Nikesh Arora at the Institute of Directors 2007 Convention




Uploaded by Google on 18.07.2007

Transcript:

NIKESH ARORA: Good morning, ladies and gentlemen, and
thank you very much for having me here.
The last time I was here was a few months ago, for
the Cirque du Soleil.
So last night I tried to explain to my nine year old
that I was going to go to the Royal Albert Hall and speak to
all of you.
And for the life of me, I could not convince her what
possible skill could I have that people would want to see
me perform at the Royal Albert Hall.
That criticism notwithstanding, I'm hoping in
the next 15 minutes I can share with you why I
passionately believe that the internet provides an
opportunity, which is unparalleled, and perhaps can
be likened to the last Industrial Revolution.
If you think about it, 200 years ago, Britain had this
huge thing happen called the Industrial Revolution, where
we went from a local to a national economy.
We went through from a rural to an urban society.
We went from small scale production to mass production.
And I think the internet today offers a very similar
opportunity for us to go from a national economy to a global
economy, perhaps, from what we call today an urban society to
a global society, and even specializing in terms of
production in various countries around the world,
which we're beginning to see.
The internet brought with it not just the fact that there
was a set of normal protocols and open source code, et
cetera, which people could use.
It actually brought with itself a lot of choice and
competition.
From my perspective, I have had the opportunity in Europe
to look at tremendous amounts of businesses which have used
the internet opportunity to transform themselves.
If you think about the internet actually--
I used to be a fund manager, equity analyst, many years
ago, when the internet first came about in 1999.
And people thought that was a euphoric event.
It was investor folly.
It was something that was going to go away.
If you go back and think then, the first phase of the
internet was all about information.
The first reaction people had was, hey, I can go to the
internet, and I can find whatever I want to find.
That soon gave way to what I call the wave of distribution
and communication, when you can see people like Amazon.
like eBay, like Skype, like Expedia were born.
This was a time when smart business people like
yourselves sat and said, how can I leverage the fact that
there are 350 million people connected together on this
common sort of protocol, common community?
How can I find a way of taking existing business, and turn it
on its head, and find consumers who want to
participate with me in this phenomenon?
What is fascinating now, I think 2000, where we have
probably about a billion people connected around the
world, people are beginning to do different
things on the internet.
I'm sure a lot of you heard of things like Myspace or
YouTube, et cetera.
These are phenomena where two people have gone into a garage
and built businesses on the back of the fact that a
billion people globally are connected.
Let's try and see how that has brought about change for us in
various industries in various sectors.

The funny problem is whenever I go make a presentation, I
can't seem to figure out the technology, and I claim I work
for a technology company.
I'm clicking away at this thing.
There we go.
If you go to dictionary.com and type the word established,
you'll find established means secure, means something that
is there with a sense of permanence.
I actually believe there is pretty much no industry or no
business which can claim to be established over the next 5 to
10 years, given the tremendous opportunity that the internet
provides us.
If you look what happened, if you look at the auction
business, it was eBay which came about and turned the
auction model upside down.
Today eBay is one of the largest auction
businesses in the world.
And people thought it was just a business which was going to
be used to take stuff from my attic, or your loft, et
cetera, and be able to sell it.
Actually, today they are one of the largest sellers of
goods and services on the web.
I think $60 billion was what I heard last, was the total
amount of gross market value they were going
to be able to sell.
If you look at what happened to the travel business, things
like lastminute.com, like Expedia, have come about and
turned that business upside down, because of the fact that
internet has allowed them tremendous amounts of
distribution, and ability to access consumers on the web.
Take a look at the book selling business.
There is no reason in the world that Barnes and Nobles,
WHSmith, et cetera, should not have been the next Amazon.
And what is it that Amazon found that was going to turn
around the whole industry on its head?
Amazon today is the world's largest bookseller.
It's probably worth more booksellers
around the world combined.
So the internet has provided an opportunity where
traditional, established businesses have been loath or
have been slow to go out there and grab that opportunity.
And a lot of entrepreneurs, a lot of small businesses, have
stepped up to the plate and used that opportunity to build
large businesses, whether it's Wikipedia, which took on
Encyclopedia Britannica by using the
wisdom of the crowds.
And I believe we are just at the beginning of this
revolution.
I think in the next 10 years, we're likely to see a lot more
people go out--
This is a picture of our founders in their--
which it doesn't quite look like the garage they were in,
but it's a big garage.
It's in the US.
They have bigger garages.

This is a picture of those two guys.
What is fascinating is a lot of the internet start-ups have
come about by two founders, whether it's Myspace, Skype,
Bebo, Facebook.
There must be something about two people getting together.
But if you look at this, this is what the internet provides
as an opportunity.
You can go out there, take a business model, look at it,
take a look at the opportunity it provides.
And I'm going to give you a little primer on how to go out
and start your own business in a garage, if you wait for
another five minutes.
Now often I get asked, well, this is fantastic.
You know, in 1999, the NASDAQ was at 5,000.
The internet crashed, and life went back to normal.
So this is yet another wave. This is going to go away.
What is fascinating is today, if you add the market value of
the top five internet companies in the world, it
actually exceeds the entire value of the
internet market in 1999.
So what is fascinating is, I think there are three
fundamental drivers which exist in the industries today,
which are going to make sure that this is not a passing
fancy, this is not something that is going away.
The number one opportunity is the opportunity of the
reducing cost of technology.
For those of you who are technologists, there's a law
which we all know, called Moore's Law, which talks
about-- somebody moved faster.
I didn't do anything.
Better leave it over there.
So there's a law which basically says that storage
doubles every 13 months.
The cost of storage continues to double every 13 months.
To give you more of a layman example, a lot of you are
familiar with the iPod.
Today's iPod carries about 20,000 songs.
It's not infeasible that in five years from now, an iPod
will be able to carry approximately one year's worth
of video without having to repeat itself.
Or in 8 years, you'll have an iPod which can carry the
entire commercial music ever created in the world, perhaps
in 10 years, the entire commercial video ever created
in the world.
Now just think about the business
opportunity that it provides.
Perhaps I will not need a broadband connection to
download videos and music.
I can go to Africa and sell these iPods for $249, and
people can just unlock the content of the iPod.
So there's a tremendous revolution going on in
storage, which I think is going to create an
opportunity, from a business model perspective.
Think about access.
I can't do this in this room, because I won't be able to see
you guys, but normally I ask the people in the audience how
many of you can live without having broadband access?
Most of you, hopefully, will say no.
And if I'd asked the question three years ago, people would
actually say, I can live without it.
What is fascinating is that internet access has reached a
tipping point beyond which it's gone from being a
nice-to-have to a must-have. It's almost
like a mobile phone.
So what's fascinating is there are 250 million people who are
accessing the internet through broadband.
The expectation is, by the end of this decade, that number
will go to 413 million.
Of course, the broadband wars in the UK have precipitated
that change for us, highly likely we will reach that
number of over 70% of the population of the UK accessing
the internet by broadband much faster than is anticipated for
the rest of the world.
So clearly, when people have the ability to access the
internet in a broadband fashion, that becomes their
first port of call.
If I was to go around the audience and ask you questions
about finding some piece of information or doing some
research on some product, our first port of call eventually
is beginning to become the internet.
And the reason that is so is because we all have learned
that it's much easier, quicker, faster, to find this
information.
And now I have the ability to access this information in a
very, very, very quick fashion.
Last but not the least, the tools of production have been
democratized.
I can buy myself a camcorder for the cost today of what it
used to cost to buy semi-professional equipment to
create videos.
Perhaps most of our mobile phones have the capability of
taking pictures which are better quality than most
cameras 10, 15 years ago.
So what's beginning to happen, consumers themselves are
beginning to create content.
And that, again, creates a huge draw for them to go
access the internet.
I'm saying there's a billion people out there connected to
the internet who are providing us this opportunity to address
these people.
What is fascinating is whilst a billion people is only 16%
of the world's population, it's 89% of the world's GDP.
So if you're in business, never before have a billion
people been available for all of us to target as businesses
as potential consumers for our goods and services.
So, as I promised, here's my primer.
I think there are five opportunities out there for
most businesses, large and small, which will allow us to
take advantage, or leverage, what the
internet has to offer.
Let's start with the first one, unlimited shelf space.
There's a fascinating example of two companies in the UK,
one called yudu.com, which sells greeting cards.
They saw an opportunity.
They had tried to sell greeting cards to Boots and
the other stores, and they realized that most of the
stores were not willing to hold on to the entire
inventory they had to sell.
So guess what?
They work out of Coventry.
They decided to set up a website.
And today they have limitless inventory, because they can
offer almost every type of card.
You can even customize your card.
They'll print it for you, and just for you, and send it over
to your house.
Another example is of a company which is called
sillyjokes.com.
They sell 3,000 products on the internet.
They have 800 square feet of physical space.
Their revenue growth is 100% every year.
Once again, what they've managed to do, the internet
allows you to stock stuff on the web, and showcase it to
consumers for a little margin of the cost it would take to
have it in a full store.
For those of you are not small business inclined, let's try
this differently.
Walmart, which I'm sure all of you have heard about, the
large American convenience store.
I don't know what they call it.
Supermarket, they call themselves nowadays, not
convenience store, although they claim it's convenient.
If you look at Walmart, it carries 1,000
new CDs every year.
Actually, 35,000 new CDs are produced every year, of music.
So Walmart actually sits on behalf of us, the consumer,
and chooses out of the 35,000 which 1,000 are customers
likely to enjoy listening to.
And typically their buyers get it wrong.
If you go to the Walmart stores in the US, you'll find
a big rack in the back, big bin, where everything's
selling for $1.
That's because somebody made a mistake and thought we were
going to like Madonna or--
sorry-- whatever.
So what's fascinating, if you to go to Amazon.com or
Blockbuster.com, they sell the entire 35,000.
And this is another example of the internet allowing you
unlimited shelf space, and perhaps an opportunity to
create products and have products stocked for-- what I
call the next example is making unviable products
viable, or the ability to target the long tail.
There's a magazine called Wired Magazine, and the
editor, called Chris Anderson, has written a fascinating
book, called The Long Tail, which basically suggests that
because of the reduction of cost of distribution and
production, you can now create products for niche markets
which you were not able to create before.
It's almost like saying if I had a small store in a village
and I wanted to sell a very unique product, a very
exciting form of chocolate, or if I had a book on Peruvian
orchids, my potential customer base was
limited to my village.
Now the fact that I can sell a book on Peruvian orchids on
the internet allows anybody who's interested in Peruvian
orchids around the world to be able to go out and find that,
and be able to buy it from me.
So it is basically expands your potential market segment
and allows niche products to become viable.
Let's take another opportunity.
The third opportunity is the falling cost of technology.
Today, it is totally possible that any small business or
large business can acquire top technology as a variable cost.
Traditionally, technology has been a fixed cost to a
business, whether it's through Google, we have a set of
applications that people get at a variable cost, or it's
through your mobile phone, or it's through other companies
called salesforce.com, or it's from Microsoft, called
Microsoft Live.
You can actually go out there and acquire technological
products which you can use on a variable cost basis, as
opposed to a fixed cost basis, which basically allows lots of
businesses to get started without having to create huge
fixed costs at the beginning.
Another opportunity that I think is one of the most
fascinating opportunities is the ability to acquire
customers on the internet.
Clearly, Andrew talked about the opportunity for internet
search advertising.
I'm not here to talk about internet search advertising,
but there is an example of a company called
trade-appliances.co.uk.
And they started in 1988 with one store.
They started another store, but they realized that for
them to go national, it was probably better to do this by
the internet, as opposed to starting more physical stores.
Today they get 80% of their sales from the internet.
And the way they acquire the customers, they actually go
out and find customers online who are looking for this
either through search, or by doing online banners, or by
doing online advertisements.
And it's fascinating how they are able to acquire customers
on a national scale using the internet, without having to
set up physical goods and services.
Another example in the UK is a company called Glasses Direct,
started by a 23 year old in 2004.
He realized that he didn't want to go out and spend GBP
150 at our local optician, because he felt that it was
too high a price.
He set up an internet business from his house.
He sold 3,000 pairs of glasses in the first 4 months.
In 2005, he sold 16,000.
2006, he sold 60,000.
He sells them all for GBP 28.50.
And I think he's got about 20 employees now in 2 locations
where he physically stores.
He does not have a physical storefront for selling the
stuff anymore.
So clearly there is an opportunity out there to go
out and acquire customers using what I call the
networked community of a billion people, or perhaps in
the UK, more like 40 million people.
Last but not the least, the opportunity for most
businesses today is that the internet allows for parity of
information.
Today I can have the same information as an individual
as large businesses used to have. When I worked in the
financial industry 10 years ago, it was impossible to get
real-time stock price data, because that was only saved
for large financial institutions, because they
could afford it.
Today, anybody, even me, can to go to the web and go to
about 50 different places where we can have access to
that information.
And what is fascinating is the parity of information creates
even more business opportunities.

I'm going to give you an example of how in the minds of
most established businesses they actually believe they
have the internet opportunity understood, they have a
fascinating internet strategy.
So two years ago, when I bought my house in the UK, my
dishwasher went bust after the first three months, and my
wife told me I need to go find a new dishwasher.
Now being lazy and looking for efficiency, I didn't want to
have somebody redesign my kitchen, so I said, this is
very simple.
I'll find the same dishwasher.
This one will go out.
That one will fit in.
So I did a little bit of research, found the model
number, and I went to the web.
I went to the web and I typed the dishwasher company's name.
And I went and found-- and it's not the name whatever
that's on that dishwasher, because I don't want to
disparage anybody here.
But I went and found the company's website.
I was confronted with a picture of the CEO, a handsome
young man, which is fascinating, but I was not
there to look for his picture.
I was there to find myself a dishwasher.
So I clicked around, and it said, the brand
values of our company.
Fantastic.
Now I even know what the brand values of the company are.
But I still couldn't find my dishwasher.
Then I clicked to the left side.
It showed me pictures of their production facilities.
Very fantastic production facilities, never knew how
dishwashers were made, but now I do.
But I still couldn't find my dishwasher.
So I kept clicking and looking.
Eventually I found a place that
said, choose your country.
I said, ah, you could have asked me that before.
But anyway, I said the UK.
I was at the UK site.
Now I had the picture of the managing director of the UK.
Fantastic.
Another handsome young man.
Thankfully the brand values were the same, so I didn't
have to go through the whole education process
on the brand values.
Eventually even silly me was able to figure out that there
was a place where I could enter a product code.
I entered the product code.
It showed me the dishwasher.
And it even compared the dishwasher with many other
dishwashers they had.
Well, I knew the one I wanted.
Then I clicked, it says Proceed.
I clicked on the Proceed button, and it says, please
call the following retailer to find a dishwasher.
Now, the reason I'm telling you this story is that has
been the approach of many businesses in how they address
the internet.
They're actually turning customers away.
And by the way, this has a negative impact on their brand
value, because I, as a consumer, felt they don't get
the internet.
And fascinating, I went back to Google and did another
search on the same product name.
This time I went to find an ad, because I figured the
advertiser must actually be selling me something.
And I went to another website which sold dishwashers.
In about three clicks I had bought a dishwasher, which was
delivered to my house.
But I actually went to the brand originally which had the
dishwasher in my house.
The reason I tell you this story is because a lot of
existing businesses, a lot of existing brands on the High
Street, are not the first port of call that all of us go to
on the internet.
And again, I believe personally that the landscape
is still wide open.
We, as consumers, are going out there and developing our
preferences.
It's almost like when you move to a new city, or you move to
a new town, first time, you spend your time, you go look
at what the local grocer, where the local bakery is.
You go check everything out, and then you form your
preferences.
And I think that is the behavior of consumers on the
internet today.
I still have not alighted on one particular website I like
to buy my tickets.
And I think most of us in this room try and plan our travel
on the internet.
And a similar thing applies to you that applies to lots of
other products and services that we buy.
So I think the opportunity is out there.
The web is wide open.
There is an opportunity go out there and build yourself a
brand on the back of solid customer service, on the back
of a great customer experience.
And I hope all of you will take something back from
today, and be able go back and apply this.
Thank you very much for listening.
[APPLAUSE]
MALE SPEAKER: Just a few key questions.
How, as a manager, do you keep focus and control of an
organization that's gone from nothing to $10
billion in 10 years?
NIKESH ARORA: I think that the key is not to
try and control it.
One of the things which is fascinating is, as you said
earlier in your introduction, Google has had the opportunity
to become the consumer's choice as far as internet
search and some of the internet products are
concerned, I think because of the commitment and the passion
of our founders on focusing on the consumer.
So if you walk around the company--
and I used to work for T-Mobile before this.
It has nothing to the fact that T-Mobile
is a sponsor here.
But if you walk around the company, and you talk to the
founders, everything is focused around, how does this
make it a better consumer experience?
How does this make it a better product?
And the first focus is always that.
The discussion on how do you make money out of this, or how
does this become commercial, is always secondary.
And everything I'd learned over my career was you look at
the four P's of marketing, and you have a pricing strategy,
and you have a promotion strategy.
There is a single-minded focus on products.
And coupled with that, there is a single-minded focus on
hiring the best people in the world.
And I think so far, that formula seems to have worked.
But clearly, as the company evolves, we will have
different challenges.
MALE SPEAKER: When it's grown into that size, and suddenly
you find yourself looking at some of the Microsoft, they're
too dominant, criticism--
there's a great quote from your co-founder Sergey Brin
here, which I'd just like you to comment on.
"Some say Google is God.
Others say Google is Satan.
But if they think Google is too powerful, remember, all it
takes is a single click to go to another search engine.
People come to Google because they choose to." How do you
handle that domination criticism, or do you just
ignore it and carry on growing regardless?
NIKESH ARORA: You know what is fascinating is that we don't
spend as much time within the business on trying to manage
the discussion which happens in the press.
And from our perspective, I think the best thing is to
continue to work hard on trying to
build the best products.
And I think you've encapsulated what
I would have said.
We're one click away from competition, and if consumers
don't like the product that we have to offer,
they will walk away.
Our brand exists because consumers like our products.
Our organization exists because we want to build the
best product for the consumers.
And our success is effectively driven by consumers wanting to
use our products, and liking them.
So I think that's where we as a business to focus, and all
this discussion will go away.
MALE SPEAKER: All right.
Imagine you came here today as a small
business owner or a start-up.
Give us a bit of advice and your expertise, supposing you
wanted to get yourself as a small business well up the
search engine preference list for as little money as
possible, how would you do it?

NIKESH ARORA: What's fascinating is I actually
believe a lot more small businesses will be even more
successful on the web than some of the larger businesses,
just because of the ingrained inertia, and the fact the
internet is still not a big, relevant
part of their business.
Having said that, there are a lot of examples out there of
businesses which have managed to work themselves up the
consumer preference, and what it takes
is a fantastic website.
What it takes is something that consumers like it.
It takes other websites recommending your website as a
good place to do business.
If all of those things happen and you have a unique enough
proposition, over time, consumer preferences land you
up at the top of the list. There's no one magic formula.
MALE SPEAKER: OK.
Very good.
Last question for today.
You were recruited into a really key role.
What stands out in your memory from your first meeting with
the founders, and how is their style compared to the more
formal, traditional leaders like a Jack
Welch or a Bill Gates?
NIKESH ARORA: Well, what is fascinating, as most of you
might know, our business is run by a triumvirate.
So we have two founders who started the business when they
were 24, and now are probably about 32, and our CEO, Eric
Schmidt, who is slightly older than them, who's sort of the
wise person who teaches us how to go about our business from
a professional business perspective.
What is fascinating for me was when I was first interviewed
at Google, I interviewed with my boss.
And then I got a call on Friday afternoon saying, what
are you doing Saturday afternoon at 2 o'clock?
I said, it's the weekend, probably spending
time with my family.
And they said, well, we'd like to come to the British Museum,
because the founders are there, and they'd like you to
be interviewed in the British Museum.
So my interview at Google was walking around
in the British Museum.
That was my first interaction with our founders.
And the second interaction, which was fascinating, when I
joined the company I went to California, and I
walked into a meeting.
The meeting started, and I saw Larry Page, one of our
founders, sitting on my left.
And I couldn't find the other one.
I said to people, so, where's Sergey?
They said, oh, he's lying behind you over there doing a
back massage, because he just bought this thing from
Indonesia, and he's having back problems. So he was
massaging his back, and paying attention, of course to what
was going on.
But it's just a very informal attitude, which I have not
seen in any other company before.
MALE SPEAKER: And they haven't changed in that style at all?
NIKESH ARORA: No, they haven't changed too much.
MALE SPEAKER: Very good.
All right.
Well, we'll watch the growth of Google with huge interest
over the next two years.
And I hope we'll have you back here to talk about even bigger
success stories in the future.
Ladies and gentlemen, Nikesh Arora.
NIKESH ARORA: Thank you very much.