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.
Until this year, Yahoo! was a partner of Google. It used Google’s technology to run its own searches, just as other portals, such as AOL, still do. This did wonders for Google’s market share: at its peak, some 75% of all internet searches touched Google’s technology. But Yahoo! was only biding its time. It bought several rival search technologies, including AltaVista and Inktomi, which its engineers souped up. The key advantage that Yahoo! now has, says Jeff Weiner, its search boss, is the registration information from more than 100m users of its e-mail, travel and other services. This should allow it to tailor searches more closely to the needs of users. In February, Yahoo! finally sacked Google and started using its own technology. Now Google’s algorithm touches a bit over half of all searches. Yahoo! is close behind.
Microsoft is also developing its own search technology and ultimately plans to integrate it into Windows, the operating system that runs 94% of the world’s personal computers. The next version of Windows, code-named Longhorn, is expected in 2006 and will have search functions embedded deep inside it. Users will no longer need to care whether the stuff they are looking for is on the web, in their e-mail, or in their Word documents. In essence, Microsoft aims to make Google irrelevant by helping people mine data wherever it is.
Google now knows that it must match Yahoo! by gathering more information about users and making them more loyal to its website. Matching Microsoft will require something even bolder. Google has decided to try to turn its own technology into, in effect, a new operating system, which will run on the internet rather than the desktop, so making Windows irrelevant. Microsoft and Google, in other words, share the idea that users should no longer care whether files are located on a personal computer, a remote computer, a digital video recorder, a cell phone, a car stereo or any other connected gadget; but they clash because each wants its own software to do the locating and retrieving.
This explains Google’s latest innovation, announced on April 1st: Gmail. A free e-mail service, it will offer many times the storage capacity (1 gigabyte) of either Yahoo! or Microsoft’s Hotmail. To make this service “free”, Google will raise money by putting advertising links into the e-mails. To tackle Yahoo! it will try to establish a continuous relationship with users. To fight Microsoft it will encourage users to store their files not on their personal computers but on Google’s remote machines.
Alas for Google, its strategy got off to a bad start. Much to its own shock—the firm considers itself “the nice guys”—Gmail’s e-mail-crawling, necessary for choosing the most fitting ad-links, has upset privacy groups. This is awkward. To become the storage medium of choice, Google, Microsoft and Yahoo! must each, above all, convince users that they are trustworthy.
But Google has another disadvantage. Microsoft is still primarily a vendor of software licences, earning fat profits that it can use to subsidise a search war almost indefinitely. Google relies for its revenues on selling sponsored links. On search pages, this is a $3 billion market growing by 20% a year, according to US Bancorp Piper Jaffray, a bank. But competition is fierce, not only with Yahoo!’s advertising arm, Overture, but with smaller players such as FindWhat.com and Kanoodle.
“The search advertising market is mature,” says Mark Josephson, Kanoodle’s marketing boss, adding that future growth can come only from placing sponsored links on the 95% of web pages that contain not search results but content. Google knows this. It is trying to use its algorithms to crawl newspaper articles, web journals and so forth to identify their subject area and place “contextual” ads. Its problem, says Mr Josephson, is that “advertisers are not buying keywords anymore, they’re buying topics,” which requires a different approach. As Google spreads out from search pages, he says, its people are “getting further and further away from their expertise.” In trying to morph into an operating-system firm or online ad agency, Google is less a leader than a novice.