Refreshing Google

Managers of silicon valley’s tech start-ups are famously flexible and entrepreneurial, able to change products, tactics, people and markets as they would their socks. If they wore socks. Then at some point their firms grow up to be large and profitable, and they struggle to maintain their advantages as ever newer technologies allow competitors to blossom.

It’s not unusual. Google’s soon-to-be-former CEO Eric Schmidt ran into it at Sun Microsystems in the 1990s. Tech companies can grow so complicated that even updating the soup menu at the cafeteria takes a committee. You end up with porridge that passes for policy or product development. It has happened to IBM, to HP, to Microsoft and even — gasp — to Apple.

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Google is wary of the dreaded Big Tech sclerosis. That’s one of the forces propelling the chair swapping that is happening at the top. A Google co-founder, 38-year-old Larry Page, will return to the chief executive’s job he surrendered in 2001, while Schmidt, 55, who has run the company since then, will become executive chairman. “Adult supervision no longer needed,” Schmidt tweeted about the change. He will instead do what executive chairpersons do, which is show up whenever asked and try to be helpful.

The curious thing about Schmidt’s instantly famous tweet is that adult supervision may be exactly what Google needs — just a different kind from what he’s been asked to provide in the past decade. Ten years ago, the company faced down Yahoo!, an early search leader with a similar business model but less attractive technology. Now the competition includes white-hot firms like Facebook as well as a host of other new social-networking businesses. Google needs a boss who can multitask while protecting the core business. “Larry is ready,” Schmidt said at the company’s fourth-quarter analysts’ meeting. “His ideas are very interesting and clever. It’s time for him to have a shot at running this.”

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Google’s numbers would seem to give Page a healthy cushion to experiment. The company just racked up a 27% increase in fourth-quarter profit, to $2.5 billion. Sales increased 26% to $8.4 billion — a 30% net profit margin at a firm that still provides free meals, massages and yoga classes for its employees. Google still rules search, with a 66% market share, despite a fierce counterattack from Microsoft’s Bing. That particular business is a money fountain that splashes more than $10 billion in operating profits annually. It provides cover for Google to try a lot of other things and make a lot of mistakes — and the firm has, in everything from mobile technology to operating systems.

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Google is a great admirer of its neighbor Apple, where tyrant in chief Steve Jobs, now on medical leave, returned in 1997 to a company in crisis and created an obsessively creative, consumer-product-driven culture. But Google can’t afford to dedicate itself relentlessly and exclusively to its core business of search. That’s risky, given growing competition and slowing sales in that area. Instead, it is looking a bit more like Microsoft, which churns away at new products without producing many hits. “The problem for me as an investor is that Google looks a little too like last year’s model,” says Keith Woolcock, founder of 5thColumnIdeas, a technology research firm. “It’s the chicken in the sandwich — Apple and Facebook are on the opposing sides. Google is in the middle. Really, it looks to me as though it has become the Microsoft of its generation: big, bad and quickly becoming irrelevant.”

Google irrelevant? The argument is that in a more app-driven world, your need for a Web interlocutor to get what you desire diminishes. The Web becomes more like cable television. Your smart phone or tablet or PC functions more like a remote: you click on the station or app you want and bypass Google. Search will always be important, but less so.

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Like Microsoft, as Google has developed nonsearch businesses, it has found the going more difficult. Its Android mobile operating system is overtaking iPhone among new smart-phone users, but it won’t be a money spinner. Chrome, its operating system designed for Web applications on PCs and tablets, has only 14.9% market share. And Google Buzz, which lets Gmail users share photos, links and opinions more broadly, has so far whiffed at the biggest wave on the Web, “social.” Investors see more upside in Facebook. Groupon, the sizzling social-network-powered discount shopping site, recently told Google to shove its $6 billion buyout offer.

Page’s Social Challenge
Page says Google is just getting going in social: “If you think about the next five years of what your life will be like online, socially, and what kinds of things, the tools we’ll be able to do, we are only at the early, early stages. I’m incredibly excited about the possibilities.” But in a broader sense, Google has to manage an issue that Stanford University business-school professor Charles O’Reilly labels ambidexterity — competing in both core and innovation markets simultaneously. This is a treacherous mission that many companies gag on. Kodak, for instance, anticipated digital photography but couldn’t capitalize on it. But there are many others that have spotted market adjacencies and moved into them. Cisco, a hardware firm, now does teleconferencing, e-tailer Amazon is into Web hosting, and Netflix has branched out to Web streaming. Google is trying to make these sorts of leaps too but so far hasn’t figured out how to generate searchlike profits on offerings such as YouTube, Android and Chrome.

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Still, if you accept the idea that Google needs a CEO who is better at exploring than exploiting, Page has those credentials. “Larry will now lead product development and technology strategy, his greatest strengths,” Schmidt noted in his message announcing the change. Page is, after all, the guy whose PageRank algorithm (developed with Sergey Brin while they were Ph.D. candidates at Stanford), which ranked websites by page visits, set Google in motion. A computer-science geek to the very core, he also displays some of that species’ less admired attributes: he’s known to be impatient, introverted and curt to the point of rudeness in conversations. Don’t expect much cheerleading.

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Page has said he wants Google to run more like the start-up it once was; he’s enamored of the Skunk Works — type projects that produced Android, for instance. Start-ups are of necessity hyperfocused since they are chronically short of resources. And they think bigger than they ought to. “Page really believes it’s easier to make progress on mega-ambitious dreams,” says a source close to Google. Page uses the phrase “uncomfortably exciting ideas that can change the world.” He’s an enemy of incrementalism, but that’s often what big companies settle for.

Whether Google needs someone to invent the whip or crack it, the task facing Page is harder than the one that faced Schmidt. There’s much more at stake as Google expands into new turf. “The unpleasant fact,” says O’Reilly, “is that most organizations don’t change without a crisis of some sort. IBM had theirs in 1992 to 1993. Google hasn’t had one yet.” Maybe Page will create an algorithm for that.

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