Google: Searching for Success
30 October 2008 David Lester
In an exclusive extract from his new book, How they started global brands, author David Lester looks at the staggering success story of the world’s leading internet search engine, Google.
Google. We all know its name and use its website probably more than any other. We also know that it is extremely successful and that its founders have become billionaires. Yet amazingly, ten years ago, almost none of us had heard of it, let alone used it.
The birth of PageRank
Google hasn’t always been such a goldmine. In fact, when they started, Google’s co-founders Larry Page and Sergey Brin weren’t even sure how their site would make money. The pair met at Stanford University in the spring of 1995, where they were both enrolled on its prestigious PhD computer science programme.
Located in Silicon Valley, Stanford had already spawned some of the world’s most successful technology companies, such as Hewlett-Packard and Sun Microsystems, and the academic environment encouraged risk taking and entrepreneurship. Its office of technology licensing offered technologists resources, advice and assistance with the patent process to help its students commercialise their research projects in return for a stake in the businesses. It was also a stone’s throw from Sand Hill Road, home to some of the US’s most successful venture capital firms. Sergey and Larry had both grown up surrounded by science and technology. Larry’s father was one of the first ever recipients of a computer science degree from the University of Michigan. His mother was a database consultant with a master’s in computer science.
Sergey was born in Moscow and came to the US when his parents moved there; his mother was a scientist at NASA and his father a maths lecturer at the University of Maryland. Sergey had completed his BSc in mathematics and computer science at the University of Maryland by the age of 19; while Larry had built a working inkjet printer out of Lego at high school. So by the time they met both were highly accustomed to the use of computers and how they worked. They struck up a strong friendship at Stanford, fuelled greatly by their shared love of academic debate and discourse.
At the time, several rudimentary search tools existed, but a search on one of them would generally yield thousands of results, which were not ranked in any order of relevance. Fellow Stanford PhD students Jerry Yang and David Filo had developed Yahoo! to tackle the problem, but they employed a team of editors to assemble a web directory, and were already struggling to keep up with the mushrooming worldwide web.
Convinced there was a better way, Sergey, an expert in extracting information from vast amounts of data, joined forces with Larry, who was studying the leading search engine AltaVista. Never short of ambition, Larry set out to download the entire web onto his PC to study the relevance of web links, which AltaVista didn’t appear to be taking into account. The project took far longer than expected and cost the computer science department around $20,000 (£12,000) every time they sent out a crawler programme to capture online data – but the effort was definitely worth it.
They concluded that the number of links pointing to a site was a measure of its popularity. Furthermore, they decided that links could be weighted. For instance, if the BBC links to your website (which receives high volumes of traffic and has many links pointing to itself), this is worth more than a link from a less-popular site.
Naming it after himself, he called the algorithm he developed to establish this pecking order PageRank. By adding this to traditional search methods – which matched keywords on pages with those in the search terms – the pair devised a search engine that produced results that were highly accurate and relevant to the user’s request. Google was conceived.
Looking for a buyer
The founders did not set out to build a business. Coming from backgrounds where academia was revered, they were more excited to have stumbled across the basis of a killer thesis. They developed a prototype of their search engine, called BackRub, which was renamed Google in 1997. The term was a play on the word googol, a mathematical term for one followed by 100 zeros, and it represented the vast amounts of data on the web. Working day-in, day-out from a room on campus, the founders unleashed their creation on Stanford’s student body via the university’s intranet. Its popularity among this information-hungry population soared through word-of-mouth recommendations, as users quickly discovered how much faster and more relevant its search results were.
Not wanting to get too distracted from their academic pursuits, but certain they had created something far superior to anything else available at the time, they attempted to sell their technology to Excite, Yahoo! and the then market leader AltaVista for up to $1m before patenting it. Amazingly, each company passed up on the opportunity. Search did not present any obvious revenue-generating opportunities and Google’s goal to produce results in a split second did not make it an ideal space for advertisers. Feeling passionately that they had developed something that people truly needed, Sergey and Larry were left with no choice but to take Yahoo! co-founder David Filo’s advice and take Google to market themselves.
By amassing email feedback from their academic peers, they refined their offering before seeking funding to make it scalable. In August 1998, they met private investor Andy Bechtolsheim, a co-founder of Sun Microsystems who had sold another business to Cisco for hundreds of millions of dollars. Despite the lack of a clear business model, Bechtolsheim was so taken with the idea that he wrote out a cheque to Google Inc for $100,000 on the spot, compelling Sergey and Larry to incorporate the company. Google was born.
Scaling it up
Bechtolsheim was particularly impressed with their plans to rely solely on the strength of their product and word-of-mouth recommendations to market the brand, instead of blowing huge sums on advertising. Instead, they planned to invest in IT as no other company had done before. From the offset, Sergey and Larry had been extremely efficient in their use of computers. They were downloading, indexing and searching the internet using a network of off-the-shelf PCs which they had custom built and linked together themselves. On these computers ran the software and algorithms they had also designed to crawl through and rank web pages. The intention was to continue with this strategy, scaling it up cost-effectively by adding more and more PCs to the network to ensure their lightning-fast search results kept up with the growing number of websites and users.
Following Bechtolsheim’s endorsement, several friends and family members also backed the pair, who were able to raise a total of $1m. After running their operations from a garage for a while where they hired their first staff member, the duo moved into offices on Palo Alto in 1999. A mention in PC Magazine’s top 100 websites created a huge surge in user numbers, and before long, Google was dealing with upwards of 500,000 searches each day.
However, struggling to maintain the level of IT investment they needed to keep up with these growing numbers, they were forced to seek further backing before long. Luckily for them, the economic climate worked in their favour. Google’s story is set against the backdrop of the dotcom rise (and subsequent fall). Following the buzz created by the stock market flotation of internet browser producer Netscape in 1995, which valued the company at $3bn after the first day of trading, Wall Street stockbrokers were on the prowl for more internet success stories.
In 1999, Google closed a deal with two of the world’s most prestigious venture capital firms (VCs), both based on Sand Hill Road, California: Sequoia Capital, which had backed Yahoo!, and Kleiner Perkins, which had backed Amazon, and many others. In an unprecedented move, the renowned VCs agreed to invest equally in Google, with neither having a controlling interest. They were so eager to back the search pioneer while they had the chance (despite it still having no successful business model) that each firm stumped up $12.5m (£7.5m), while Sergey and Larry remained in sole charge of the company they had created – a non-negotiable condition for them.
Following the buzz this created, Google experienced a major growth spurt. They continued with their method of custom-building server racks using parts from low-cost PCs and stacking them one on top of the other, getting maximum value per square foot in their data centres. At this stage, their business model was to earn income by licensing their search technology to other partners. This wasn’t bringing in anything like sufficient revenue, so they began to consider other ways to turn their growing search engine into a sustainable business.
They were initially hesitant to allow advertisers onto the site because they worried that users would doubt the search results’ impartiality – and Sergey and Larry remained resolute that they would never allow companies to pay to rank more highly, as other search engines had done. They came up with a compromise which was to revolutionise not only their own business, but also their competitors’ and, no less, the world’s advertising industry. Their idea was that whenever someone searched for a topic, they would display small text adverts relevant to the subject of the search alongside the more prominent ‘natural search engine results’.
This soon evolved into the current pay-per-click model, whereby Google would earn money whenever a user clicked on one of these ‘sponsored links’. The rate paid per click was set by the advertiser in a fair, automated online auction process. This worked spectacularly well for several reasons: it was extremely simple and quick for an advertiser to set up; it could be tested for a tiny investment – far smaller than any other advertising method; it enabled advertisers to present their message to a very highly targeted and hungry audience; it was free unless someone clicked on the advertiser’s advert; it was easy to measure how successful it was; and above all, it worked. Advertisers got excellent results from people clicking on their ads.
In 2000, the founders hired Dr Eric Schmidt as chief executive to take over the day-to-day running of the business. Although Sergey and Larry were hesitant at first through fear of losing control of the company they had created (this was a condition of their investment that they had reluctantly agreed to) Schmidt’s appointment proved to be extremely successful. In particular, his business expertise played a key role in Google’s overseas expansion.
One of the first things he noticed was that, while 60% of its searches came from outside the US, just 5% of ad revenues came from overseas advertisers.
While the searches had been available in foreign languages for some time and the business was truly serving a global audience, it had yet to make money from this. Under Schmidt’s supervision, sales offices were duly established in London, Hamburg, Tokyo and Toronto. Revenue soared.
Google’s stated mission is ‘to organise the world’s information and make it universally accessible and useful’. As its revenue grew, it started adding new services to deliver more of this mission. By 2004, in addition to the core search engine, it offered Google Images, a huge library of searchable images, and Google News, a service that aggregated stories on any particular subject from around the world, and introduced Gmail, a web-based email service.
In 2004, the founders reluctantly listed the search engine on the Nasdaq Stock Exchange, raising $1.2bn (£600m). But going public was actually the last thing Sergey and Larry wanted to do. Apart from the fact that their independence had helped them weather the dotcom storm, they were extremely reluctant to make their financial information available to competitors. Up until 2004, analysts had grossly underestimated just how big the search giant had become, and the last thing Google wanted was for the world to know how much money they were making, or more information on how they were making it. However, they had become so big that US law required them to disclose their financial information. Given that they would have to spill the beans anyway, they felt it prudent to take the company public, and give their early employees and investors a tangible return.
But shortly before its initial public offering (IPO), a number of factors coincided to bring down Google’s share price. Firstly, the company had to deal with backlash from rival Overture, a subsidiary of its largest competitor, Yahoo!. Overture pioneered the idea of selling ads to accompany search results using a pay-per-click model, and accused Google of infringing its patents. Conscious of the negative affect the ongoing legal battle was having in the run up to its stock market debut, Google’s founders gave Yahoo! 2.7 million shares in an out of court settlement.
Secondly, its recent entry into the email market with Gmail had been steeped in controversy. The founders had sought to offer a service that was far better than anything else out there. Using their search technology, you could easily search for and find a stored message using Gmail and they offered what was then a colossal one gigabyte of space with an account. However, their plans to make money through contextual ads, which were generated by scanning messages and matching ads to keywords, were slated by privacy bodies.
The combination of factors meant that Google’s IPO valued shares at just $85 (£43) each. But this didn’t last for long. Despite these setbacks, Google’s share price rose to $100 by the end of the first day of trading, valuing the company at $23.1bn (£11.5bn). As with many new companies in Silicon Valley, many of Google’s early employees had been given share options (instead of high salaries, which helped keep the young business’ costs down while they were trying to become profitable) which made them millionaires when the company went public.
Part of Google’s phenomenal growth has come from a scheme it created called AdSense. This allows other websites to install a Google search box on their site; when users click on the contextual ads that Google supplies alongside the results, the partner website earns some of the fee advertisers pay to Google. AdSense has been enormously popular with other websites, even including giants such as AOL and the New York Times. AdSense is typical of Google’s progressive approach, and its belief that working alongside competitors can grow the market for all.
Where are they now?
Two months after the IPO, Google’s share price hit $135 (£68). Since then it has risen substantially as the company’s revenue and profits have grown; the share price currently stands at $528. Its market capitalisation (the current value of all its shares) is a staggering $165.87bn (£89bn) (correct at time of writing). When its stock value exceeded $700 a share in November 2007, Google became the fifth largest listed company in the US.
Furthermore, Google’s triumphant revenue and profit figures in the first quarter of 2008 have quashed rumours that it faced a slump in advertising income in 2007. At the height of its success in 2007, shares in Google were being sold for $741.80 (£370), but its price began to tumble amid fears that its ad revenue was falling (newspapers reported fewer people were clicking on its ads).
But, true to form, Google laid waste to those claims when it brought home $1.3bn (£700m) profit between January and March 2008, from a turnover of $5.1bn (£2.7bn). Its presence online has become so mighty that IT giant Microsoft, keen to extend its reach in online search, recently attempted to buy Yahoo! for $44.6bn. Google and Microsoft continue to battle it out to entice the world’s brightest technology engineers.
Google has used its success to make a number of significant acquisitions. Examples include its $1.65bn purchase of user video-clip phenomenon YouTube in October 2006 and online advertising network Doubleclick in April 2007, which it bought for $3bn, lengthening its reach into the display advertising market on the web.
Sergey and Larry moved to their Mountain View headquarters, in California, in 2004 and that is where the company remains to this day. The company’s founding principles have also played a key part in the company’s success, not least the founders’ determination to make Google a great place to work. Its motto, ‘don’t be evil’, is world famous, as is the award-winning culture that Sergey and Larry have fostered. On site at its Mountain View headquarters, staff can make use of a wide range of facilities, including pool tables, swimming pools and volleyball courts, as well as being well fed with free gourmet food. They receive more than 1,300 job applications every week.
The founders are still keen to solve some of the world’s great problems. New products such as Google Earth, a service that enables users to hone in on any part of the globe using satellite imagery, have continued to wow its users. A project to map human genes is currently underway. Engineers are given 20% of their time where they are actively encouraged to work on their own projects. Both Google News and Froogle, an online shopping service, are the result of this initiative. It now has sales offices all over the world and this culture of creativity pervades them all.
Google’s website now processes hundreds of millions of searches every day. Google’s homepage has retained its design simplicity and has not tried to use it for even more advertisements – despite the fact that it could potentially be a source of considerable extra income. As a result, it loads quickly, improving the customer experience.
Likewise it has steered clear of flash features and such things that would slow it down. It is estimated that Google’s network now consists of more than 400,000 servers, a computing power unmatched by any other company. Its employees still assemble and customise the PCs the company uses to carry out its searches. No enterprise has more computing power than Google. No other company in history has achieved such brand awareness without spending heavily on advertising and marketing and no other company has created such phenomenal influence, profit and wealth in such a short time.
How they started global brands by David Lester is available from Crimson Publishing: www.crimsonpublishing.co.uk