we do not see an impact as of this time," Schmidt said. "We're well positioned should economics change. We continue to do well because our model is so targeted, and targeted (advertising) does well in most scenarios."

Google CEO Eric Schmidt

(Credit: Stephen Shankland/CNET)

Second quarter 2008: "Despite the weakness in the economy, advertising revenue seems to be holding up remarkably well in most sectors. I think this illustrates the point that we have made several times: during periods of slow economic growth, the last thing an advertiser wants to cut is its spending on search-based advertising," said Google chief economist Hal Varian.

Third quarter 2008: "It's clear the economic situation is so fluid that we're all in uncharted territory...It's clear the global economic situation is worse than predictions just a month ago," Schmidt said, and Varian added, "When there is a recessionary event, and people are counting pennies and researching purchases, this potentially has an upside for Google...We think this kind of effect could work to Google's benefit potentially."

Fourth quarter 2008: "In some ways, the fourth quarter was the easy part," Schmidt said, when the economy was in "uncharted territory. Now it's clear we're in recession. We don't know how long this period will last. We're certainly prepared to get through this (with) no problem."

So yes, Google has been getting more cautious about the economy and its effects, but Thursday's assessment was the most sober by far. In contrast, other companies including Yahoo saw these effects sooner and issued cautionary statements earlier.

Through a Google lens darkly
One curiosity about the timing disparity is that Google, through analysis of search activity through what the company calls the "Google lens," has a view on the economy most other companies lack. Where a business such as Proctor & Gamble has to look at sales data and surveys to project consumer sentiment, Google can look directly at what people are searching for.

Searches on "bankruptcy" increased 53 percent in the last year, and those for "unemployment" more than doubled, said Jonathan Rosenberg, senior vice president of product management.

So what comes next? Google clearly isn't done with search advertising, and there are plenty of opportunities for more money: Google can improve search results overall, drawing ever more search traffic. It can show ads more often, as long as it maintains the quality standards to avoid showing irrelevant or inappropriate ads. It can draw more advertisers to search advertising, increasing the bidding for search terms.

And of course, the company is working on any number of other projects, from closely aligned ones such as ads on image search results, to more distant ones such as graphical "display" ads on YouTube that are targeted at users based on their Web-surfing behavior, to remote ones such as charging subscriptions for online office productivity tools. Such areas are subsidized by search results today, but there could come a day when they stand on their own.

Even though the recession's teeth took a bite out of Google's results, even though Google has trimmed a number of projects that didn't pass muster, and even though the company's employee count actually dropped for the first time, the company still has plenty of money to invest in its other areas.

"We think Google is now well placed for the recovery as it occurs It appears (advertisers') shift to online ROI...is outpacing, on a relative basis, any on loss of economic activity. We benefit from that," Schmidt said. "Our priorities remain unchanged. Basically, long-term growth."

Google's revenue growth rate has been slowing, but for the first time since it went public, the company's quarter-to-quarter revenue declined.

(Credit: Google)

Buoyed by continued growth in search and by cost cuts, Google reported better-than-expected profitability for the first quarter of 2009.

Google's net income increased 8 percent annually to $1.42 billion for the quarter ended March 31, the company reported Thursday. Revenue increased 6 percent to $5.51 billion, but excluding commissions paid to advertisers (called traffic acquisition costs), revenue increased 10 percent to $4.07 billion.

On average, analysts surveyed by Thomson Reuters had expected revenue excluding commissions of $4.085 billion, a bit more than what Google reported. However, the company cleared the earnings forecast as it did in the fourth quarter with earnings per share of $5.16 compared to the $4.93 expected once various charges were factored out.

"Google had a good quarter given the depth of the recession--while revenues were down quarter over quarter, they grew 6% year over year thanks to continued strong query growth. These results underline both the resilience of our business model and the ongoing potential of the web as users and advertisers shift online," Chief Executive Eric Schmidt said in a statement. "Going forward, our priority remains investing for the long term to drive future growth in our core and emerging businesses."

Google makes money when people click on ads next to search results, so search volume growth is central to the company's business. So is the number of times people click, and that figure increased 17 percent from the year-earlier period, Google said.

"Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 17 percent over the first quarter of 2008 and increased approximately 3 percent over the fourth quarter of 2008," the company said.

Google been restraining its exuberant experimentalism, cutting several projects that weren't performing up to snuff. That included not just online services such as Dodgeball but also potential revenue-generation engines such as print and radio ads.

And it's cut hundreds of employees through the process--nearly 200 in sales and marketing, 100 recruiters, 40 in a radio ad project, and an undisclosed number of contractors.

Google's revenue increased yearly but decreased compared to the most recent quarter for the first time. It's not the only ascending curve to start dipping though: Google also for the first time had fewer employees, trimming head count from 20,222 in the fourth quarter of 2008 to 20,164 in the first quarter of 2009.

Google CEO Eric Schmidt

(Credit: Stephen Shankland/CNET)

Update 2:25 p.m. PDT: On a conference call to discuss the earnings results, Schmidt spoke in sober tones while touting his company's overall performance.

"No company is recession-proof. Google is absolutely feeling the impact," Schmidt said.

For one thing, people are still searching, but they're doing more window-shopping and comparison while buying less, Schmidt said. And advertisers are pulling back to bid more on search keywords that produce a stronger return on investment, which means bids in the keyword auctions are generally lower.

Overall, though, the company's business model is healthy, according to Schmidt. "We think Google is now well-placed for the recovery," he said. "The shift to online gives us a real advantage."

He made no economic forecasts about the future beyond cautioning that Google's second and third quarters are typically seasonally slower. Regarding the economy, he said, "we're still basically in uncharted territory."

Google also said that longtime executive Omid Kordestani, senior vice president of global sales and business development, is stepping down to become a senior adviser. He's being replaced by Nikesh Arora, currently president of international operations.

Google has a short message for those wondering whether the search giant will soon buy micro-blogging site Twitter: "unlikely."

That was Google CEO Eric Schmidt's response Friday when queried on the topic during a wide-ranging interview with journalist Charlie Rose. Schmidt said:

I shouldn't talk about specific acquisitions. We're unlikely to buy anything in the short term partly because I think prices are still high. And it's unfortunate I think we're in the middle of a cycle. Google is generating a lot of cash. And so we keep that cash in extremely secure banks.

Rose didn't press Schmidt for more perspective on the micro-blogging site. But earlier in the week during an on-stage chat at the Morgan Stanley Technology Conference in San Francisco, Schmidt called Twitter a "poor man's" e-mail system. "They have aspects of an e-mail system, but they do not have a full offering," he said at the conference.

"Twitter's success is wonderful and it shows you that there are many, many ways to reach and communicate, especially if you are willing to do so publicly," he said that day while touting the success of Google's instant messaging system.

However, Schmidt's comments to Rose about the merger market echo sentiments he expressed during the Morgan Stanley conference: Google will be ready to make a deal when the price is right. "The good news is we have lots of capital," Schmidt said at the conference. "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."

Schmidt wasn't asked to describe his ideal model and he didn't volunteer to elaborate.

"Poor man's" e-mail aside, if Schmidt is interested in buying Twitter, does he think he can cut a bargain-basement deal? Twitter has already turned down an offer from Facebook reportedly worth $500 million.

During the rest of his hour-long interview with Rose on Friday, Schmidt discussed Google's origins, how the company arrived at its advertising business model by accident, and his view of future technologies--such as a TV revolution in which Android-powered devices tranform into televisions.

TechCrunch has printed a full transcript of the interview with Rose.

(Credit: Dan Farber/CNET)

Google CEO Eric Schmidt expects 2009 to be a "tough, tough" year and he warned that the search giant is "not immune" from the worsening economy.

The search giant's chief touched on a wide variety of topics and, specifically, how they affect Google, during an on-stage chat with tech analyst Mary Meeker during the Morgan Stanley Technology Conference held Tuesday in San Francisco. But he focused mostly on the economy, calling the current climate "pretty dire" and adding that he doesn't expect it to improve until next year.

"It obviously will affect the online advertising market because our systems are so tightly tuned. If customers are buying less, it will eventually be reflected in CPCs and CPMs," he said, referring to cost per click and cost per 1,000 impressions, respectively. "We are not immune to this."

Schmidt also said that Google "was pretty inactive right now" on the mergers and acquisitions front, blaming unfavorable prices.

"The good news is we have lots of capital," Schmidt said. "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."

When asked about Twitter during an audience question-and-answer session, Schmidt said Google "was in favor of all these new communications mechanisms."

"Speaking as a computer scientist, I view all of these as sort of poor man's e-mail systems," he said. "They have aspects of an e-mail system, but they do not have a full offering."

"Twitter's success is wonderful and it shows you that there are many, many ways to reach and communicate, especially if you are willing to do so publicly," he said while touting the success of Google's instant messaging system.

Schmidt also had kind words for Yahoo CEO Carol Bartz, who also appeared at the conference, calling her a "fine and able CEO."

Google's name is on the lips of music industry powerbrokers.

The top music labels are seeing big music sales from Google's G-1 mobile phone.

(Credit: CNET Networks)

For several years, YouTube has been a disruptive force in film and television. Now music poobahs are wondering what designs Google may have on their businesses. Three of the four largest recording companies are in talks to renegotiate music-licensing deals with Google's YouTube. Sony Music is very near to inking a YouTube agreement, say my industry sources. Meanwhile, YouTube has reportedly started to generate "tens of millions" for some of the labels.

At the same time, the music store Amazon.com created on Android, Google's mobile-phone operating system, is leading to big music sales. Google declined to provide numbers or to comment for this story, but my sources say that the labels are "very happy" with Android's songs sales. In addition, Google could one day tap into a huge market by helping people discover and buy music using search, according to Susan Kevorkian, an analyst with research firm IDC.

For example, Google could post "click-to-buy" links when someone keys a song title into Google's search engine, Kevorkian said. The company could also conceivably use its search engine to suggest songs or alert people to local music events.

Incredibly, Google CEO Eric Schmidt, a lifelong technologist, could find himself becoming an accidental music industry titan, a sort of digital-age David Geffen or Ahmet Ertegun. Google, of course, has many challenges ahead of it before executives there wield that kind of influence. Geffen and Ertegun, after all, were two of the most powerful label bosses ever.

No one is saying, of course, that Schmidt will be hanging gold albums on his office wall or moving to Hollywood. For one thing, Google isn't in the business of promoting talent or producing records. For another thing, the company hasn't produced the kind of revenues that would put it on par with the likes of iTunes or even Amazon, according to one music industry source.

Not only that, Google at this point doesn't possess the licensing rights to the music libraries from all four major labels. YouTube and Warner Music Group failed to reach a new licensing agreement and Warner's content has been removed from the site.

But in terms of influence, matching what the old record moguls accomplished isn't that hard to imagine.

Google's a powerful music distributor
Let's start with YouTube. Worldwide visitors to the site now number more than 100 million per month. Of the top 20 all-time most viewed clips at the site, 12 of them are music videos. The most watched YouTube channel belongs to Universal Music Group, the largest of the four top record labels. And YouTube has become one of the most popular ways to share music legally.

Google's appeal as a digital jukebox is first that it's free of charge to users and that many people are so familiar with the site. The site enables fans to embed songs on their blogs or Web sites and provides an easy and legal way to share music. If someone wants to send a song to a friend, they can just e-mail a link to the song's YouTube video.

YouTube is trying to capitalize on the popularity of music videos by posting click-to-buy links near the videos that lead to Amazon or Apple's iTunes. Google declined to provide sales numbers for the ads.

Google's G-1 cell phone could become an even more powerful music platform than YouTube--that is if the phone continues to attract consumers.

Studies show that sales of mobile music will skyrocket in the next two years. Songs purchased via handsets will reach $7.3 billion by 2011, nearly equal to that of digital downloads, according to a report from eMarketer. Together, they are expected to make up 56 percent of total music sales.

More than 1 million G-1 units were sold in 2008, the year it was launched. Apple has raised its mobile music stake by enabling iPhone owners to download music via cellphone networks.

This is all mostly good news for the major labels. They need to find new distribution models as record stores disappear. They need competitors to iTunes, which has become too powerful for some in the music business. They need to have a strong presence in mobile music sales.

Google needs to drive more music revenue
Where things could get sticky for the labels is if they hand too much power to Google. They don't want Schmidt to be able to dictate to them the way that Apple CEO Steve Jobs (registration required) has for the past few years.

For Google, one of the main challenges is executing a new music ad model. Two music industry sources say that Google has done only a lackluster job of selling ads against music videos and other label content. Another hazard is in negotiating with the labels.

For example, Warner Music pulled out of talks with YouTube after Google reps declined to fork over upfront money, my music sources said. All three of the other labels receive advances but Warner doesn't. The reason is Warner agreed to forgo an advance back in 2006 when it signed its original deal and YouTube wants to maintain those terms.

Of course, there's Apple. Anybody selling music, either downloads or the ad-supported kind, must consider Apple their biggest competitor. Apple's iTunes appears on pace to sell 2 billion songs a year.

Perhaps the biggest question is whether anybody wants Google to have a grip on videos, music, news, books, photos... all our media?