Google's Goofy Formula

'We're trying to make lots of money,' co-founder Larry Page assures an analyst-day crowd.
Publish date:

Google (GOOG) - Get Report spent much of Wednesday trying to persuade investors it's serious about making money.

The irony was considerable, what with Google's profit having quadrupled last year and shareholders having reaped millions of dollars selling the ever-climbing stock.

But trying to persuade investors that there's a method to Google's moneymaking magic appeared to be a key element of the company's first-ever analyst day. The event was Webcast from the company's Mountain View, Calif., headquarters Wednesday.

That's what happens when you're an Internet phenomenon with youthful founders, explosive revenue growth and a passion for secrecy.

Google's shares, which went public last August at $85 per share and hit $216.80 last week, fell $6.89 Wednesday to $191.75.

A secret to understanding Google, CEO Eric Schmidt told analysts, is "we're actually not as unconventional as we say we are."

In an illustration of that, Schmidt shed some light on the methodology by which Google invests its resources. The search-engine operator -- which has long acknowledged that its employees are encouraged to spend 20% of their time on self-driven projects -- actually has a precise formula for resource deployment, Schmidt said.

Seventy percent go to core businesses of search and advertising, said Schmidt, including products and services such as combing through the Internet, ranking the relevance of content and image search. Twenty percent go to extensions of core search, currently including Google News and the Froogle shopping search engine. Ten percent goes to exploratory issues such as the Picasa picture service and wireless services.

Schmidt alleged that Google co-founder Sergey Brin had come up with a mathematical formula that allegedly "proved" the 70-20-10 allotment. Perhaps more credibly, Schmidt asserted that every company that has forgotten to remain innovative has ultimately lost its way as technology changes.

In his presentation, Brin addressed ways in which the company seeks to keep employees motivated and productive. In accord with the company's prior indications that it is leaning away from stock options as an incentive tool, Brin alluded to the difficulty for one individual among thousands to feel that his or her efforts have an effect on the company's stock price.

Returning to points discussed by Schmidt, Google's other co-founder, Larry Page, asserted that the importance of "20% time" at the company "doesn't mean we don't structure the company."

Responding to a question related to the company's monetization of new products, Page said, "We're trying to be ruthlessly efficient about how we run our business, and we're trying to make lots of money."

While the company scrupulously avoided forward-looking statements Wednesday, Page and Schmidt mapped out a crude roadmap of efforts in their advertising business. Both indicated the company must better address the needs of its very largest advertising clients and its very smallest. The largest, suggested Page, needed Google to devote larger teams to their needs; the smallest, he indicated, didn't have Web sites.

Despite Google's efforts to promote a theme of normalcy, it proved impossible Wednesday to paper over the company's distinctiveness. For example, when the analysts' meeting took a lunch break, attendees heard one last presentation from yet another key Google employee: its executive chef.