Inside Google

Google CEO Eric Schmidt, brought in a decade ago to provide suit-and-tie management to the search giant, had a Twitter-size explanation for stepping aside Thursday to make way for the return of co-founder Larry Page.

“Day-to-day adult supervision no longer needed!” Schmidt said on his Twitter feed as word of Google’s unexpected shake-up spread.

The announcement that the 37-year-old Page, who with Sergey Brin established Google in 1998, will return to run day-to-day operations as CEO upstaged Google’s own good-news fourth-quarter earnings report.

The shake-up capped what is shaping up as one of the most tumultuous weeks in Silicon Valley history. Just three days earlier, Apple co-founder and CEO Steve Jobs announced he was taking an unspecified medical leave, raising questions about the company’s future without its iconic leader in charge of operations.

Minutes after Google’s news, Hewlett-Packard announced a massive overhaul of its board of directors in the wake of clumsy handling of the ouster of former CEO Mark Hurd in August. Hurd was forced out after HP said he violated standards of business conduct. He’s now president at Oracle.

HP named five new board members, including former eBay CEO Meg Whitman, who last fall lost a race for governor of California in which she spent $140 million of her own fortune. Four directors were dropped from the board.

Industry analysts said they could not recall a confluence of such seismic changes in so short a time in Silicon Valley. They pointed out that Page’s return parallels previous encores: Jobs’ return as Apple CEO in 1997 and Yahoo co-founder Jerry Yang‘s regaining of the CEO mantle in 2007. “I’m sure there is more going on behind the scenes at Google,” says Greg Sterling, an independent analyst who closely follows Google. “Page might be cheered as a return to the company’s roots, as a more authentic leader.”

Google, whose top executives sometimes operated as a triumvirate, is handing the CEO reins to the comparatively inexperienced Page at a time when the company faces stiffening competition from Facebook for consumers and advertising dollars. Google’s social-media efforts have been wanting, though the company reportedly is working on a social network that would, in part, compete with Facebook.

“Google is on the outside looking in at the social networking phenom,” says Roger Kay, president of Endpoint Technologies Associates. Video service YouTube, which Google owns, is “vaguely social, but that’s about it.”

Longtime Google watcher Danny Sullivan, the editor of SearchEngineLand, said that despite its profits, Google is a company with a “declining reputation,” that is badly in need of a shake-up. “This is a company that a few years ago was seen as doing no wrong,” he says. “Today, there are a lot of concerns about privacy and bureaucracy, and calls in some quarters for an antitrust review.”

Google is facing tests here and abroad as it tries to close a $700 million deal, announced last July, to acquire travel search site ITA Software.

The Justice Department is reviewing a request by Expedia, Farelogix, Kayak and Travelocity to block the deal and launch an antitrust probe. Meanwhile, Europe in November began probing allegations that Google systematically ranks search results derived from rival search engines lower than they should be.

Success – but missteps, too

Schmidt, 55, has led Google through a decade of enormous growth, as it has become one of the largest businesses in the world and, to some, a corporation seemingly poised to dominate commerce on the Web. The company’s Android-based smartphones compete aggressively with Apple’s popular iPhone. And Google remains tops in search.

But while Schmidt provided a polished face to the company’s management, his slick-speaking style sometimes got him into trouble, Kay says. He noted Google’s unsteady efforts to establish a foothold in the huge China market and controversial comments that suggested a lack of concern about privacy issues.

Schmidt will get the new title of executive chairman and serve as an adviser to Page and Brin, who both sit on the board and hold titles as presidents for products and technology, respectively. The change is effective April 4.

“In my clear opinion, Larry is ready to lead and I’m excited about working with both him and Sergey for a long time to come,” Schmidt said.

Page praised Schmidt as “a tremendous leader” who has taught him much.

“There is no other CEO in the world that could have kept such headstrong founders so deeply involved and still run the business so brilliantly,” Page said.

On a conference call with analysts, Schmidt predicted the move “will produce even better success for the company.”

Google posted $2.54 billion in fourth-quarter profit, up 29% from the year-ago quarter on revenue of $8.44 billion. Shares rose $9.18, or 1.5% to $635.95 in extended trading after the announcement. In the regular session, shares fell $4.98 to close at $626.77.

Page said Schmidt has “done an outstanding job running Google. I couldn’t have imagined a better leader for the company. … No one else in the universe could have accomplished what he did.”

For his new position, Page said: “Google is an incredible opportunity. When we started it, people thought we were coming in too late, there were too many search engines. It was early then, it’s early now. I can’t wait to get started.”

Brin said he wants to direct more attention to “personal passions” in the Google pipeline. “There are several significant new products I hope to tell you about in the future.”

Schmidt said he will work on “what I’m most interested in: customers, partners, external issues, more than the internal issues I’ve been working on.”

A question of privacy

Sullivan says 2010 was “the worst year,” ever for Google, from a PR standpoint, and that Schmidt made too many statements that came back to haunt him. With Page at the helm, “They lose all of Eric’s baggage,” Sullivan says. Even if Page is “the quietest of the three. Maybe he’ll be a quiet CEO.”

In late 2009, Schmidt drew the ire of privacy advocates by declaring in a widely circulated CNBC interview, “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”

At the Washington Ideas Forum conference last October, Schmidt described Google’s approach to privacy as straddling the “creepy line.”

John Simpson, spokesman for non-profit advocacy group Consumer Watchdog, says Schmidt “has put his foot so far in his mouth, so frequently, about privacy that it got him kicked upstairs.”

Adds Simpson: “Larry Page stepping in as CEO is a great step, if he remembers where he came from and what the company stood for when he co-founded it.”

Company observers say Schmidt may have been hamstrung, somewhat, operating day to day under the shadow of the company’s legendary co-founders, Page and Brin. Many times it seemed as if the company was run by committee, says tech industry analyst Scott Cleland, of research firm Precursor.

“The leopard now will have to change its spots — never an easy feat,” Cleland says. “The big open question is how a company culture that strongly emphasized loose management structure will adapt to a substantially tightening structure.”