Romesh Vaitilingam interviews Hal Varian for Vox

January 2009

Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/3541

Romesh Vaitilingam: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam, and today's interview is with Professor Hal Varian who is on leave from the University of California at Berkeley as Chief Economist at Google. Hal and I met at the American Economic Association's Annual Meetings in San Francisco in 2009 where I began by asking him what the Chief Economist at Google does.

Hal Varian: Well, it's kind of a mix of traditional and non-traditional tasks. I would say the group that I lead has three primary roles. One is working on mechanism design issues – Google makes all of its money virtually through an ad auction, so many issues come up on how to keep that alive and functioning and modified, improve it. So we do work in that area.

The second thing we do is we do the forecasting in Google, so this is basically time series econometrics for revenue, queries, capacity expansion…all sorts of work in that area.

The third thing we is we do a lot of work on advertiser behaviour, ad effectiveness, marketing and quantitative marketing-related work.

Romesh: So there used to be a lot of economists working in business back in the old days. And then they largely died out, it seemed to me, in 70s and 80s. But it seems to be coming back now. Is that something to do with the development of the information and communications technology, and the kind of applications of economic analysis that are valuable there?

Hal: Well, there's actually a fairly large group of business economists. A lot of times they'll be doing industry forecasting and industry analysis for the areas that are of interest to the company where they work. It's just that this is very specialized sorts of work. It is usually just internal to the company, so we don't hear quite so much about externally.

But there's a pretty large group of people that do that kind of work. I think in Silicon Valley there's been a lot of interest in the area because so much of what they're doing impinges on economics. So I talked about some of the things I worked in for Google, but there's also a whole set of policy issues about broadband policy, about copyright, patents, pricing issues... a number of things that are relevant to economics in those areas.

Romesh: Now when the Internet happened, I guess, what, 10, 15 year ago, everyone was talking then about this was changing the rules. And you wrote one of the books at that time that said the rules haven't changed. In fact, we're not necessarily a new economy, we can still use the old techniques of economics. In fact, this is a great opportunity to use them. How do you reflect back on that now?

Hal: Oh, I'm absolutely convinced that's true, because the forces that we see at work, even today, can be described in I think a much more profound way using the vocabulary and the tools of economics. A third thing I do at Google is actually read those tea leaves for the executive board. It's not really forecasting, it's just trying to interpret some of the current events and apply what I would call mainstream economic views to what's going on now.

Romesh: So the heart of the Google business is all about search, isn't it? How does economics come to add value to that process, that function, that need that we all have?

Hal: Well, the biggest aspect that I work on is on the monetization side. How do you monetize that search? And, of course, the way we do it is through showing ads next to the search results. This is really the most effective from of advertising ever invented because by construction the ads are typically highly relevant to the search.

So it's what you're thinking about now, what you care about. You're doing a search and you're seeing commercial ads, commercial opportunities that are related to that search. So it's far more effective than almost any other kind of advertising. So that's been one of the great features of Google, that they figured out a way to build a business around search.

Romesh: And does that have a superstar economics feature to it, in that Google is the place that people go to, and it's hard for other people to get into that business?

Hal: Well, the way we think about it is the competition is just a click away. Because it's very, very easy for the user to choose a different search engine. Now that there have been effective ways to monetize search, there's really intense competition for those users. So we think of it as being a pretty competitive environment and we have to work every day to make our system better.

Romesh: One of the big issues that people are talking about today, particularly around the publishing industry, is about the end of print. They're worrying about this in the book industry, in the newspaper industry, in the magazine industry. What's your perspective on that? How does Google or you as an economist think about that issue?

Hal: I think we're going to see a lot more devices like the Kindle and mobile phones. Portable devices that allow you to pull up text. It's likely because of the structure we'll see shorter pieces, more succinct pieces in text, but I don't think the business is going to disappear by any means.

I think we do have a model for support: advertising support and micropayments support. So my view is it's more of a transition than a funeral.

Romesh: That's a good analogy. But how do you think people are going to make money out of content? Because that seems to be the thing that people are most worried about.

Hal: I think so. I think the issue is if you look at content, it's not as if we have an insufficient supply. There's a huge amount of content that's available, accessible on the web. There are many, many people participating in the business. The issue is for producing high quality stuff, it requires an investment. You need to send the foreign correspondent to Iraq, or you need to get the team of experts assembled to analyze a particular issue. And so that always requires some funding. I think we'll see a mix between advertiser-supported and payment-supported media in this area.

Right now everything's advertiser-supported but my view is the pay-per-view is going to come back for certain kinds of content: very specialized content.

Romesh: Let's go back to the forecasting issue that you mentioned as one of your functions. That's an area where I guess economics, particularly in the moment, has been getting a bad press. Is there something of value that an economist adds to a business, in say, looking at broad macro issues in terms of forecasting, or is it more specific? Are we looking at industry developments, technological developments and marketing opportunities?

Hal: It's typically much more specific. Because, for example, we need to make sure that we have capacity available in Indonesia as a number of queries from Indonesia grows. So there's a question of how many queries would you expect to see in Indonesia a year from now.

And so we do that sort of analysis, and there's some influence from macro-economic events obviously. Telecommunication investment is going to go up or down. But a lot of this stuff is not so much influenced by the usual business cycle fluctuations, but it's driven by its own internal logic. Actually, you can do really remarkably good forecasting, six to nine months out. Using pretty standard techniques; nothing that's particularly exotic.

Romesh: It's interesting you mentioned Indonesia. I was thinking about other countries and the whole language issue. That must be an interesting issue for Google and for the internet generally. Presumably, the English language – does it increase in value?

Hal: Well, nowadays every product that Google launches has to be available in 40 languages. When you look at the number of internet users in China, it's pretty close to the number of internet users in the US and they'll surpass it in a few years. So there's a lot of challenges involving other languages, but we're a global company and we have to respond to that.

Romesh: Google is known for offering its employees the opportunity to experiment and think about projects of their own that might be part of the Google package in the future. What kind of things do you and your team think about in that line?

Hal: We've done some fun things that were done mostly just because people thought they were interesting. We did some analysis of the election, for example, the role that the internet played in the election. Now that was quite interesting.

You've probably seen these reports about the Google flu forecast. We did some work on that looking at queries that were related to symptoms and how those helped forecast the prevalence of flu in different geographic areas.

There are a lot of things of that sort. We have this fantastic data, so there will be projects that will come up that may not be directly revenue-related, but are just interesting from a scientific viewpoint.

Romesh: In terms of aspirations for young economists, it sounds like there might be more opportunities in the business sector for developing their research careers, not just maybe being stuck in the university or international organizations or governments.

Hal: Right, right. I think that that is a very important issue - that our system is set up to train more teachers or more university professors. But there are a lot of opportunities in the public sector, a lot of opportunities in the private sector. I think that the work that economists do is very valuable, and there are other sectors of the economy where they can be usefully employed.

Romesh: Hal Varian, thank you very much.

Hal: Thank you.