People work differently during time that is defined as their own, to get creative and do what THEY want and not necessarily what will impress the top brass. Some astounding ideas can come from this type of free time - stuff the top brass never would have thought of. They can't "get them to work on it anyway" if they don't think of it.
My work is good and high quality when someone tells me exactly what they want or what they need me to do ... It's best and 'way beyond' when they give me the freedom to 'play' and be creative and explore different directions we haven't discussed before when I get into a project and see something I could do different that's more or innovative or pushes the limits or whatever.
Sure, new algo's would be developed, but if someone like Panda has an idea but not the freedom to chase it and develop it and think it through if whomever his boss is doesn't 'get it' or can't 'grasp it' without seeing it's possible and how it could be implemented, then it could easily get 'nixed' as a nice suggestion but not important today.
The freedom they gave their employees is part of what made them what they are today, it didn't take away from it...
As far as paying 1000s of employees for it, it's relatively small when you think about someone like Panda working for Bing instead and not having ownership of the piece of the algo he dreamed up, isn't it? How much do you think it would cost to buy that part of the algo away from Bing or find a workaround for the patents I'm sure sprang from it, if they could even buy it...
Maybe it's easier to understand this way:
How much would they have lost if Panda pitched his idea and got 'shot down' from developing it for Google, so he went and explored it on his own at home then pitched it to Bing and they liked it? It only takes a very limited number of things like that happening coming from 20% time to make the expense a very good long-term investment.
ADDED: When I look around at the great ideas that were 'chased' (UPS, Google, Microsoft, Nike, Apple, etc.) I don't see them springing from 'doing what the boss said' I see them coming from people being innovative while chasing their dreams and crazy ideas.
With 20% time Google had ownership of those ideas, because they allowed people to chase them and dream on the clock, but when 20% time ended they gave up that ownership by forcing people to go home and dream on their own...
[edited by: TheMadScientist at 6:31 pm (utc) on Dec 10, 2012]