In the mid-1990s, the Internet was just emerging. Millions of people were logging on and communicating through email. But researchers grew frustrated with the clutter of Web sites. Searching it for relevant information often resulted in an abundance of completely meaningless data. Search engines began to organize the Internet, and thus Yahoo and AltaVista among others were born. But they still left a lot to be desired. The answer to more relevant research seemed to be a better use of links, such as a highlighted word or phrase. In 1996, Page and Brin teamed up to work on downloading and analyzing Web links. In the process they developed a ranking system for searching the Internet that yielded prioritized results based on relevance to the object of the search, and useful answers could be found swiftly.

In 1997, they made the search engine available to students, faculty, and administrators on the Stanford campus, and popularity grew by word of mouth. As the database and number of users burgeoned, more computers were needed. In these early days, Brin and Page were able to scrounge around for unused computers and string together inexpensive PCs. By July 1998, they had an index of 24 million pages, with more coming. But their growth was stymied by lack of capital.

They decided to take a leave of absence from the Ph.D program and start their own firm. This way they could develop a business of their own that would fit their search engine. If it was as good as they thought, and with Internet use growing so rapidly, growth could be virtually unlimited. Rather than selling out to some existing firm, wouldn't they be better off keeping control?

Still, by August they had run out of cash and badly needed an "angel." One of their professors suggested they meet his friend, Andy Bechtolsheim, a legendary investor in a string of successful start-ups. After listening to their presentation, he said, "This is the single best idea I've heard in years. I want to be part of this," and he left them a check for $100,000 made out to Google Inc.^[90] It took them two weeks before they could formally incorporate the company, Google Inc., and then open their first bank account. The check sustained the two entrepreneurs at first, and in fall 1998 they moved their computers from a dorm room into a garage and several rooms of a house. They also hired a friend, Craig Silverstein (mentioned earlier), as their first employee.

After five months they outgrew the garage and moved into offices in downtown Palo Alto, barely a mile from the Stanford campus. By now, their search engine was handling 100,000 queries a day, all this through word of mouth, emails, and instant messages. But they were again running out of money, despite the now $1 million in funding that they had collected from Bechtolsheim and other early investors, and through borrowing on their credit cards. But it was clear that with upward of 500,000 searches per day toward the end of the year, they needed much more money. In the boomtown climate of Silicon Valley in early 1999, a public stock offering was one option, even though Google had no profits. But Brin and Page resisted this option, not wanting to reveal their trade secrets and lose some control. Efforts to license their search technology to other firms wishing to use it for research, found few takers.

Eventually they went the venture capital route. But Brin and Page insisted on keeping control of Google's destiny and remaining majority owners, or it was no deal. On June 7, 1999, less than one year after they left Stanford, they issued a press release announcing that two venture capital firms, Kleiner Perkins and Sequoia Capital, were investing $25 million in Google. On the Stanford campus and around Palo Alto, amazement reigned at the enormity of the sum seemingly without the two giving anything up in return. "The announcement included details of the funding as well as additional information about Google, its impressive list of investors, and its growth rate of 50 percent per month. All this put the company in the global limelight, giving it the opportunity to grow further through free media publicity."^[91]

But Google still had not earned any appreciable revenue to support its heady growth, and no plan for this was revealed in the press release.

They wanted to avoid the clutter of almost out-of-control, irrelevant ads, and they developed strict standards for size and type of ads. They separated the free search results from the ads, which they would label "Sponsored Links." These "Links," because of their relevance to the search, would be clicked on more often than if they were labeled simply "Ads." They decided to display the links in a clearly marked box above the free search results. The ads would be brief and look identical, with just a headline, a short description, and a link to a web page. But these would be targeted ads, offering a major advantage for advertisers confronted with the huge wastage of advertising reaching uninterested audiences.

At first Google sold this advertising to large businesses that could afford expensive ad campaigns, but it soon found substantial market potential in letting smaller advertisers easily sign up online with a credit card, and their ads could then be running within minutes. This gave Google an edge over similar providers unable to offer such fast service, and also minimized its own costs of selling advertising.

Shortly after turning to its advertising model, Brin and Page had another innovative idea—they would rank ads based on relevance. And relevance would be determined by how often ads were clicked on by computer users. This would provide valuable feedback to advertisers and influence the selling and pricing of ads.

In early January 2001, at the urging of its venture capitalists, Larry and Sergey reluctantly consented to hire a chief executive officer to run operations. Eric Schmidt was highly recommended by one of the venture capitalists. He not only had entrepreneurial experience as founder of Sun Microsystems, and CEO of Novell, but also academic credentials—a Ph.D in computer science from the University of California at Berkeley, and a degree in electrical engineering from Princeton. Then there was research experience at Xerox Palo Alto Research Center and Bell Labs. At 46, he was a seasoned tech executive and brought a needed mature balance to this organization of young people. Besides, he was willing to invest $1 million of his own money to buy preferred stock in Google, this at a time when the company was running short of cash again. (It would soon never again run short of cash.)

Google entered into pacts with Yahoo, AOL, EarthLink, and Ask Jeeves. This gave it relationships with most of the biggest Internet properties.

By the end of 2002, Google and its venture capitalists could see that the search engine was going to be a huge financial success. For the year, it had recorded $440 million in sales and an amazing $100 million in profits. Virtually all of these profits came from people clicking on the text ads that were on the right side of search results pages at Google.com and the pages of its partners and affiliates. But the world did not realize the extent of this profitability because Google was still a private company. This silence about the profitability of the online search and advertising business model undoubtedly kept other firms, especially Microsoft and Yahoo, from investing in or developing search engines of their own—until Google had an almost insurmountable head start.

The advertising industry was being transformed as well, as billions of dollars of advertising was being shifted from television, radio, newspapers, and magazines to the Internet. But the time was nearing for Google to go public, and with this full disclosure would shock the investment community and make Google stock the darling of investors and employees alike.

As the business burgeoned in the spring and summer of 2005, Google added more than 700 employees in just three months. The total headcount now was 4,183, nearly double the total the previous year. Google was hiring Ph.Ds from the top universities across the country, and even trespassing on Microsoft's own neighborhood, at the University of Washington. It opened a facility in a Seattle suburb just down the road from Microsoft's Redmond plant, and now it was easy for their engineers and scientists to move over to Google. They didn't even have to move to a new city or change their commute.

In these days, Microsoft was viewed as a mature business. It no longer had the sex appeal that Google had grasped. Microsoft was struggling to keep its best people, even offering more money and perks. But the amazing growth and potential of Google brought the lure of great riches as stock options became valuable. As mentioned before, not the least of the perks that Google offered were the free restaurants and other amenities at its Googleplex headquarters in the Silicone Valley 40 minutes south of San Francisco.

The increasing poaching of talent climaxed with Dr. Kai-Fu Lee, a highly regarded scientist, who wanted to leave Microsoft to become president of Google China. Microsoft began an all-out legal assault alleging that Google improperly sought to induce Lee to violate the terms of his employment contract with Microsoft. A temporary triumph over Google raised the specter of litigation for any senior Microsoft employee who left for Google. The wide publicity served to illustrate how seriously Microsoft regarded the threat posed by its smaller rival.^[96]

Larry and Sergey were innovators. They did not originate searching the Internet, but they got in on the ground floor and ran with their ideas to vastly expand the search process. They were sufficiently creative and technologically adept with computers that they could string together a bunch of unused PCs to make a powerful entity, their search machine.

Their real innovation was how to make money from the searches. They wanted to make an Internet search free to all users—without this freedom to search without costing an arm and a leg, would the popularity of the Internet ever have reached the levels it did?

Probably not. But how do you make money without charging the users? Ah, there was the genius: It was marketing strategy at its finest. Advertising was the key, not licensing, which they had tried at first. But not just any advertising.

Firms spend hundreds of billions of dollars for mass media advertising, but most of it is wasted, this despite more than a century of advertising research. For most mass media advertising, advertising research can identify which ad or commercial of several is the most attention-getting, the most memorable, the most humorous, the most likeable. But how this directly translates into concrete demand and sales is more a matter of faith and hope. Mass media advertising can be improved if it can be seen by enough of those likely to be interested in purchasing. Certain media—TV and radio programs, magazines, newspapers, direct mail from carefully selected mailing lists—can help reach these target buyers. But still as we have seen, even for target buyers, many will not be particularly interested, or already have similar products, or just have different priorities for spending their money. The better job a firm can do in reaching a carefully chosen target audience, the more effective the advertising would be, and the more productive the money spent for the ad.

So, how did Larry and Sergey tie the most effective advertising to its Internet search? They did this through targeted advertising, that is, providing an arena for ads most likely to be read. Short advertising messages link the search for a particular topic to a Web page for a product or service of most interest to those searching. The advertiser of the short message then pays a small amount to Google based on each hit or click of its website.

At first, Larry and Sergey themselves did not see the great money-making potential of these small ads. Millions of users did not either; they couldn't fathom how Google could make billions of dollars of revenue when they were using it for free. But on the scale at which Google was operating—hundreds of millions of searches each day-even if just a small percentage of these searchers clicked on a ad at only cents per click, the results could be awesome.

The venture capitalists who had invested heavily in the new firm had been pressuring the founders for several years to recruit a strong top executive to handle the operations side of the business. Eric Schmidt proved to be both compatible with Page and Brin, and highly effective in installing good systems, policies, and controls, as well as being a mature interface for Google with government and business. It is doubtful if the time and talents of the founders could have brought Google as far along without him. Schmidt himself benefited well from the association, also becoming one of Forbes 400 Richest People in America, worth $6.5 billion at the beginning of 2007.

The work environment could hardly have been better. The atmosphere was geared to young, highly educated professionals, many single, many driven and ambitious. Page and Brin were hardly older than most of their employees, and were of the same mode. It was a happy ship. Recruiting was easy. The environment stimulated creativity and innovation, and wealth through stock options was within reach. Microsoft was once this kind of firm, but now had become mature, and vulnerable to a new over-achieving entity on its periphery.

Invitation to Make Your Own Analysis and Conclusions

So was the success of Larry and Sergey mostly due to tremendous luck? What do you think?

With size and growth, a firm becomes more visible and vulnerable to litigation and regulation, especially from competitors who feel disadvantaged, employees who feel discriminated against, governments federal and otherwise who suspect anticompetitive actions, and from salivating lawyers eager to fan any perceived inequities or grievances. As we saw previously, Microsoft accused Google of inducing a key employee to violate an employment contract. Earlier lawsuits involved American Blinds in a trademark controversy, and also Geico, a major insurance conglomerate owned by Warren Buffett. These were harbingers of threats to come, and would eventually consume more corporate time and expense. Even if Google won most of its cases, the wide publicity could become a public relations nightmare.

As a firm becomes larger, statistics put a brake on growth percentages. For example, Google's growth percentages were 409 percent in 2002, 234 percent in 2003, and 118 percent in 2004. Such percentages of year-to-year growth are just not sustainable as a firm grows to large size.

As a firm becomes larger, and especially if the major characters are young, the climate is ripe for jealousy and envy. This can arise among associates, employees, governmental agencies, and others that the firm has to deal with. In its early growth stage, Google was the darling of the media. With increasing size, however, the media will likely become just as eager to capitalize on any miscues, with reporting not always objective.

John Battelle, in an insightful book about Google, observed a serious problem developing by late 2002 as the company was racking up massive sales gains. In a section titled "Just Who Did These Kids Think They Were?" he noted a backlash growing that Google was unresponsive, self-centered, and dangerously cocky. "Google is going to have a major fall in the next couple of years. They've pissed off too many people," a venture capitalist source was quoted. "Some of their hubris is warranted," a major Wall Street analyst cautioned, "But this cult of genius is going to be difficult to take out of the company." By mid-2002, Silicon Valley was in its second full year of recession, and tens of thousands of young technology workers were unemployed, and the only firm hiring was Google. Thousands of resumes poured in each week, and most were tossed away without any acknowledgement, and the bad mouthing began.

More than 100,000 advertisers were using its services by 2003, yet its customer service was abysmal. Google preferred to automate customer interactions, and shunned any personal contact. With years of great growth, Google was becoming viewed as the next great monopolist—first IBM, then Microsoft, and now Google. While this was attractive to those wishing to establish lucrative relationships, to many others, a cold and unresponsive great monopolist was hardly a desirable entity.^[97]

I do not know whether "insular arrogance," and the "cult of genius" sentiment still permeates the Google organization, as obviously it did in 2002–2004. I suspect success breeds such an attitude, unless strong efforts are made to minimize the hubris.

Can you identify any other likely threats?

In early January 2008, Google unveiled nearly $30 million in new grants and investments focusing on a massive philanthropic endeavor. This was the first of planned efforts in five focus areas: (1) to predict and prevent disease pandemics, (2) to empower the poor with information about public services, (3) to create jobs by investing in small- and mid-size businesses in the developing world, (4) to accelerate the commercialization of plug-in cars, and (5) to make renewable energy cheaper than coal. Google had already set aside assets valued at about $2 billion for this philanthropic arm, Google.org., this being the biggest in-house corporate foundation in the United States. (Some private foundations such as Microsoft's Bill Gates have more assets.) These initiatives were in areas where Google could utilize its engineering and information management prowess.

While this commitment to bettering the environment had to be laudable and concrete evidence of the corporate motto, "Don't Be Evil," there were skeptics. Some warned that efforts trying to solve the world's problems have consistently underestimated the complexity of such problems, and fallen short. Critics warned that some of the initiatives would negatively affect the oil and coal industries and result in their business shifting out of Google's core online advertising.^[98]

At the end of January 2008, Microsoft formally made a hostile bid of $44.6 billion for Yahoo, this being a 62 percent premium over Yahoo's share price, and an indication of its desire to narrow Google's dominance in the lucrative online search and advertising markets. This would be the largest acquisition in Microsoft's history, far surpassing last year's $6 billion purchase of online ad service aQuantive. Actually, Microsoft had been after Yahoo for more than a year, but had been rebuffed. Steve Ballmer, Microsoft CEO, in a conference call said, "This is a decision we have—and I have—thought long and hard about. We are confident it is the right path for Microsoft and Yahoo."^[99] The following statistics show the increasing dominance of Google and the tempting acquisition of Yahoo.

Yahoo turned down the hostile bid, and Google offered to help Yahoo fight off Microsoft. The issue remains unresolved as we go to press.

By March, with a collapsing stock market and rising unemployment, most experts believed the economy was sliding into a recession. This was triggered initially by a bursting of the bubble of real estate prices gone wild, and the consequent hundreds of billions of dollars of write-offs for subprime mortgages. In this deteriorating environment, Google's exuberant share price was savaged, as many investors thought the great growth of the past could not be maintained. Google's share price that had climbed to a historic high of $747.24 in November 2007, a little over three years after its initial public offering of $85 a share, closed on March 8, 2008 at $433.35, a decline of 42 percent. The amount of insider selling and the lack of any open-market purchases by insiders led some analysts to see a strong bear signal of a worsening situation amid concern that an economic slowdown would drastically affect Google's advertising revenues. Many predicted that the share price had much further to decline.

Google executives downplayed any recession, pointing out a fourth-quarter 2007 addition of 889 jobs, including engineers, in the United States, and also an 85 percent increase in capital outlays from the previous year. Forbes magazine noted that adding jobs and capital expenditures characterize expanding firms and cited Google and seven others that fit that criteria. Still, growth was slowing in the industry for online ads.^[100]