Advertising for the Masses - The Google Guys

The Google Guys: Inside the Brilliant Minds of Google Founders Larry Page and Sergey Brin

Chapter 5 Advertising for the Masses

I have never made but one prayer to God, a very short one: “O Lord, make my enemies ridiculous.” And God granted it.


In June of 2000, Larry and Sergey had a meeting with America Online. AOL had recently merged with Time Warner, creating what most observers believed to be the most important Internet property in the business. The AOL executives wanted to get to know Google better and were considering licensing its search engine. Google had already garnered rave reviews and, in terms of users, was growing faster than a baseball player on steroids. But it had officially been on the market for only a few months, and the AOL deal was huge for Google. It made sense to link the two companies; KPCB was an early investor in both Google and AOL. Although licensing their search engine was the primary means of getting revenue at the time, Larry and Sergey were reluctant participants in the talks.

“Sergey and Larry were mad that they had to go to the meeting,” says an employee who worked at Google for most of 2000 but who, like most former employees, refuses to let his name be used. “They only wanted to talk to technology people. They were really socially awkward.”

The AOL executives started talking about all the potential opportunities in the two companies’ working together. Then one of the AOL business guys in the meeting talked about how Google was “stupidly” refusing money by not accepting paid placements—i.e., ads slipped surreptitiously into the search results. This was one thing that Larry and Sergey considered evil. Says the former employee, “Sergey walked out of the meeting and started screaming so that everyone in the meeting could hear him, ‘Someone get me a can of gasoline—I have to light myself on fire to get rid of the scum of those people.’ ”

So much for getting AOL’s business—at least that time. In 2002, Google returned to the negotiating table with AOL to discuss the possibility both of AOL using Google’s search engine and of Google enhancing AOL’s advertising system with its own. This time Schmidt took charge of negotiations, and this time he was the one reluctant to sign a deal. AOL wanted a guarantee that Google would provide it with at least $50 million in revenue over the length of the contract. At that time, Google was bringing in only a total of $80 million in revenue annually for itself, was just breaking even, and had net cash assets of zero: $9 million in cash and $9 million in debt. “I thought we would go bankrupt,” Schmidt says.

This started the first huge argument between the founders and the CEO, one he describes as “a significant marital spat.” Larry and Sergey were ready to take the deal, and ended up arguing with Schmidt every day. Eventually Schmidt decided to schedule an argument every afternoon at 4:00 P.M. The scheduled arguments included Larry and Sergey, sales executive Omid Kordestani, corporate counsel David Drummond, and Eric Schmidt. But Larry and Sergey would not give in.

Finally, Schmidt decided to take his case to the board, certain that the venture capitalists who had backed Google would share his reluctance. He was wrong. By that time they had learned to trust the seeming recklessness of the founders. “I called the board members, and they said, ‘Oh, take the deal. We can always get a loan against your receivables.’ So we signed the deal on Larry’s and Sergey’s terms.”

As it turned out, within six months it was apparent that Google would have no problem meeting AOL’s demands. The relationship continues to this day. With that deal, Schmidt learned how influential and how right Larry and Sergey could be—although that hasn’t ended the occasional closed-door arguments over important issues.

Saying No to Advertisers

In early 2000, though, alienating AOL seemed like a stupid move. Google’s primary approach to generating revenue at that time was to license their technology to others. AOL was the biggest deal Larry and Sergey could have made. But the two had very specific ideas about how advertising should be done, and these did not include giving advertisers preference in search results—a practice known as “paid inclusion.”

Since Google’s inception, Larry and Sergey have adamantly kept ads separate from search results, while others have not. They regard it as deceptive to users, something that falls into the category of evil. It might bring in revenue, as users are fooled into clicking on them, thinking they are pure search results, but Larry and Sergey were determined never to pollute their search engine in that way. In 2004, Yahoo announced that companies would have to pay a fee if they wanted to be certain their sites were included in its index of search results. In an article in the New York Times, Larry compared search results to newspaper articles, which are supposed to be free of influence from advertisers. “Any time you accept money to influence the results, even if it is just for inclusion, it is probably a bad thing,” he said.1

Google didn’t have to even try the practice of paid inclusion. Revenue growth was fine without it, and as a private company, Google did not have to succumb to investor demands that it pursue every penny of ad revenue possible. By contrast, in 2002, all other Internet companies were hurting like kicked dogs. Yahoo stock was down to about $5 a share. Ask—then called Ask Jeeves—had seen its stock drop to 83 cents. At that price, someone could have bought the company for $30 million, shut it down immediately, and still made a profit, since Ask had $100 million in the bank.

“It’s easy to say we should have been doing what Google did,” says Jim Lanzone, a former CEO of the search engine Ask. “But it was fundamentally prohibitive to do that at the time.”

The irony is that paid inclusion didn’t even do much to help the bottom line. “The dirty secret is that it’s not just bad for users, it did not make you that much more money,” says Lanzone. “The chance of someone clicking on the sixth or eighth listing on a page was so unpredictable and infrequent, it turned out to be a long walk for a short beer. It turns out there’s a place for ads, and it’s in the ad section, not the search results.” Ask later dropped the practice of paid inclusion and put the ads only in the separate boxes where they belonged. Yahoo still offers paid inclusion.2

The important point is that Larry and Sergey never considered the practice.

The Big Shift

This dedication to clean advertising was a key part of Google’s success. In life and in business, change comes in waves, pushed along by major shifts in the environment. To evolutionary scientists, the impetus for species change is known as punctuated equilibrium, a response to rapid changes in the environment. To science historian Thomas Kuhn, progress in science comes in leaps, the result of a paradigm shift caused by scientific revolutions dreamed up by the Einsteins of the world.3 To Harvard Business School professor Clayton Christensen, technology advances through the power of disruptive innovations.4 In each case—evolution, science, or business—different entities are selected as having the right phenotype to prosper.

Larry and Sergey provided Google with the DNA that allowed it to thrive and become destined to reside at the pinnacle of the Internet food chain. Just as organisms that have evolved for a particular environment lose their advantage once the environment changes, existing corporations tend to follow the same path into obsolescence. In fact, many of the ideas that Google developed were simultaneously being explored at other companies. Those ideas just never went anywhere, their significance poorly understood at the time. When it came to advertising, Larry and Sergey got it. Their advertising plan was developed—or at least considered—before Google was even launched. In a January 1999 interview conducted by Karsten Lemm, Sergey stated that they were in the process of “preparing” ideas about how to make money: “One thing is we can put up some advertising. Another way would be co-branding. Provide the back-end search engine to other sites.”5

But those ideas did not take the form of an actual formal business plan. In fact, there was no business plan, which would normally lay out in detail the proposed revenue stream, with projections on how fast revenues would grow in five years. “We worked on a business plan for a little bit, but we were basically never even asked for it,” Sergey told Lemm. He then added, “Recently we got an e-mail from one of our investors saying, ‘Oh, do you guys have a business plan? I don’t think I ever saw one.’ ”

Although they didn’t yet have any idea how the ads would work, they already knew one thing: the ads had to be useful rather than an annoyance. Said Sergey: “The key there is to put up advertising that will be really useful to our users and not slow down our site. That way we won’t push people away from our site, but we’ll still take in some revenue.”

It took them nearly three years to figure out how to fill the requirements Sergey had stipulated. Silverstein says that Larry and Sergey felt that no advertiser on the Internet had solved that problem. It’s likely none of them was trying. Just as Larry and Sergey demonstrated that there was a huge market for a search engine that gave better results, they set out to show that there was a market for Internet advertising that gave better results, with the needs of the user—not the advertisers—given the highest priority. “We had this idea that if we could get a lot of users, we could make money,” says Silverstein. “That said, we did not have advertising for a long time because we couldn’t think of a way to do it that we thought was good for our users. Which I think gets to what Sergey was warning about. There are a lot of ways to do advertising. It took us quite a while to find a way that was actually beneficial to users and have an appropriate separation between editorial and advertising. We noodled it over, we talked about it.”

Larry and Sergey have maintained this attitude that advertising should be done only when it helps the user in some way. In 2006, engineers met with Larry and Sergey with a simple proposal: to include ads with image-search results. They argued that this would add $80 million a year to revenues. Larry’s response was to ask: “We’re not making enough money already?” Sergey was equally skeptical. “I don’t see how it enhances the experience of our users,” he said. They rejected the proposal.6

Inventing AdWords

In 2002, most advertising at the time, including ads on Microsoft’s site, MSN, came in the form of banner or display advertising, flashing billboards that appeared at the top of the page. Some search engine/portals were already “selling” search terms to advertisers, charging them for making the ads appear when people searched using certain words. But most contracts set a predetermined price negotiated by ad reps, rather than using an auction. As CEO Schmidt puts it, the philosophy was, “Give us half a million dollars and we’ll show the ad whenever it’s appropriate.”

A company called (later renamed Overture) had come up with the idea of an online Yellow Pages system, where users would type in search words and be taken to advertisers who bid to have their ads appear when people searched with those words. (In 2002, after Google started showing the way, Microsoft and Yahoo both considered buying Overture. Yahoo won the bid.)

Larry and Sergey started placing ads next to search results almost immediately, in 2000, but also sold them for a set fee. But they were not satisfied with that; they had to be sure the ads were as relevant to their users’ interests as were the search results.

Google executives today insist that their approach was unique, and continues to evolve. “The idea came out of GoTo,” says Google chief economist Hal Varian. “But [GoTo] didn’t really improve it. We took their model and refined it. When the guys at Google looked at it, they figured out how to advance it. This strong emphasis on quality came from Sergey and Larry.”

In order to ensure that quality, Google essentially created a separate search engine dedicated to determining the relevance of ads, allowing them to select from millions of ads before displaying them. “Larry and Sergey came up with the targeted ad model,” says CEO Schmidt. “That model coupled with search is a gold mine.”

The focus in the early days was small advertisers—a market that would put Google in competition with eBay online and classified advertisers in newspapers. It fit well with Larry’s and Sergey’s desire to focus on small players and individuals. The two founders believe in the idea of the “long tail,” all the millions of people on the Internet who wanted services that were not being offered by others. In Google’s 2006 annual report to shareholders, Sergey discussed the importance of small advertisers: “Our goal is to create a single and complete advertising system. Diversity in our advertising and publisher base continues to be central to our business and is important to our long-term success. Advertisers large and small use Google to reach their target audiences easily and get measurable ROI [return on investment].... As more and more users look for local information online, we must continue to improve our ability to attract local advertisers. This year we partnered with companies . . . to help us bring more business information online and convert more small businesses into happy Google customers. Small business is big business.”

Because prices were to be low, sometimes just pennies per click, volume had to be extremely high. This required a fully automated system with very little human intervention.

What they came up with was a system that would let advertisers bid online to set prices, with those ads automatically matched to search terms without advertisers’ ever talking to an ad rep. “Getting to that vision of what [advertising] could be was the big bottleneck,” says Silverstein. “We could run a system ourselves that could support having a million advertisements from one advertising company [i.e., Google] and just show the right ad for the right kind of search.”

After some testing, it seemed to work. So in January 2002, Larry and Sergey gave the go-ahead to convert Google’s premium ad system—in which fixed-fee ads were placed in a box at the top of the search results—with the auction-based AdWords program. Larry and Sergey were solidly behind the switch, but Schmidt was worried that the auction system would not set ad prices as high as those the Google ad reps were getting. “I said, ‘Promise me that revenue won’t fall.’ I was terrified.”

As a precaution, Schmidt instituted a period of restricted spending, also known within Google as the “crap period.” The rule was wickedly simple: people could spend money only one day a week. Every Friday morning at 10:00 A.M., anyone who wanted to buy something had to head to Schmidt’s office to justify the expense. But this lasted about three weeks. By then Schmidt had discovered that the ads priced through bids were collecting twice as much revenue as the ones that had been sold by the ad reps. It turned out that the reps were pricing the ads too low for the market. One of the beauties of Google’s ad system is that it automatically reaches exactly the price the market will bear.

It was the support Larry and Sergey gave that made the difference. Other companies did not have the push from top management to take that leap. In November 1998, Microsoft bought a company called LinkExchange, which was in the business of distributing ads to other Web sites. Along with that acquisition came a man named Scott Banister, a young college dropout who had come up with the idea for something he called Keywords, a business he had sold to LinkExchange. His concept was to create a software system that would auction off search terms to advertisers, placing the ads next to the search results.

In early 2000, Microsoft’s online group ran an experimental system to match search queries with ads. But some managers were worried that the system would eat into display ad revenue, so those ads were shoved to the bottom of the page, and minimum bids were placed at fifteen dollars per ad. In May the service was shut down. Despite the fact that Banister’s boss, Ali Partovi, pitched the concept to Microsoft as “the next big thing,” executives at Microsoft rejected the idea.7 They were too tied to banner ads. Microsoft executive Satya Nadella later admitted that shutting off the service was, in retrospect, “a terrible decision. But in all honesty, none of us saw the paid-search model in all its glory.”8

Microsoft wasn’t the only company to reject the idea of socalled “search advertising” as a revenue model. Partovi, frustrated with his lack of progress at Microsoft, started shopping the idea to others. Yahoo also turned him down. So he tried Google. But Larry and Sergey had already started pursuing the idea on their own.

The Scientific Approach

CEO Eric Schmidt has also made significant contributions to the development of Google’s advertising system. The biggest may be in luring economist Hal Varian to the company.

Varian, a sandy-haired professorial type with Bill Gates glasses, was dean of the business school at UC Berkeley in 2002. He had written Information Rules: A Strategic Guide to the Network Economy, a book that discusses how to market and distribute goods in the network economy, including how to price them. He had also been involved with Inktomi, the search engine that spun out of the university. When he ran into his old friend Eric Schmidt at a Super Bowl party in January 2002, Schmidt, who had read Varian’s book, said, “ ‘Why don’t you take a look at this ad auction?’ ” Varian recalls. “ ‘I think it might make us a little money.’ ”

Varian wasn’t sure he was impressed enough with Google to make the leap from academia. That spring, Schmidt and Larry met up with him at a conference for big thinkers at the Aspen Institute. Varian wondered who the young man was with Schmidt. “I thought, gee, why did Eric bring this kid along? He could have been in high school, as far as I was concerned.”

But the two persuaded him to meet with some people at Google the following April, and in May, Varian took an academic leave from Berkeley to consult for Google.

In 2007 he became the company’s chief economist. “It’s a lot more fun here than at Berkeley,” he says.

One of Varian’s areas of expertise was predictive pricing. He worked on a system that could predict the rate at which people would click on ads and compare it to the bids people placed. It’s part of a discipline called economic mechanism design, and it includes elements of game theory. The system allows advertisers to decide how much to bid based on the number of predicted clicks on an ad. This is an important feature, since advertisers pay their bid price to Google only when somebody clicks on their ads. In order to make the system more efficient for advertisers, they are allowed to see where they stand in the rankings and the bids made by other advertisers.

Larry and Sergey did not scrimp on investing in the technology to handle the ad placement system. “I’ve got to say, they thought big,” Varian says. “They built a very large and complex system. It was significantly more ambitious than the competition’s.”

And this was at a time when they spent little money on the normal accoutrements of a growing company. “Most of their money went into the servers,” Varian recalls. “There were still five people to an office, with desks made from doors and steel legs. That was mostly Larry. He plays his cards close to his chest. When [Larry and Sergey] started to understand the potential of auctions, the way growth was going on, they didn’t move into bigger offices. The goal was to fly beneath the radar as long as possible. People were very surprised when numbers were released about how profitable Google was.”

Larry’s famous secrecy, however, was something an academic researcher was not accustomed to. The system Varian first worked out in the summer of 2002 was used internally, but was not publicized, or even written up in academic papers. But he was invited to give a talk at Stanford, and was allowed to say a little about the work, since it was a small class. A visiting professor there, Mark Schwartz, had been working on a similar idea, and talked to Varian about it. “It became pretty clear that he was going down the same path,” Varian says. So after his talk, he went back to Google and reported that other researchers were working on the same ideas, and asked if he could publish a research paper on the work. “It went all the way to the top, to Larry and Sergey,” he says, and they finally gave their approval.

Still, other companies were slow to catch on. A couple of years later Varian presented the ideas to a Yahoo executive. “He said, ‘What?’ ” Varian recalls. “He had never thought about it. That amazed me, because we knew about this in 2002.” After that, Yahoo hired its own chief economist, as did Microsoft.

The advertising system designed at Google has another clever quirk. Instead of just giving the highest ad placement to the highest bidder, Google created a feedback loop to give preference to the most effective ad, not the priciest. Each ad builds up a reputation. If people don’t click on it, it drops in the rankings, while lowercost ads rise. Google executives have said the reason for this is to ensure that the ads are as relevant to the users as possible. But, once again, it turns out to be the most profitable approach. It’s better to get many clicks on a low-paying ad than none on a highpaying one. It’s obvious in hindsight: keep the most-clicked ads at the top of the page, and Google collects more revenue.

Competitors, however, questioned the originality of Google’s ad system from the beginning. In 2002, after Google introduced its AdWords program, Overture sued Google for violating its patents. At the time, Overture spokesman William Tell took a few well-targeted shots at Google. “We’ve spent millions on attorneys’ fees and lawyers’ fees,” he told TechUser.Net. “We’re not going to let some company with a bunch of hot shot programmers come in and steal our best ideas.” The suit was settled in August 2004, after Yahoo had bought Overture. Google was granted a perpetual license to the patents in return for payment in the form of 2.7 million shares of Google stock, about 1 percent of the company at the time.

Creating AdSense

In March 2003, Google launched a new advertising program that would place ads on other Web sites rather than relying entirely on ads that accompanied its own search results. This was the business that LinkExchange was in when Microsoft bought it in 1998, but it did not become part of Microsoft’s business model.

Google’s system used its computer algorithms to analyze the data on a Web site and choose which ads people visiting that site were most likely to click on. But it turned out that another company, Applied Semantics, in Santa Monica, had a very similar third-party advertising system, called AdSense: its specialty was also extracting information from a Web site in order to deliver more relevant ads. A month after it launched its own unnamed third-party advertising system, Google announced that it had acquired Applied Semantics. In a press release about the acquisition, Sergey said, “This acquisition will enable Google to create new technologies that make online advertising more useful to users, publishers and advertisers alike.” From then on, Google’s system was called AdSense.

The final element that made AdSense popular was Google’s deciding to make it more profitable for the AdSense partners. Google started splitting revenues fifty-fifty with sites that carried its ads, instead of eighty-twenty, as was common at the time. The reason for this, says one former Google executive: “It just didn’t seem right to Sergey.” The split today is even more favorable, and competitors have had to follow Google’s lead.

The result is that AdSense is also by far the most popular advertising system of its type. And, it turns out, Google can afford to sacrifice a high percentage of the revenues from AdSense. Its true value is in the fact that it creates a bigger inventory of sites showing Google’s ads. This creates a virtuous cycle: with more places for ads to appear, more advertisers want to use Google’s advertising systems, which makes more Web sites interested in using Google’s ads. No other system can match the sheer number of eyeballs that will look at a particular ad, and there is little reason to go elsewhere.

Competitive Response

After Google set the pace, competitors tried to follow, but they were several laps behind. Microsoft started a project to create a new search engine and search advertising system in 2003, code-named Moonshot. Its search engine was launched in late 2004 and the advertising system in 2006. But by then it was too late. Advertisers were dedicated to Google.

It is now extraordinarily difficult for any competitor to catch up to the infrastructure and design of Google’s advertising system. Google had too much of a head start and never stops refining and advancing its system. The system was obviously doing something right and filling an unmet need; Google has captured the overwhelming share of all advertising revenue on the Internet, and regulators and competitors are warning that it has become an Internet advertising monopoly.

Both Yahoo’s and Microsoft’s ad systems seem to be racing on broken legs by comparison. By the end of 2008, Google had captured about 75 percent of Internet search advertising dollars, while Yahoo held on to about 20 percent, and Microsoft just 4 percent. Google’s revenue from advertising came in at $5.5 billion in the third quarter of 2008, Yahoo took in $1.8 billion, while Microsoft’s online revenue was just $770 million.

In early 2008, Microsoft CEO Steve Ballmer finally decided the solution was to buy Yahoo, combining the two companies’ search and advertising market share. Larry, Sergey, and Eric Schmidt didn’t want to see Yahoo fall into the hands of Microsoft, a company that, despite its fumbling in the online world, all three executives are wary of as a potentially fearsome competitor. “The Internet has evolved from open standards, having a diversity of companies, and when you start to have companies that control the operating system, control the browsers, they really tie up the top Web sites, and can be used to manipulate stuff in various ways,” Sergey has said in a clear reference to Microsoft. “I think that’s unnerving.” 9

It took another meeting between the top three Google executives to decide on a proposal. Yahoo didn’t have enough ad volume to fill all the slots it had available, so Google offered to fill those slots with ads from its own inventory, with almost all the revenue going to Yahoo. The Google executives saw this as a way to save Yahoo from Microsoft’s iron grip. It seemed like a good idea at the time.

But they also knew that the deal could cause some consternation among government regulators. Microsoft was prominent among the competitors complaining that Google already had a de facto monopoly on Internet advertising. So the Google executives decided to approach the U.S. Department of Justice proactively in order to explain why the deal would not decrease competition and would be a benefit to Yahoo. There was no legal requirement to approach DOJ with the proposal. The Department of Justice normally takes on antitrust cases only when there is a complaint or when a merger might reduce the number of competitors in the market. The Google executives felt that their proposal was by far the better option, since a purchase of Yahoo or its search engine by Microsoft would clearly reduce the number of independent search engines by one. Google’s deal would be limited in scope, nonexclusive, and temporary.

They were surprised by the response. Microsoft lobbied heavily against the deal as anticompetitive. Newspaper advertisers complained that it would raise the price of ads at Yahoo, since Google’s ads tended to get higher bids than Yahoo’s. Critics argued that if Google’s advertising system displaced Yahoo’s, there would be less competition, forcing more advertisers to just go with AdWords and AdSense, thus driving up bids even higher. The Department of Justice cast a skeptical eye on the deal.

The Google executives still don’t understand the complaints. Craig Silverstein expresses this view: “That argument makes no sense to me at all,” he says. “I don’t want to say anything bad about those people, but I wonder how they justify it.”

Silverstein points out that an auction system is the most direct way to match supply and demand. “Having more auction systems does not increase the supply [of ads or of places to put them]. It just increases the number of auction systems. It shouldn’t affect the price of ads at all. This is very basic economics, the law of supply and demand.”

But Google’s arguments fell on ears that were primarily listening to other voices. And Microsoft spoke with a very loud and influential voice. It had already spent a decade learning how to lobby Washington while defending itself against federal lawsuits over abuse of its own monopoly. It knew how to play the game. Larry and Sergey did not.

An article in the New York Times10 in 2008 noted that Microsoft had collected some strange bedfellows in its battle against the deal, including the National Association of Farmer Elected Committees and the National Latino Farmers and Ranchers Trade Association. Presumably, since farmers use the Internet, they were worried about a Google/Yahoo monopoly. The Times confirmed that the Latino Farmers and Ranchers took a stance after talking to the Raben Group, a lobbying firm that received $30,000 from Microsoft to lobby against the deal.

Google had put its own lobbyists in Washington in 2005, but inexperience and hubris made them ineffective. Larry and Sergey have a tendency to believe that, since they’re clearly in the right, the merits of the deal would speak for themselves, and Google’s efforts echoed Larry’s and Sergey’s attitudes toward dealing with outsiders. In the New York Times article, one technology lobbyist who has worked for both Microsoft and Google said of the latter, “They’re renowned in this town for not returning phone calls and not showing up to political events.”

The Department of Justice came down firmly against the deal and signaled to Google that it was going to file a lawsuit to stop it. Schmidt and chief legal officer David Drummond met with Larry and Sergey to give them the bad news. “I told [them] we were going to have to make a hard decision,” says Schmidt. “I knew what the endgame was going to look like.” They agreed to concede defeat, although all were unhappy about it. At 10:00 A.M. on November 5, just an hour before the Department of Justice was scheduled to file the suit, Drummond issued a press release announcing that Google would no longer pursue the deal with Yahoo.

After the Yahoo deal fell apart, Microsoft announced a new program that has been widely viewed as a desperation move. It is paying customers to use its search engine to find and buy items online. Web shoppers who sign up for an account and buy items found using Microsoft’s Live Search “cashback” site will receive a percentage of the purchase price deposited into their account. When the total reaches five dollars, the shoppers can redeem their cash via eBay Inc.’s PayPal.

Who’s the Monopolist Now?

Google has made it almost impossible for other companies to compete with its advertising volume. It cemented its position in April 2007, when it bought banner advertising firm DoubleClick for $3.1 billion.

At the pinnacle of advertising success, Google is in a precarious position. With the overwhelming share of online searches and online advertising, it has seemingly become a monopoly, and government regulators don’t like monopolies. Right now, its advertising dominance is only online. At the company’s 2008 annual meeting, Sergey used an argument that mirrored Bill Gates’s claim during Microsoft’s own antitrust problems that Microsoft was not a monopoly because the computer business is much bigger than just PCs. Asked about Google’s apparent advertising monopoly, Sergey replied, “You are narrowly focused on search advertising. Advertising as a whole is much broader, and Internet advertising is much broader.”

But Google wants more. Federal regulators are now keeping an eye on the company as it diversifies into other forms of advertising. And the company is as ambitious in making those plans as it is in anything else. Larry, Sergey, and Schmidt are now diversifying the company into print, radio, television, and cell phone advertising.

The obvious question is whether Google can leverage its online technology into something that makes sense in other media. But there’s already a lot of experimentation going on under Sergey’s purview as president of Technology.

The most promising new advertising medium for Google may be television, an area that gets particular enthusiasm from Sergey. In a conference call in 2007, he said, “The remarkable thing about television is, it’s surprising, but in fact, [among] offline advertising, it’s the one that’s closest to Internet-level accountability and we feel we can bring much greater ROI-type accountability to television advertising, much as we’ve done online.”

How would that work? Google has set up a relationship with EchoStar, which makes controller boxes for satellite and cable companies. EchoStar’s boxes are tracking when and how frequently people change channels, and Google is analyzing that data. They’re finding some interesting things about viewers’ habits during commercials. Between 5 and 15 percent of viewers, for example, change channels as soon as a commercial break begins. Google can also keep records of individual commercials, tracking how many people switch channels after the ad starts and how quickly they do it. Google is using these data to figure out which ads are more relevant to viewers of which programs.

As Google learns how to apply its analytical technology to other forms of media, it stands a chance of revolutionizing many types of advertising the way it has done with online advertising. On one hand, this could revive a moribund ad business. On the other, it could make Google an even more powerful monopoly, and a more fearsome intruder into everybody’s habits and business. But Larry and Sergey have no qualms about upsetting the status quo.