This week, Google, a secretive private firm that is also the world’s favourite internet search engine, reached a regulatory tripwire that forces firms with more than 500 investors to disclose almost as much information as firms listed on America’s stockmarkets do. In Silicon Valley, where firms often pay workers in shares as well as cash, this is common and often prompts firms to go one extra step to an initial public offering (IPO) of shares. As a result, as The Economist went to press, Silicon Valley and Wall Street were rife with speculation about what Google might be worth as a listed company. Not since the Netscape IPO in 1995, which kicked off the dotcom era, have techies been so excited.
But the IPO hype around Google and its likeable and soon-to-be fabulously rich founders, Sergey Brin and Larry Page, obscures a more subtle point. Not only is Google less strong than it looks, but an IPO might make it even weaker at a crucial moment, since Google is about to face simultaneous onslaughts from two fearsome rivals—Yahoo!, an internet portal that offers free e-mail and other services, and Microsoft, computing’s software superpower, which runs an internet portal of its own.
It appears that Messrs Brin and Page, aware of the bad timing, have been anything but keen on a speedy IPO. Instead, the push for a listing seems to be coming from two venture capitalists on the firm’s board—John Doerr of Kleiner Perkins Caufield & Byers, who also backed Netscape, and Michael Moritz of Sequoia Capital, who also financed Yahoo! and PayPal, an online-payment firm now owned by eBay, a hugely successful internet-auction site.
An IPO is “a tremendous distraction”, says Peter Thiel, who co-founded PayPal and ran into the same regulation in 2002, leading him to launch a PayPal IPO and then, soon after, to sell the entire company to eBay. The pressures of quarterly reporting and transparency are huge, says Mr Thiel, adding that “the investment bankers benefit most” (in Google’s case, that would be Morgan Stanley and Credit Suisse First Boston). Google does not need capital, says Mr Thiel, but it does need to keep a laser-like focus on its rivals.
In Search of Excellence
Google owes its massive success to two events. First, Messrs Brin and Page came up with what was for some time the best algorithm for searching web pages. Second, Eric Schmidt, whom they hired as chief executive in 2001, figured out how to “monetise” Google’s popularity by selling small and unobtrusive advertisements on related topics, so-called “sponsored links”, alongside the search results.
In search, Google is now vulnerable because the barriers to entry to its market are low. This is the big difference between Google and eBay, the firm held up by the bullish analysts as a valuation benchmark. The auctioneer keeps ahead of rivals due to “network effects” that draw traders to the most liquid market, whether in shares, cars or second-hand junk. In search, network effects do not apply. Hence, in the late 1990s, Google was able to displace the cognoscenti’s engine of choice, AltaVista. Hence, too, Google may in turn be ousted—perhaps by a bright new upstart, such as Mooter, an Australian engine that draws on psychology to improve search results, or, more likely, by Yahoo! or Microsoft.