HJ: I wouldn't mind some PRE-IPO shares of Google...=)
That firm has SO MUCH positive buzz, a strong management team and is ALREADY profitable...
Fortune Small Business COVER STORY
All the Right Moves
Google has all the trappings of the hot dot-coms that came before it. But is it smart enough to avoid suffering the same fate?
By Ed Welles
Thursday, August 29, 2002
Fortune Small Business
fortune.com
"We want to organize the world's information and make it available to you how and when you want it, " Larry Page says matter-of-factly one day over lunch at Google, the search engine company he co-founded four years ago. Page foresees the day when searching the Web will become "proactive," and he offers an example relevant to our circumstance. "Before you come to Google you can ask the computer, 'What are the 20 questions I should ask Larry?'" As he lays out this mind-bending scenario, Page picks at a peanut butter and jelly sandwich. It feels like lunchtime at the local high school. But Google, based in Mountain View, Calif., is really a dot-commers' Disneyland; it is littered with Lava lamps and exercise balls, and has a baby grand piano in the lobby. Still, Googlers -- as the company's 400-plus employees have dubbed themselves -- are quick to reject the notion that they will face a fate similar to all those cyber-wonders who have come before. Boasts Sheryl Sandberg, director of advertising sales and services: "Google has all the fun and the free food. But we can afford it. We're profitable." Eric Schmidt, the privately held company's chairman and CEO, confirms that, and reports annual sales of $100 million-growing at 100% a year.
Chalk up that lofty trajectory to the brainy bent of Page and his fellow 29-year-old boy wonder, Sergey Brin. The two incorporated Google in 1998 while computer science graduate students at Stanford University. Today Google is dominant. Web users perform 150 million searches a day on Google, 50% more than its nearest rival, Inktomi. Google can search in 74 languages through 400 million photos and images and more than two billion Web pages. Chris Sherman, editor of SearchDay, a widely read industry newsletter, points to a study showing that in a recent one-month period users logged nearly 13 million hours at Google. Yahoo ranked a distant second with 5.4 million hours. But as Google migrates from its academic roots to the business mainstream, new competitors will challenge it. "Google is not the be-all and end-all," Sherman says. "Other search engines can do certain things better." (For our evaluations of the various search engines, see page 30.) AlltheWeb.com, built by the Norwegian company Fast Search & Transfer, for instance, does a better job searching news pages, and it can "crawl"-that is, review-as many pages as Google's search engine, with an added twist. AlltheWeb uses human editors to review and refine searches, as does another upstart, Wisenut.com, which is owned by LookSmart. The human element, Sherman says, can improve the accuracy of its searches over Google's, which are fully automated.
Maintaining the robustness of Google's search engine is crucial to boosting its prospects as a business. In the 11-year history of the World Wide Web, the fortunes of portal and search engine companies have traced a sickening parabolic arc. Companies like Ask Jeeves, Lycos, Inktomi, Excite, and AltaVista (part of CMGI) have gone public and seen their shares soar to triple digits-only to plummet to single digits. Notes Jarvis Mak, a senior analyst with Nielsen/NetRatings, an Internet market research firm in Milpitas, Calif.: "That second tier of portals is dying out." What's left, he adds, is a landscape stalked by giants such as AOL, Microsoft's MSN, and Yahoo, with Google potentially providing the vital search function to all three.
But playing for bigger stakes means assuming bigger risks. Google, as Mak notes, has cultivated a "powerful brand," which ironically could become a liability. The company has signed multiyear deals with heavyweights like AOL (which shares a parent company, AOL Time Warner, with this magazine's publisher) and Yahoo to power searches on their sites. But as Google's own Website vies for ad dollars and user traffic, will it threaten the company's relationship with its customers? Further, as Google roars toward a likely public offering to reward venture capitalists desperate - finally -- for a dot-com winner, maximizing revenue will become a priority. The image of Google's formerly pristine site choking on advertising could threaten its hard-earned academic cachet, alienating purists. "Google has always been the hip search engine for the tenured Web user," notes Patrick Keane, senior analyst at Jupiter Media Metrix, a New York City-based Internet consultancy. "But the more people dangle money in front of them, the more they risk losing that."
Besides all those external threats, Google faces tensions from within. Schmidt, who was brought into the company as CEO by its lead venture investor in March 2001, says that the founders "disagreed with everything I believed" when he first met them. Why couldn't Google simply remain a small company? they wanted to know. Why does earnings growth need to remain steady? "I couldn't decide if this was refreshing insight or naivete on their part," Schmidt says.
He is likely to find out soon enough. Page and Brin's swaggering smarts have so far served them well. But Page's lofty talk of wanting to "change the world," coupled with Brin's down-and-dirty dismissiveness regarding rivals ("We understand user behavior better in lots of ways"), may create blind spots that leave the members of the "Googleplex" vulnerable to upstarts, some of which aren't yet on anyone's radar. Clearly Google is in thrall to its own mystique. But can a company so blessed with so much success-where so many others have failed-really keep its edge?
That very success owes as much to its founders' imagination as to their genius. When Page and Brin began the company, the prevailing wisdom based the Internet search function on relevance: The more often a particular word appeared in a document, the higher up it should appear in search results. Brin and Page took a different tack. They believed that what mattered was how often other Web pages linked to a page, and how reputable those pages were. To Brin and Page the variables that mattered were popularity and quality of links in determining a page's rank in search results.
That approach proved correct, judging by the steadily increasing use of Google, from ten million queries a day four years ago to the present 150 million. Buzz among serious computer users soon evolved into mainstream acceptance. "We knew we had a pretty good tool," recalls Page. But as he and Brin approached various portal sites, seeking to license their search engine, they encountered more conventional wisdom: Search was becoming a commodity. Internet companies, the two were told, built value not through search but by becoming portals or destinations. That meant larding the site with information-news, sports scores, stock quotes-to attract traffic. The theory? Those eyeballs could then be monetized as advertisers paid up for the exposure.
Google's rivals focused on becoming portals-and gave short shrift to search. Brin and Page instead perfected their search engine. Because competitors "didn't believe in search," as Brin says, Google had ample room to maneuver-and to hone its tool. "Their [rival's] leadership on search was very negative. Across a whole number of metrics we were able to go way past our competitors," adds Brin. They were also able to build themselves a business. As Brin and Page saw it, people came to the Internet not to gorge on data, but to look for specific pieces of information-to search, not surf. Users would reward an outstanding search engine because it rendered coherent the sprawling mass of data before them. Portals, conversely, proceeded to overwhelm, numb, and even alienate users with information they didn't want and ubiquitous banner and pop-up ads they never asked to see.
Google's clear-eyed strategy has proven out not just in its ascent-and its rivals' demise-but in the ability of Brin and Page to stir the faithful. Consider Ram Shriram, a longtime Silicon Valley angel and former vice president of business development at Amazon.com, who bumped into Page and Brin during a brief elevator ride at Stanford in 1999. "They proceeded to walk me to an office to show me what they were doing. It was pretty impressive," recalls Shriram, who ended up investing in Google and sitting on the board. Similarly, Andy Bechtolsheim, a founder of Sun Microsystems, wrote the pair a $100,000 check-even before Google had opened a corporate bank account. Venture funding followed from Silicon Valley's most prestigious firms. Kleiner Perkins Caufield & Byers and Sequoia Capital have together invested $25 million in Google.
Brin and Page, meanwhile, have attracted some 50 computer science Ph.D.s who appreciate the company's appetite for tough technical problems. Among them is Urs Hslzle, the former vice president of engineering and now a Google "fellow." He describes the founders as engineer's engineers. "You want to be able to work on interesting problems, and there are a ton of them here," says Hslzle. He has found that luring engineers away from competitors has proved easier than he imagined. "I called people [at their former jobs] and they told me, 'I've been here only four months, and I've solved all the technical problems.'" Google keeps an open database of more than 100 future projects, contributed to and commented on by the engineers, ensuring that they are not just hired hands but also guardians of the company's destiny.
The idea of the engineer as resourceful antihero informs the company at its core. The Google servers that handle the company's now massive traffic reside at five data centers around the country. They are imposing, ultrasecure facilities designed to withstand such cataclysms as bombs and earthquakes. But at the data center in Santa Clara, Calif., Page and Brin's subversive instincts are subtly on display. There they rented the smallest space available -- seven feet by eight feet -- for their first servers. They had bought PCs off the shelf at the local Fry's electronics store, then ripped them apart and rebuilt them. They shrank the motherboards, jettisoning all unnecessary chips and cards, so that in a typical rack designed to hold ten servers, Brin and Page managed to jam 80 of their own design. Some of the data center's other tenants have since copied their design, and Google's lowly servers hum alongside rivals' sleek machines, which can cost upwards of $1 million.
But while Brin and Page were miniaturizing their hardware, they crafted their software code for so-called scaleability. Translation: As the number of Web pages to be searched grows, Google's search function, based on ever-multiplying links, actually improves. "Larry and Sergey had tremendous scale in mind when they set up the software and the hardware," says Jim Reese, chief operations engineer. "They said we are going to be huge, and people will do millions and millions of searches using our tool" (hence the name Google, derived from the mathematical term "googol," the number one followed by 100 zeroes). Adds Reese: "It takes a lot of confidence and courage to go ahead and do that. It's rare to find people who think on such a grand scale and are also able to create a great product at the same time."
In jeans and button-down shirt, Reese seems like another earnest hardware engineer. In fact, he's a Harvard graduate and Stanford-trained neurosurgeon, not atypical of the sort of talent Google, which receives as many as 1,000 resumes a day, attracts.
But while brainy engineers laboring in the bowels of the company represent Google's legacy, the future belongs to educated overachievers like Reese and Sheryl Sandberg. There is nothing subversive about Sandberg, 32, whose resume includes a Harvard MBA, a consulting stint for McKinsey, and a post as a World Bank economist. Then she got serious, going on to become chief of staff to the Secretary of the Treasury in the Clinton Administration.
Google made its name by building a technologically advanced search engine. But profits will come from converting those millions of random searches on Google into something more focused -- namely, targeted advertising. That's where Sandberg comes in. Hired in November 2001, she is the director of Google's AdWords program, which the company launched almost a year ago. Under the program, advertisers buy space on the Google site. This takes the form of two types of text-based ads. One is sponsored links, which appear to the right of a user's search results, or larger premium sponsorships at the top of the page. Advertisers bid for the space and pay only when users click on their ads. Their ads appear only when a user searches for a related item. Someone looking to buy a car, for instance, will see only ads for auto dealers along with any search results. They won't see, say, ads for surfboards. That was the problem with the banner ads on many portal sites.
Google's flexible and targeted AdWords program appears to be paying off. It claims its advertisers experience a "click-through rate" on their ads up to five times greater than traditional banner ads. Google management won't disclose what percent of revenue advertising accounts for. However, Sandberg says that Google has already landed "tens of thousands" of accounts under the AdWords program. Best of all, perhaps, at least as far as the company's image is concerned, few seem to have noticed the incursion of increased advertising. "Google has really been operating in stealth mode," says Sherman of SearchDay. With an eye toward an exit strategy -- either an IPO or sale of the company -- it has been introducing commercial clutter onto the site as quietly as possible.
Google has done so thanks, in part, to Jonathan Rosenberg, a recent hire who is Google's senior vice president of online products. "Our current prosperity is driven by the monetization of the search function," he says, quickly adding that Google's search technology is flexible enough "to monetize only when it makes sense." Translation: Users searching for digital cameras will see plenty of ads with their results, while users inquiring about insect mating habits will not be so bombarded. Rosenberg, like many of his management peers, seems to have most if not all the answers. Is overconfidence then a problem at Google? "Overconfidence is a function of how you define yourself," he says. "Google's mission is to give anyone the information they want when they want it. By that definition we have a long way to go."
But as Google inevitably reveals its more commercial side, that creates "an essential tension that Google has to deal with," predicts Keane of Jupiter Media Metrix. He notes that Google's "success as a search engine makes it a destination that ultimately competes with its customers." In other words, instead of using Google's search engine on, say, the Yahoo site, users familiar with the Google brand would simply go directly to Google's site -- thereby depriving Yahoo of potential ad revenue and making for a potentially truncated relationship. And the fight for ad dollars has only begun to heat up, given the depressed Internet advertising market. Portal sites are now lucky to sell 20% of their available ad space, Keane says. And yet, he adds, if Google goes public, it will be under the gun from investors to maximize revenue. "For them to have a massive multiple on Wall Street it's much easier done if they are a big destination site," he says. Google CEO Schmidt acknowledges the dilemma. "It's a very bad strategy for us to compete with our customers," he says.
Google's latest crop of rivals -- Overture Services, LookSmart, and Fast Search & Transfer -- have deliberately avoided becoming destinations and focused on a "private label" approach whereby they license search and other services to customers. Overture, in fact, recently changed its name from the more inviting "GoTo." (Overture preceded Google as AOL's search engine.) "We want to be the technology under the hood for our customers," is how Fast's CEO, John Lervik, puts it. By staying in the background, these companies signal that they have no intention of competing for ad revenues with their customers. They simply want to help them build those revenues.
But Google's intent is less clear -- and its ambition to be a dominant force on the Web is grander than advertised. Says Lervik of Google and its reach: "It's a strange combination of consumer portal, search service provider, and a media company. They try to stick to their nerdy technology image, but they're really a very commercial company."
The debate over whether Google is primarily a technology company or a marketing vehicle is playing itself out internally. For instance, Schmidt says he's not worried about Google's becoming all things to all people because the company hews to users' wishes. "Our customers tell us what they want" because Google monitors their search activity and shapes the search engine accordingly. "The Google model doesn't work without the end-user." In Schmidt's universe the customer is always right. But that view contrasts with Larry Page's notion of Google as a technology-driven company. "We're a focused software company that develops technology that we want to sell to everyone in the world," he says. Similarly, the rank and file at Google point to the brilliant mathematical algorithm and software code that underlies its search engine as the bedrock beneath the company's success. Schmidt's take is more prosaic. Referring to Page and Brin's biggest breakthrough, he says, "They figured out how they could do targeted ads on the Internet." Given their differing views about the company's strengths, the relationship between Schmidt and Google's founders bears watching.
The founders may sound like devoted techies, but they aren't going to be able to avoid becoming astute businessmen. Brin may be the author of such treatises as "Beyond Market Baskets: Generalizing Association Rules to Correlations," but he already comes across as a Silicon Valley potentate in the making. Meeting for lunch, he immediately lets it be known that he's just come from a confab "with Meg" -- as in Meg Whitman, CEO of eBay. Their topic? Bringing the 2008 Olympics to San Francisco. "He's a bit of a showman," says Page, describing his partner. Prodigies are often so temperamental because all they hear is how smart they are. Page, after all, built his first computer printer out of Lego blocks at age 6. When Brin's math professor in college needed a tutorial in object oriented programming, he turned to the then freshman. ("Sergey is very mature for his age," notes Bill Goldman, the professor.) The same can be said for their company. Google has known only praise because so far everything has seemed within its reach. It can have its algorithms and its targeted ads. But growing up requires making choices-even for prodigies. How smoothly Google balances its clever past with its commercial future will determine how smoothly it navigates through its adolescence. And that, in turn, will ordain whether the company, unlike other would-be masters of the Web, even survives to enjoy a comfortable middle age.
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