Little by little, AOL is offering investors more and more details about what the company will look like after it spins off from Time Warner (TWX).

The problem: The more AOL discloses, the less attractive the company looks.

The most recent nuggets come from a preliminary prospectus Time Warner filed with the Securities and Exchange Commission yesterday. Some, but not all, of this has broken out in previous filings or earnings announcements. In any case, it helps to see it all in one place.

The big picture: AOL’s subscription service, which accounts for the “vast majority” of the company’s operating income, is withering away. But advertising revenue, which was supposed to replace that money, has been declining for nearly two years (see tables below; click to enlarge):

And here’s a closer look at the ad business and its recent performance:

The good news for AOL is that some of this is the result of self-inflicted wounds, and it’s possible to heal some of them. The company’s previous regime seemed to go out of its way to mismanage and dismantle the sales force, for example, and if new CEO Tim Armstrong can rebuild that team, he can make a bit of headway.

The flip side is that some of AOL’s woes may be well beyond Armstrong’s control. Money from a Google (GOOG) search deal, which provided a third of AOL’s $2.1 billion in ad revenue last year–and had been increasing up until this year–is now dropping off, too.

Google dollars fell by $42 million in the most recent quarter, representing more than half the $75 million drop in ad dollars from its AOL Media unit. And Google income fell by $90 million in the last nine months, representing about 40 percent of $197 million decline in that period.

AOL says some of the Google decline stems from its declining subscriber base, which brought down search query volume. The rest is due to lower revenue per search query–that is, Google has changed its algorithm in way that ends up punishing AOL. But Armstrong can’t do a whole lot about either of these variables.

He can try extracting more money from Google, whose search deal expires at the end of next year, or from Microsoft (MSFT), which is trying to gain share any way it can.

Earlier this year, Armstrong turned down a new deal from Google and now says he’ll deal with search after he gets other things in place. But the longer he waits, the less leverage he may have.

AOL shareholders will be paying Armstrong well to figure this out, though. His three-year deal pays him a base of $1 million a year, plus annual cash bonuses of up to $4 million. In addition, he’s getting $20 million worth of stock grants to make up for Google shares he left on the table when he resigned from his old employer. And he’ll get stock options worth as much as 1.5 percent of the company once the spinoff is complete.

That said, AOL will also be paying former AOL CEO Randy Falco, who got tossed out in March. Falco will continue to pull down a $1 million salary through 2010–and he’ll get $7.5 million in bonuses through then as well. Former AOL COO Ron Grant, meanwhile, will earn $750,000 a year, plus another $3.3 million in bonuses.

That’s how much an unnamed bidder has ponied up, via a Microsoft charity auction, for a look-see at Gates’s place. After the tour of the 48,000-square-foot complex, which is located outside Seattle on the shores of Lake Washington, the winner gets to nosh on some appetizers, TechFlash reports.

A year ago, the same tour, of the same house, fetched just $8,600. Go figure.

All of that is out of your price range? I understand. Here, for us proles, is a free, “virtual” tour of the place:

[Image credit: Tiktik]

This assertion comes from the analysts at Bernstein Research, who I think have been pretty levelheaded about this stuff over the past year or so. From the “stuff you probably already knew” file:

• The ad business is still declining–in the U.S., Web ads will be down three percent for 2009–but should start moving up again next year, when Bernstein thinks they’ll climb 7.6 percent. Remember that those numbers will be off a depressed base.
• Search is improving more quickly than display.
• Google’s (GOOG) grip on search isn’t weakening a bit–if Microsoft’s (MSFT) Bing push is having any effect, it’s at Yahoo’s (YHOO) expense.
• The mobile Web is going to be big, but not that big. Mobile ads may account for seven percent of U.S. Web spending in 2012.

Okay. Back to work.

The funding is an “inside round”–only existing investors participated in the funding–which sometimes, but not always, raises a red flag. In this case, AppNexus says the funding is also an “up round”–its existing investors now think the start-up is worth more than they did the last time they bought in–but didn’t disclose a valuation.

There’s also a bit of fuzziness, still, about what exactly AppNexus does. The company says it provides a “gateway” to ad buyers who want access to ad exchanges like the ones operated by Google (GOOG) and Yahoo (YHOO)–Microsoft (MSFT) will launch its exchange next year–though many industry types think that AppNexus is itself an ad exchange.

The company certainly boasts lots of ad exchange bona fides. Co-founders Brian O’Kelley and Mike Nolet are both veterans of Right Media, the ad exchange Yahoo bought in 2007. And in September, the company brought on Michael Rubenstein, who had been running Google’s exchange.

The latest in a string of downbeat declarations comes today, via Steve Ballmer’s visit to South Korea, where the Microsoft (MSFT) CEO warned that tech spending would take years to get back to its pre-recession peak. AP:

“The economy went through a set of changes on a global basis over the course of the last year which are, I think is fair to say, once in a lifetime,” Ballmer told a meeting of South Korean executives in Seoul.

Spending on information technology, which accounted for about half of capital expenditures in developed countries before the crisis, was unlikely to rebound fully because capital was more scarce these days, he said.

“While we will see growth, we will not see recovery,” Ballmer said.

Which is pretty much what he’s been saying for some time.

There’s at least one upside to this kind of relentless and sensible negativity, though: If you deliver any news that isn’t straight-up awful, people get ecstatic. As they did last month, when Microsoft posted a downbeat but better-than-expected earnings report (click on graph below to enlarge).

This should finally change next year. People familiar with Microsoft’s (MSFT) plans say the company intends to open the exchange, which will allow online ad buyers and sellers to match up in real time, in January. That will put it several months behind Google (GOOG), which turned on its real-time ad exchange in September.

But on the plus side, AdECN will offer lots of intriguing inventory from the get-go: It will sell space on Microsoft’s giant MSN network, as well as inventory on sites the company reps, like Facebook, Digg and News Corp.’s (NWS) Fox Sports.

Here’s Microsoft’s formal statement about AdECN’s the timeline:

AdECN and Microsoft remain fully committed to the AdECN Exchange and exchange business.  AdECN has been running a Pilot of its Federated, real-time bidding technology within Microsoft for the past several months and will be rolling that product out to a select group of participants in the coming months.

Real-time ad exchanges are a big deal for people trying to automate advertising buying and selling. They differ from older ad exchanges, like Yahoo’s (YHOO) Right Media, in that they’re supposed to let buyers and sellers negotiate a price within milliseconds on specific pieces of inventory.

But it’s not clear that buyers and sellers will embrace real-time exchanges. In order to use them, for instance, they’ll have to build, buy or rent technology that allows them to make and process orders at lightning speed.

AdECN manager Jeff Green left Microsoft earlier this month without explaining what he intended to do next. Jed Nahum, Microsoft’s director of network strategy and planning, is running the unit in the interim.

(Disclosure: News Corp. owns Dow Jones, which owns this site.)

[Image credit: rednuht]

What happened? Apparently, Microsoft (MSFT) realized that “Family Guy” is a ribald, off-color sitcom–but only after showing up to the taping of “Family Guy Presents: Seth and Alex’s Almost Live Comedy Show.”

Variety says “Family Guy” creator Seth MacFarlane and actor Alex Borstein did indeed promote Windows 7 during the Oct. 16 taping. Alas, “for most of the special, however, MacFarlane and Borstein made typical “Family Guy” style jokes, including riffs on deaf people, the Holocaust, feminine hygiene and incest.”

Whoda thunk?

Give Microsoft credit, though: At least the company figured this one out before the show actually aired–unlike the vomit ads it used to push Internet Explorer 8 last year. And, in defense of MacFarlane and Borstein, Google (GOOG) hasn’t seemed to run into any problems with the pact it struck with MacFarlane last year.

Microsoft’s backpedal, via Variety:

“We initially chose to participate in the Seth and Alex variety show based on the audience composition and creative humor of ‘Family Guy,’ but after reviewing an early version of the variety show it became clear that the content was not a fit with the Windows brand,” said a Microsoft spokesperson. “We continue to have a good partnership with Fox, Seth MacFarlane and Alex Borstein and are working with them in other areas. We continue to believe in the value of brand integrations and partnerships between brands, media companies and talent.”

Here’s a representative sample of the show Microsoft was betting on: A clip that Hulu says is one of its users’ favorites. Warning! The following includes flatulence, some sex talk and some racial stereotyping. No mention of Microsoft products, though.

That’s the core of Twitter’s pitch, of course, and it has helped the microblogging service raise $155 million, a $1 billion valuation, and forge partnerships with Google (GOOG) and Microsoft (MSFT). Not surprisingly, investors are looking to place money on related bets, from search engines that parse real-time data to location-based social networks with real-time updates, and even real-time photo-sharing sites.

The newest entrant: Hot Potato, a buzzy start-up that’s supposed to let users converse about a particular event, whether they’re attending it in person or watching from afar. When it’s up and running, that is. The five-man crew doesn’t have users or a product just yet.

But that hasn’t prevented the Brooklyn, N.Y-based company from raising about $1 million, sources say, in a round led by First Round Capital and RRE Ventures. A group of smaller investors, including Betaworks, the incubator that specializes in real-time companies, and Ron Conway, the angel investor best known for his Google bet, are also backing the company.

Hot Potato is led by Justin Shaffer, an eight-year veteran of Major League Baseball Advanced Media, pro baseball’s well-regarded Web unit. Shaffer has recruited three other MLB.com employees (one of whom subsequently left to get an MBA at MIT) to join him.

Shaffer wouldn’t comment about his funding round, but was willing to discuss his start-up’s general plans. They are finishing an iPhone app and plan to submit it to Apple (AAPL) in the next few weeks, he said, and will open their doors once that’s approved.

The big idea is an interesting one. People are already using Facebook and Twitter to converse about events in real time–think about Barack Obama’s inauguration, or Balloon Boy, or last night’s Yankees-Angels game.

Shaffer’s critique of those platforms, though is that “they break at scale–there’s no good way to filter the chatter so that  you, your friends, and a group of strangers with something relevant to say can all connect. Hot Potato, he says, will offer a “curated stream” in real time of all the data coming out of the event in real time. What we’re really focused on doing is bringing together the entire audience of an event, whether they’re at the event or watching at home.”

Business model? TBD, of course. But there are a couple of obvious ways to go. For instance, Shaffer thinks people who opt-in to a particular conversation–say, about an NFL game or a U2 concert–would be okay with seeing “in-stream” ads, as long as they were relevant.

But that’s a problem that’s best tackled once the service is up and running. We’ll check back then.

But we’re not exactly right. New statistics from the Pew Internet Project indicate that 19 percent of U.S. Internet users are on the service on a regular basis. To spell out the obvious: One in five is a lot of people, but it’s not everyone.

This is worth remembering as Google (GOOG) and Microsoft (MSFT) move to integrate Twitter updates into search results: Those results come from a particular slice of Web users.

Here’s Pew’s breakdown of that slice, by gender, race and other demographic markers:

Pew says the average age of a Twitter user is 31 (MySpace, 26; Facebook, 33; LinkedIn, 39). And it has some other stats that are useful–and, if you use the service, evident.

For instance, Twitter and mobile are a peanut butter/chocolate combination–25 percent of Internet users with wireless access use the service, compared with eight percent of those who are tethered. And, not surprisingly, gadget junkies are Twitter junkies too: 39 percent of Web users with four or more Internet devices use the service, compared to 10 percent with one device.

The full report is embedded below:

PIP-Twitter-Fall-2009 –

The publisher plans to start selling digital copies of its print titles via a yet-to-be-approved app. Condé will start with the December issue of GQ, which it will sell for $2.99 (versus a newsstand price of $4.99), but the idea is that the publisher can use the same technology to sell other issues of other magazines down the road.

Condé says the GQ digital issue will replicate the print one on a page-by-page basis, including the ads. Digital bonuses include related videos, as well as links to sites for products (clothing, music, etc.) featured in the issue.

I wasn’t able to attend Condé’s presentation this morning, so I can’t tell you how its attempt to transfer a rich glossy magazine onto a phone (or iPod touch) actually works. But for now, I’ll take the company’s word for it and assume that it’s a nice alternative to carrying around some dead trees.

The interesting question is the business model, which I think has some real potential. This doesn’t solve Condé’s core problem–its costs are too high to support its shrinking ad revenue–but it does have several things going for it.

For one, this approach reaches its potential readers where they are: I don’t want to read a magazine at my desk, and I’m far from sold on the idea of buying a specialized reader to consume it digitally. Getting it to me on my phone, which goes wherever I do, is the way to go.

It also generates some (potential) additional revenue for Condé Nast right off the bat without creating a channel conflict with its analog product line: Condé will be able to count any magazines sold via its app platform toward its audited circulation numbers, a trick that no publisher has been able to pull off with Web products so far. Meanwhile advertisers in the print publication who want to add digital links to the iPhone version will pay a premium, Condé says. And the publisher has been able to extract additional dollars from Grey Goose and Gillette, which will be “premium sponsors” of the GQ issue.

Bonus upside: Condé says the technology it has assembled for this effort should work well for future Apple (AAPL) products, like, say, its mythical tablet. “We think that the minute Apple is ready, if they ever are, to announce that they’re going forward with a tablet, that we’ll be ahead of everybody,” says Sarah Chubb, president of Condé Nast Digital.

This doesn’t solve the distribution issue that Condé and other publishers have with Apple, Amazon (AMZN) and other potential digital delivery outfits: Apple, not Condé, will control the billing relationship for the app. But then again, Condé doesn’t get to interact with you when you buy a magazine at a newsstand either, so at least it’s not getting disintermediated.

The question, as always, is whether customers are willing to pay anything at all for content they’ve been getting free on the Web. I still think we’re going to end up with a small segment of people willing to pay up for specialized stuff and a very large group that are going to end up with free things of dubious value. It would be great to be proved wrong, though.

I’ll spare you the details, but suffice it to say that Twitter has replaced a cumbersome and completely nonintuitive process with one that makes more sense. That’s good, right?

The flip side is that spam really isn’t one of Twitter’s most pressing problems.

In fact, Twitter’s antispam qualities were one of its best features from the very start: “Spam” on Twitter isn’t like other services’ spam since no one can actually send you spam and clog up your inbox. You only see it if you’re gazing at messages that include your name. So it’s aesthetically offensive, but not the kind of thing that actually makes Twitter less useful.

In the more proactive category: Twitter’s “lists” feature, which curates interesting groups of Twitter users to follow, should debut next week, I’m told. This one does tackle a more significant problem for Twitter: New users come to the site and have no idea what to do or whom to pay attention to. (Twitter’s quasicontroversial “Suggested Users List” doesn’t really cut it, though it does drive Robert Scoble nuts, which is amusing.)

And in the time-to-get-serious category: Actual revenue generation. Twitter’s giant cash pile means the company doesn’t have to start making money anytime soon. But it’s going to start trying, I’m told, with a series of…well, I heard them described by someone familiar with the company’s plans as “experiments.” Alternate name for them: “Don’t freak out if this stuff doesn’t work.”

We already know what one of them is: A plan to sell both Google (GOOG) and Microsoft (MSFT) access to Twitter’s data stream. But I’m told we should see other kinda-sorta trials in coming months.

Check it out (click tables to enlarge):

Note that these numbers are actually all down from August. Apparently some of you spent your last days before returning to work or school in front of your Web browser.

Meanwhile, Nielsen’s Top 10 list has the usual suspects. That is–Google’s (GOOG) YouTube and then everyone else. Interesting to note the disparity between total audience and total streams on Hulu compared to Yahoo (YHOO) and Microsoft’s (MSFT) MSN. Hulu is attracting a smaller but much more engaged audience than the big portals.

At some point, this could be a problem for the joint venture between News Corp.’s (NWS) Fox, GE’s (GE) NBC Universal and Disney’s (DIS) ABC since advertisers ultimately want reach. But it’s still astonishingly early for the site–recall that it only went out of beta in March 2008, and doesn’t have a major portal promoting it.

One caveat: Note that for whatever reason, Web video publishers tend to push the numbers they get from comScore (SCOR) more than the Nielsen numbers. But directionally, they tend to say the same thing.

Allrighty, then. If you’re going to spend so much time watching Web clips, best to make sure you’re watching something excellent. Like this clip from last night’s “The Daily Show”–a classic evisceration of CNN. Jon Stewart and crew often go after the cable channel and its brethren, but this one is particularly good. Warning! It is more than 11 minutes long!

In fact, reps from Google and the AP linked up in Manhattan on Wednesday to discuss the deal, which expires at the end of this year, people familiar with the meeting tell me. This timing makes sense since Google (GOOG) had flown in many of its top brass to New York for a series of internal meetings this week.

But that would come as a surprise to anyone who took Curley’s words, delivered after a speech in Hong Kong on Tuesday, at face value.

Here are Curley’s comments, recorded by an attendee at the Hong Kong meeting and transcribed by Zachary Seward at Nieman Journalism Lab:

Someone asked Curley if Microsoft was willing to accept the AP’s demands. “They have said very strongly that they would,” Curley responded. A bit earlier, he said of Microsoft, “They know how to have a conversation.” And what about Google? “I’m not talking about Google,” he said. “We haven’t talked. We haven’t talked. We haven’t talked with them in any serious way.”

AP spokesman Paul Colford says he has nothing to add to Curley’s comments. But I’ll try to make a case on his behalf: Maybe this is one of those “depends on what the meaning of the word ‘is’ is” situations whereby Curley doesn’t consider the talks the two sides have been having to be “talks.” Alternate proposal: Maybe Curley is going for “truthiness” instead of “truth.”

I guess that’s possible. The recurring story I’ve heard from sources on both sides of the negotiations, which have been going on for months, is that they’re not moving very far.

The problem: The AP has a list of demands, which start with more money and move on from there, including assurances that its copy will receive better treatment than secondary outlets. And Google hasn’t expressed much interest in changing the existing agreement. The company is “quite happy” with the deal it has now, Google CEO Eric Schmidt told reporters on Wednesday.

I understand why Curley would want to play up his talks with other portals, as well as the notion that he’s willing to pull his cooperative out of the world’s biggest traffic generator. Per above, I don’t think those are particularly effective tactics, but I understand them. But that’s different from creating an alternative reality altogether.

Schmidt added a bit of nuance to that message today, noting that the company had been surprised to see its European business bounce back as quickly as it has. Here’s my transcript of his opening statement.

We are clearly seeing aspects of recovery, and what is notable is that we’re seeing aspects of recovery not just in the United States but in Europe. I had been in error in assuming that there would be a lag, that it would the U.S. first and Europe second. Asia, of course, was never significantly hit in the first place.

So that means from a Google perspective that…we never stopped hiring, but we told our team internally and again, we’ve said to many other people that we are increasing our hiring rate and our investment rate in anticipation of a recovery.

Schmidt and Google co-founder Sergey Brin covered a lot of ground in the hour-plus press conference, and I’ll try to go back and break out out some of the other highlights. A few items worth noting in summary:

• Brin expressed contrition over recent Gmail outages and said the company was working both to prevent future failures and to react more quickly if and when they do happen. But he reiterated the argument, common among cloud-computing fans, that conventional email systems fail much more frequently.
• Schmidt repeatedly defended the proposed settlement Google had reached with authors and publishers regarding its book archive. Recurring theme: It’s not a perfect settlement, but it’s workable.
• Schmidt stressed the importance of porting Google’s Chrome browser to Apple’s Mac platform and said this would happen within months.
• Schmidt said Google was working on ways to help publishers sell their work on the Web (via one-offs or subscription). But he said he had no interest in promoting one publisher’s results over another, as Associated Press officials had recently suggested: “We have to be very very careful not to favor one media organization over another, with regard to speed or latency.”
• Schmidt, who’d previously noted that he expected Google to start making an acquisition per month, said that these would likely be small, five-to-ten-person companies. He added that it was unlikely the company would be in the market for something the size of a YouTube acquisition, which cost Google $1.65 billion. Translation: Don’t expect us to pony up billions for Twitter.

Earlier: My live coverage of the press conference:

Google (GOOG) co-founder Sergey Brin is sitting down with about a dozen reporters in Google’s New York City headquarters for a Q&A session. Tune in for live coverage. This should be a wide-ranging conversation, which I’ll attempt to cover live as well as I can. Please consider everything below to be a paraphrase unless it’s in quotes.

Brin is joined by Google CEO Eric Schmidt. Brin gives an unofficial intro.

Schmidt adds his own informal introduction.

Schmidt: We’re here because we have a global sales meeting in New York, and we’re winding that up right now. A series of internal talks, and the mood was “very, very positive.” We told them that “the worst is behind us” (which Schmidt has said before). We’re seeing recovery not just in the U.S., but in Europe as well. I had been in error in thinking it would be U.S. first, then Europe second. Asia is less important, obviously. We’re increasing our hiring rate and investment rate in an anticipation of a recovery.

Brin discusses some tweaks to search. Do you feel that Microsoft’s innovations with Bing will cause you to accelerate your innovations?

Brin: Competition is healthy. Microsoft (MSFT) has made its contributions. So has Cuill. Many of the tweaks in Bing we’d already seen from Microsoft Live earlier in the year.

Schmidt: I agree!

But do you think Bing is really different? Or just a rebranding.

Brin: [Demurs]

Schmidt: You guys should judge us and our competitors. We’ve been criticized for having a self-referential view of the world. But I’d argue that our success so far proves that’s been a good strategy.

Please talk about Android and other mobile plans.

Brin: We started with Android because it was a problem for us, as an end-user and a developer, that phones lacked powerful browsers and the ability to install powerful apps. I think Android has addressed this very well, but it has also pushed the market. It has pushed Apple (AAPL) with the iPhone and RIM (RIMM) and Windows Mobile. I’m pretty excited about the future; they’re getting increasingly capable browsers, and you can now write native applications across five platforms that will cover most smart phones. I think that having the software platform has freed the hardware makers from spending time on that, and they can rejuvenate their efforts on hardware.

Please talk about enterprise efforts.

Brin: We started in enterprise, like mobile, to address our own needs. When we started with mail in ‘04, Web email was like a toy. We really focused on something that would work in an enterprise and then made it available to consumers. We feel we’re farther ahead (than competitors) both in email and in collaborative document-editing. We’re moving toward eventually having everything (all our applications) available everywhere. “I just think the cloud model is a better model….I do think this install-less model of a cloud is better….It’s definitely made me more productive.”

More on enterprise from Brin: We’ve been successful with both SMB [small and medium business] and increasingly with enterprise. We’ve got a big implementation with Genetech (DNA), and in Washington D.C. We’re specifically adding features for enterprise. That’s part of the Postini acquisition–to add some of those email features for enterprises. You’d be surprised to hear some of the things businesses ask for.

Please talk about recent Gmail outages.

Brin: Certainly we’re not happy with any outages. With those outages we’re at the “three nines” level, which is not where we want to be. Targeting “four nines” by end of quarter. We’ll let you know how we do. Focusing not only on outages, which we don’t like, but recovery time. Second outage could have been resolved in five or ten minutes, but we made errors in handling it, and it extended over an hour. But if you look at a typical enterprise today, those outages tend to add up to more than even these kinds of outages that we had in Q3. Also, we’re working on the number of people affected by outages. Trying to group people into pods so that if one goes down it doesn’t affect others.

You’re adding more complexity to search. It’s more confusing than it ever was. Same thing with site links. Is that an issue (it is for Danny Sullivan)?

Brin: I’d like to see all the options, available in all the corpuses. We don’t have all the same options in each offering. In terms of the links and snippets that we’re offering, we’re trying to experiment with that.

On Google book deal: If the judge asked you why he shouldn’t be concerned by the concentration of Google’s power, what would you say?

Schmidt: It’s an error to answer a theoretical question from a journalist. But anyway, we won’t get that kind of question. With respect to book search, we were doing something that we thought was appropriate. We were sued, and after three years of discussion, we’ve come to a settlement. This is perfectly normal. From our perspective, this is a settlement we like, it’s a settlement we think they’ll like, and we’ll hear what the court says, within minutes. Let me reframe your question: There’s nothing particularly exclusive about what we’re doing. The rights registry we’re doing is for the benefit of orphan works. “It’s not a particularly good business for us. We’re going it because we think it’s the right thing to do.” We don’t think the settlement is perfect, but we think it’s good.

What are plans to expand book search?

Schmidt: We’re already huge. There are millions of books that have never been read, and we’re going to deliver readers to those books.

Brin: We want as many works as possible in some form, because that’s of tremendous value.

Schmidt: This doesn’t cover all international books, all books in the world. [Some disagreement about this between Brin and Schmidt]. It will take time to get the registry up and running, so for the near future I think that’s all we can achieve.

Back to the economy, please.

Schmidt: We’ve tried for a while to figure out if Google is an accurate predictor of the economy, and we can’t prove it. If we could, we’d brag about it. Last early in the year we saw a decline in U.K., which surprised us. From our perspective, the low point was somewhere in the spring. Which is why I said worst was behind us in May, June. We noticed a recovery “June-ish.” The conventional wisdom is that U.S. recessions are 18-24 months. Bernanke sees a recovery too, which we agree with. Conventional wisdom was that Europe would lag by three-five months, which we’re not seeing. Europe is not one country, and it varies a great deal depending on which country we’re in. I won’t go in to specifics but it’s the obvious stuff–the countries that didn’t have a big bump did not have a big fall. More on being a leading indicator: Obviously we’re a leading indicator in advertising.

Brin: And we’re good indicator for consumer spending, and you can see for yourself by looking at Google trends.

It seems as if Chrome isn’t having the impact with consumers that you would like.

Brin: [Starts, then stopped by Schmidt]

Schmidt: Some of your premise about Chrome is incorrect, in terms of adoption, and we’re going to get that message out.

Brin: It’s actually exceeding our benchmarks.

Schmidt: I see a lot of Macs in this room, and a lot of very sophisticated people are using Macs now and we need to get a version of Chrome out for that, which we’ll have in a couple of months. Key to browser strength is speed. In general, we announced Chrome OS and Chromium product. Everything is linked together: Cloud, chrome, etc.

At one point do Android and the Chrome OS come together or not come together?

Schmidt: Current definition of use platforms has to do with use patterns. Android for mobile, delivered via telecom store, heavily integrated with telco offerings, like our Verizon (VZ) deal, which we’re enormously excited about. The analog for Chrome is that it’s designed for a 10, 12-inch form factor. They both use Linux, etc. But they’re designed for different uses. [Netbooks?] May be some overlap there.

Is Google being too nice? Is there a rethinking of relationships with aggrieved groups?

Schmidt: In many ways we’ve always wanted to be this Google as opposed to the way we were perceived a few years ago. We’re particularly proud of the way we’re working with advertising agencies, which is very important to us. With the media industry, we’re having success with YouTube and YouTube monetization, and we’ll have more on that coming forward….”We have always wanted to have these partnerships….We’re learning how to do them in a way that they win, too.”

Brin: People can now differentiate between us and the Internet.

Schmidt: Google is an innovator. The Internet is causing collisions. Innovation plus collisions equals opportunity. For instance, the fact that Verizon has embraced most of the open principles that we put forth five years ago is shocking. “It’s pretty amazing. This is Verizon. It’s not some itty-bitty telecom start-up.”

Are you uncomfortable with Google employees’ sense of entitlement? [Per new Ken Auletta book]

Brin: [Refers to layoffs--Schmidt corrects him: "We did not have layoffs."] [Addendum: Schmidt was talking about Google closing engineering offices in Phoenix and other locations; Google did have layoffs last winter.] You’re right:

What do you think about publishers requiring pay walls, and how will you help surface that.

Schmidt: We’re starting with that YouTube. Overall, “there’s clearly a market for free content, and that market is the size of the Internet.” Also a market for subscription/paid. The analogy I would offer is TV. We all grew up with “free” TV. Now almost everyone pays for cable, and some people pay for pay-per-view, “which is ridiculously expensive,” but people will pay for particular events, like boxing. I think all three of those uses will emerge. We’re working on payment models, subscriptions, to enable that.

But what about surfacing paid content in search [this comes from WSJ.com editor Alan Murray]? Will you factor the desire of someone to pay for content into results?

Schmidt: We’re not going to use the price you use as our ranking in results. That’s not going to be our signal. But we’ll incorporate the price people are paying for your content into results. But I’m not going to answer this precisely because I don’t want to discuss how we produce results. The most interesting improvement you could make is that to the degree that we have more of the marketplace data available, we could take that information and reflect some of that in our rankings.

The AP CEO said Google or Microsoft might be willing to pay a premium for an advance look at the news.

Schmidt: We have a deal with the AP, and I don’t want to talk about any specifics of any deal. I don’t think that’s proper. “We have to be very very careful not to favor one media organization over another, with regard to speed or latency.” We are staying out of the media business. “You guys are very good at it, and we’re not.”

[Apologies for tech error; I missed the specific question and part of the following exchange, but the subject is entitlement.]

Brin: We cut down on snacks, etc. to “reset expectations” regarding entitlement.

Schmidt: “Google pays very well. Google is clearly a growth company. People at Google don’t work for those reasons at Google. We don’t want them to come to work for Google for those reasons. We want people to come to Google to change the world. Life is short.” The tightening in the last year has been good for this, by the way, the controls put into place by Patrick Pichette, who is our hero, have been very helpful.

Please talk about M&A plans and goal of one acquisition per month.

Schmidt: That’s been our historic pattern. I think we will be buying small companies–five, ten people. That’s where some of our best stuff has been. One day Larry and Sergey bought Android, and I didn’t even notice. Think about the strategic opportunities that has created. Sergey found Google Earth one day while he was surfing on the Web. And then he walked into my office and told me he bought them. “And I said, ‘for how much, Sergey?’ And it turned out to be a few million.”

Would you buy a YouTube?

Schmidt: Is there another one to buy? The problem with that size of acquisition is that you have to make your money back. I think that DoubleClick and YouTube will be two of our best acquisitions. DoubleClick is already close to paying back, and YouTube will get there soon. But bear in mind that any major acquisition now will involve a regulatory review, because of our size and because our competitors will make sure of that.

[Sorry, missed another question]

Do you anticipate making large upfront commitments for new or renewed search deals [as you did with MySpace and AOL]?

Schmidt: I’d rather not comment on search deals. We are in discussions with both of those companies. “Some of our best friends are in those companies.”

[Missed yet another one]

What will new tablet machines [like Apple's] mean for you? And to content producers?

Brin: Hardware is getting amazing with regard to cost. Used to be that display was expensive. Now that’s cheap, and so are chips, etc. Now, the main cost is broadband connection, or cellular, or however you get to the Internet. That’s why wide broadband availability is important to us. Think about how much you spend on access costs compared to the amount you spend on your handset. The phone cost is negligible.

Schmidt: Not sure how to answer question. We provide the infrastructure below what you’re talking about [touch interfaces, etc.]. Kindle is a good example. Don’t think about current one, think about one two or three years out. I think there will be many kinds of things like Kindles, and that’s a material change in the way people will interact with hardware, media.

Brin: I think it’s better if hardware isn’t locked down to specific platforms.

[Long exchange between Schmidt and Danny Sullivan that I'll have to pick up later]

Should Google be required to lease servers and access to Google checkout numbers to deal with “lock-in” issues that broke up the telcos?

Schmidt: Google Checkout isn’t interesting. But I think your analogy is wrong and that there are no data to support your theses.

[I missed the next question on the book settlement about orphan works, etc.]

Schmidt: A lot of these complaints are being made by people who don’t want a solution.

What are the reasonable book settlement proposals you’ve seen?

Schmidt: Goal is to get all the books to everyone and to get all the authors compensated properly. Some of the proposals make sense to me, but I don’t want to characterize them. Not a perfect solution, but the best one we can do.

How will book settlement affect international users?

Brin: It won’t. We’d love settlements that work across a range of countries.

Why won’t you be like Microsoft with regard to antitrust?

Schmidt: Many reasons. Culture, for one. Another reason is that majority of users are one click away from moving away from us. Third: If we went into an “evil room” and had an “evil light” shined on us, and we then behaved in an “evil way” we would be destroyed….There is a fundamental trust between Google and its users.”

Schmidt walks through “ludicrous” thought experiment whereby Chrome takes 80 percent of market share and then tries to lock consumers in, noting that it wouldn’t work due to open source.

Do you think you’ll take another stab at moving into radio, print?

Brin: We are quite optimistic on the TV front. Radio and print didn’t pan out as well as we thought initially. One of the reasons is that those mediums are moving online and consumers are moving online and the publishers/producers want to work with us there. “We were kind of at the dock where the ship had already left.” But TV is quite similar to the Web in terms, potentially, of measurability, so we’re excited about those prospects.

Is page rank broken? People are gaming it, etc.

Brin: No. We have to continually develop. Part of the issue is span, but the main issue is that everything changes. We’re doing a much better job of ranking than we did a decade ago. If we just rested on our laurels with what we wrote in paper from 1998, we’d be in big trouble.

Last month, Google (GOOG) lost Michael Rubenstein, the head of its ad exchange, shortly before the ad giant formally rolled out the service to the public. Now Jeff Green, the top guy at Microsoft’s AdECN exchange, is out as well.

In an email memo, Green says today is his last day working for Microsoft (MSFT), which bought his company a little more than two years ago; he doesn’t mention what he’s doing next. Green’s old boss, former AdECN CEO William Urschel, left Microsoft earlier this summer.

One big difference between Green’s departure and Rubenstein’s move, which saw him land at AppNexus, a quasi-stealth ad tech startup: Rubenstein left a few weeks before his ad exchange launched, to much hoopla. But Microsoft hasn’t said much about its exchange product for quite some time, and ad industry insiders believe the product is stalled in Redmond.

I’ve reached out to Green for more info and will update if I hear back. Here’s the text of his goodbye message:

From: Jeff Green
Date: October 6, 2009 9:52:24 AM PDT
To:
Subject: Thank you

Dear Friends & Colleagues –
As you may know, today is my last day with MSFT/AdECN.
I can’t believe how far we have come in such a short time. Though nearly 5 years ago, it seems like yesterday we started AdECN as pioneers in the exchange space. Using an auction for every impression, we debated whether to build an ad network or an exchange. We opted to build an exchange because there were hundreds of ad networks but there were zero exchanges.  We launched in London with our mantra of neutrality and with great partners despite some of the ad network objections:
“The world doesn’t need an ad exchange. It needs our network.”
“If you succeed, you threaten our business. We hope you fail.”
“You’ll make online advertising a bloody complicated mess and then go bask in the f*&$in sun while I’m still doing this ad sh^$.”
It was quite a testament to the model that momentum grew so quickly.  It is amazing to look at the exchange landscape now and see so many companies built on or around the exchange model. It has been great to see how much things have moved even in the short time that we’ve been preparing for our federated pilot this fall. Microsoft continues to make the exchange a central part of its strategy. Similarly, Google’s Eric Schmidt recently declared the exchange was Google’s top priority. Growing transparency and buyer/seller control is great for the industry. The market has evolved so far so fast.
The true exchanges will always be more of a referee than a player–since they are in the business of creating a fair market. As I look across the playing field, I see massive amounts of opportunity and I look forward to playing in the ad game in the next chapter.
Anyway, I primarily write this email because I want to say thank you. This chapter has been one of the most exciting of my life. AdECN never could have grown like it has without great employees, great partners, great clients, and a great parent company–Microsoft. I sincerely thank you for your partnership—and in many cases, friendship.
For Microsoft’s AdECN/TPAN/reseller matters going forward. Please contact the following:
Jed Nahum (EMAIL REDACTED) The manager of the TPAN team going forward and is very acquainted with the exchange.
David Coburn (EMAIL REDACTED) The manager of the AdECN product team and the AdECN Biz Dev team for at least the interim.
Ben Mottau (EMAIL REDACTED) manages all ad broker/buy-side partnerships for AdECN.
Jason Shue (EMAIL REDACTED) manages all pub broker/sell-side partnerships for AdECN.

I would very much like to keep in touch. Linked in and my cell phone is the best way going forward: http://www.linkedin.com/in/jefftgreen and XXX.XXX.XXXX.

Best wishes.

Until next time,

Jeff Green