The 70 Percent Solution
Google CEO Eric Schmidt gives us his golden rules for managing innovation.
By John Battelle

(Business 2.0) – Before he arrived at Google in 2001 to serve as adult supervision for Larry Page and Sergey Brin, Eric Schmidt was little known outside Silicon Valley. With his Ph.D. from the University of California at Berkeley and research stints at Bell Labs and Xerox's famed Palo Alto Research Center, he had a solid reputation among geeks, cemented by his championing of the Java programming language as Sun Microsystems's chief technology officer. And he faced his first real management test as CEO of Novell, the troubled software maker that has fought a long, difficult war with Microsoft.

These days Schmidt is on a stellar winning streak, recruiting top talent, seeing his company through a stunning IPO, and fending off rivals from Barry Diller to Bill Gates to Terry Semel--while trying to keep Google's good-guy reputation intact. How does he do it? One rule was handed to him by Brin and Page when he walked in the door: Don't be evil. The other one is a formula he uses to stay on track while innovating: Spend 70 percent of your time on the core business, 20 percent on related projects, and 10 percent on unrelated new businesses. Business 2.0 talked to Schmidt to find out how he and his colleagues live by those rules.

How has "Don't be evil" helped Google? When I showed up, I said, "You've got to be kidding." Then one day, very early on, I was in a meeting where an engineer said, "That would be evil." It was as if he'd said there was a murderer in the room. The whole conversation stopped, but then people challenged his assumptions. This had to do with how we would link our advertising system into search. We ultimately decided not to do what was proposed, because it was evil. That kind of story is repeated every hour now with thousands of people. Think of "Don't be evil" as an organizing principle about values. You and I may disagree on the definition of what is evil, but at least it gives us a way to have a very healthy debate.

But as you've grown, outsiders apply their own view of what is evil and use it to point out your company's flaws. There's nothing wrong with that. We believe in that sort of criticism. But the way "Don't be evil" works is no different from pulling the rip cord on the Japanese assembly line. Any person on the assembly line can pull the rip cord to stop the line. Think of it as employee empowerment

Does Google have some kind of grand strategic plan for the new products it creates? Virtually everything new seems to come from the 20 percent of their time engineers here are expected to spend on side projects. They certainly don't come out of the management team.

But you decide which arrows you put the wood behind, so to speak. Right? Yes, but we do that once there's sufficient critical mass, which is if there's a small set of engineers and a product manager who are excited about something.

What do you do with your 20 percent time? Well, 20 percent time applies to the technical staff. It does not apply to sales or management. Here's how it works for management: We spend 70 percent of our time on core search and ads. We spend 20 percent on adjacent businesses, ones related to the core businesses in some interesting way. Examples of that would be Google News, Google Earth, and Google Local. And then 10 percent of our time should be on things that are truly new. An example there would be the Wi-Fi initiative--which I haven't kept up with myself. God knows what they've done in the last week. I've been too busy on core search and ads.

How do you enforce that 70/20/10 rule? For a while we put the projects in different rooms. That way, if we were in one room too long, we knew we were not spending our time correctly. It was sort of a stupid device, but it worked quite well. Now we have people who actually manage this, so I know how I spend my time, and I do spend it 70/20/10.

Larry and Sergey are now operating under 70/20/10 too. They might spend their 70 percent time differently. Sergey, for example, has been looking at new ways of doing search quality, a new math around that. Larry has been pushing for some very new ad models. That would count in the 70 percent.

Some of your new initiatives are drawing controversy. Why are book publishers suing you over Google Print? Everyone seems to be making something up that we're not doing. We're building the world's largest card catalog. People go to the card catalog, they see a snippet of the book--they don't even see a full page--and then they have to go to the library or buy the book. Can you explain to me what's wrong with that? We've obviously had a communication problem, because I don't understand what's wrong with it.

The publishers claim that you are making a reproduction of the book in digital form for commercial purposes, in that you're going to run advertisements next to the index you create and thereby make money off it. This is what every search engine does when it crawls the Web. I'm not going to debate it because I'm not a lawyer. I will tell you that we have been through this very, very, very thoroughly, and fair use, which is a balance of the interests of publishers and readers, clearly permits the creation of a card catalog. It's not a disputable point. Hopefully, the legal system will actually try to get to the facts of the case, but, again, we are not making copies to sell them.

Let's talk about the Wi-Fi idea. Business 2.0's Om Malik has noted that you're buying up a lot of bandwidth. Are you going to roll out free wireless Internet across the country? Well, the Wi-Fi experiment has been publicly described as a test. We never rule out anything. The answer is, let's do the test, see how it works. It's going to either succeed or fail. We're going to work really hard to make it successful. We're very excited about it. We think it has great potential.

Let's talk about the competitive environment. Back in 2002, you mentioned to me how nice it was to be working at a company that was not competing with Microsoft ... Yeah. Can you take me back to that time? I really liked being in our little bubble. We were having a really good time.

And Bill Gates wasn't paying attention to you. Yeah.

I recently asked MSN's Yusuf Mehdi what he made of Google. His answer: "Well, we're the underdog now." I would prefer not to respond to Microsoft's statements, of any kind. He's welcome to say whatever he'd like. I'm happy to talk about Google.

So is Google building a computing platform? A Web-based operating system, if you will? The problem I have with that question is that "operating system" and "platform" and "Web OS" are very generic terms, so I prefer not to engage in those discussions. There is this presumption that Google has to go build its own OS, its own browser, when those technologies are quite mature and well valued. There is a great deal of strategic leverage for us in building an ecosystem around content and advertising that is an extension of our search mission.

OK, so does that mean Google's a portal? Because if you think of it that way, as Terry Semel recently pointed out, it ranks as one of the smaller ones. Well, if I can be obnoxious--

Please. You're using a tired model of looking at corporate behavior. You're looking at us based on market share for technologies and ideas that were invented 10 years ago. A much better way to ask that is to say, Are the things that we're doing consistent with the mission of the company? We're not in the portal business, we're in the business of making all the world's information accessible and useful. We never have the conversation that you just asked.

The test that I apply--and we do this every day, 70/20/10--is to ask how a feature will extend the core, the adjacent, or the innovative stuff to fulfill our mission. That's the sort of drug that we all take, and it works really quite well. So it may very well be that what you said is correct, and it may not matter very much.

It's been more than a year since the IPO. How do you like running a public company? On a personal basis, I've always preferred to be a private-company CEO. I've said that since I started here. But some things in life are inevitable. "What you cannot avoid, welcome" is an old Chinese proverb. Google had to go public, it was time, and so the correct response is to do the best job you can as a public company.