radio ads, they’ve lost a fortune on selling print ads, and they are now losing a fortune on selling television ads.” Tad Smith, the CEO of Reed Business Information, which produces eighty publications and Web sites, asked, “Where is the new pony? Apple came up with a new pony, the iPod and iPhone. Microsoft came up with Office. Google is throwing a lot of things against the wall, and so far only one has stuck to the wall. And Google’s search growth will slow.”
Eric Schmidt had a ready rejoinder to Ballmer: “I like the trick!” And justifiably so: the trick yielded more than sixteen billion dollars in revenues and four billion dollars in profit in 2007. Schmidt went on, “The Google model is one-trick to the extent that you believe targeted advertising is one-trick.” Google now had about 150 products available, and he believed the other efforts—You Tube; DoubleClick; mobile phone products; cloud computing; selling TV, radio, and newspaper ads—could sell targeted advertising. Yet with almost all of its revenues pumping from only one of 150 wells, the question—can Google find another gusher?—was “a legitimate question,” as top Google executives like Elliot Schrage conceded at the time.
At the start of 2008 there was evidence that the gusher was tapering off. Search advertising was slowing. In January and February, comScore, a research firm that tracks online activity, reported that Google searchers were clicking on fewer text ads. Wall Street analysts predicted Google’s revenue rise would stall, and the stock price dropped; from its pinnacle of $742 on November 6, 2007, it had plunged 40 percent by March 2008. The press, lusting for a new narrative, fixed on this one: the Google rocket was crashing. “Goodbye, Google,” read the headline in Forbes.com. Reporters buzzed, incessantly, about dire days ahead. Google was spinning them, they believed, when people like Tim Armstrong explained that the company was trying to make the ads “more relevant” and had deliberately reduced the number of ads appearing with search results to reduce clutter and produce better information. Google said clicks without purchases meant the ads were not useful to the user, so they were eliminated. Reporters were deeply skeptical when chief economist Hal Varian in early 2008 cautioned, “The clicks are not what is relevant. The revenue is.”
But events would demonstrate that the press and Wall Street analysts are often handicapped by two imperatives: don’t be late with bad news, and don’t be the lone blackbird left on the pole. In April 2008, when the company released its first-quarter results, the narrative changed. Google’s revenues had surged 42 percent compared to the first quarter of 2007; its profits had jumped 30 percent, and as Varian had suggested, its ad clicks had risen 20 percent. “Google Inc’s Go-Go Era Apparently Isn’t Over,” said a report in the Wall Street Journal. The Times headline was: “Google Defies the Economy and Reports a Profit Surge.” As the report showed, Google hogged three quarters of all U.S. search advertising dollars, compared to only 5 percent for Steve Ballmer’s Microsoft.
Yet Ballmer had a point. Google had not figured out how to make money on its surfeit of products. YouTube accounted for one of every three videos viewed online, three billion of the nine billion viewed in January 2008. The impact of this new medium would forever change the way politics are conducted. Seven of the sixteen candidates who ran for president in 2008 announced their candidacies on YouTube, and more people saw a taped version of the July 2007 Democratic presidential debate there than live on CNN. YouTube succeeded in democratizing information. It became a viral hub where a candidate’s flubs or fibs were exposed by a video. When Mitt Romney became a born-again crusader against abortion, videos were posted of the former governor of Massachusetts championing a woman’s right to an abortion. Overseas, when Venezuelan strongman Hugo Chavez shut down El Observador, an opposition newspaper, it began broadcasting on YouTube.
However, YouTube made no money. Its bandwidth and computer costs were steep, and it paid for some of its content. Three senior Google executives with knowledge of these figures said at the time that YouTube would lose money in 2008, and these losses would grow in 2009, with revenues initially projected at about $250 million and losses totaling about $500 million. There were those, like Gotlieb, who believed “they’ll never make money on YouTube.” He thought online display ads would annoy viewers, and that most advertisers sought predictably ad-friendly settings for their ads,