OUNTAIN VIEW, Calif.
IN the last few years, Google has risen as a force on the Internet by
offering its smarter, faster searches as a free public service. Now the
band of technoinsurgents who run the company are striking a blow against
the business strategies of giant Web portals like America Online,
Emerging as a powerful new marketing medium, Google has found a route to profitability that stands apart in a Silicon Valley that is still crippled by the dot-com crash.
Its rivals are responding by trying to out-Google Google for leadership in a technology searching for information that they once dismissed as an easily bought commodity. But Yahoo, Microsoft and others are discovering that it will not be easy to unseat Google, which has mastered an enormous private computer network that stores a snapshot of much of the Web and allows searchers to find digital needles in haystacks of data.
Google, a private company, does not disclose revenue or profit. But it says it has been profitable for nine consecutive quarters. Moreover, its executives have privately told the board that revenue will soar from less than $300 million in 2002 to $750 million or more this year, with gross profit margins of 30 percent, according to a Google executive and several people who have knowledge of the company's financial situation.
That cash is flowing from the likes of Ge'Lena Vavra, an importer of Italian suits in Las Vegas who is among more than 100,000 advertisers to flock to Google in the last year. Last May, she decided to pay from 21 cents to $1.50 each time her ad for discount Italian suits was clicked after a search for words like "Armani" or "Hugo Boss."
One form of Google advertising allows companies to buy two lines of text that appear above the results of each search. A newer ad program, the one used by Ms. Vavra, displays boxed text ads on the right side of a search result. Depending on popularity, advertisers pay anywhere from pennies to dollars when a searcher clicks on the ad.
Both advertising programs rely on Google's software to make the ads relevant to Web surfers' search requests. They are limited to text; graphics are not allowed, a limitation that Google says is crucial to its popularity with users, who are irritated by pop-up and video ads.
Before Ms. Vavra advertised with Google, she was selling about 10 suits
a month over
"Our business exploded from Google, and Google alone," she said.
Google has created a buzz in Silicon Valley that has not been heard since Netscape Communications, the original leader among Web browsers, took the stock market by storm in 1995 with its initial public offering. Despite hopes among investment bankers, Google says it has no plans to sell stock to the public this year. Still, its emergence as a star (giving rise to the pop culture term "googling") validates the notion that, even during a grim technology downturn, Silicon Valley retains some of its unique allure.
In an effort to capitalize on that allure, Yahoo which has long
relied on Google's search technology last Monday introduced a search
tool that closely imitates Google's idea. In the future, Yahoo intends to
draw heavily on technology obtained in a recent acquisition of a unit of
Yahoo denies that its new initiative is a declaration of war on Google. Eric E. Schmidt, 47, Google's chief executive, also says the two companies are still allies. But relations are strained.
Google's newfound power as arbiter of much of the world's digital information, meanwhile, is posing concerns about privacy and fairness, not only from competitors but also from social policy experts and even librarians. Some worry that the company may have become too central in an age when so much vital information is available online.
Google says that it goes to great lengths to maintain the privacy of its users and that it refuses to allow advertisers to influence the results of its regular searches.
"They're the traffic cop at the main intersection of the information society," said Jonathan Zittrain, co-director of the Berkman Center for Internet and Society at Harvard Law School. "They have an awesome responsibility."
Google's rise initially flowed from a single software innovation: a formula to retrieve pages ordered by their relevance to a Web surfer's request.
The basic idea, known as "link analysis," was not new. But in 1996, Sergey Brin and Larry Page, then graduate students in computer science at Stanford, began applying it to the global links that connect Web pages. Their idea was to exploit existing human intelligence by tracking the popularity of billions of different Web pages. Two years later, the two men would found Google.
Applied to the explosively growing thicket of electronic pointers that
make up the World Wide Web, the approach simultaneously being explored
Google now employs 800 people, yet it handles 200 million searches of the Web each day, a staggering one-third of the estimated daily total. To keep up with that torrent, Google has essentially built a home-brew supercomputer that is distributed across eight data centers.
Unlike most supercomputers, which are used by the government for tasks like predicting complex weather patterns or simulating nuclear explosions, Google's system is designed to answer hundreds of thousands of queries simultaneously from all over the globe, each in less than half a second.
The company stopped giving updates on the size of its computing resources in 2001. But several people with knowledge of the system said it consists of more than 54,000 servers designed by Google engineers from basic components. It contains about 100,000 processors and 261,000 disks, these people said, making it what many consider the largest computing system in the world.
The computers run a jealously guarded set of software programs that try to return the most relevant Web pages in response to surfers' questions, while separately displaying advertisements that are closely matched to the requests.
THE immense size of the system helps explain why taking on Google will not be easy. "Managing search at our scale is a very serious barrier to entry," Mr. Schmidt said.
Google's ascendancy is a back-to-the-future throwback to an earlier Silicon Valley, when companies built businesses on solid technological advances before going public.
That formula was abandoned in the mid-1990's with the launching of thousands of dot-coms that went public before they were profitable and then mostly crashed and burned. But Google, in the tradition of other great companies that started here, has scientists with advanced technical degrees and idiosyncratic ideas about how to run a business.
Mr. Schmidt, a former executive at Sun Microsystems, is a low-key computer scientist who must discipline Google's flamboyant, self-indulgent culture, without wringing out the genius.
When Edward Zander, Sun's former president, first visited Mr. Schmidt at Google not long ago, he was stunned. "I found dogs running through the halls, a piano in the lobby and all these food goodies around," he said. "I'm thinking to myself, 'It's like chaos here.' "
Indeed, it seems that there is nothing normal about Google's corporate routine.
Not long after arriving at the company in 2001, Mr. Schmidt found that he was contending with a squatter in his office.
One of Google's top engineers, Amit J. Patel, who was sharing space with five others in Google's chronically crowded quarters, decided that he could find relative solitude in Mr. Schmidt's tiny, 8-by-12-foot office. The chief executive would travel and attend meetings often, Mr. Patel reasoned, offering privacy during the intervals.
When Mr. Patel sought permission, Mr. Schmidt turned the decision over to his vice president for engineering, hoping that the request would be denied.
"We were trying to drive home the point that we needed more office space," said Wayne Rosing, the vice president, a veteran of Apple and Sun.
Mr. Schmidt got the point. In an example of Google's eccentric culture, he let Mr. Patel share his office for several months. He now says that there was an upside to the odd arrangement: Mr. Patel is a master data miner, and Mr. Schmidt soon had instant access to better revenue figures than did his financial planners. (Ultimately, the company expanded to a fourth building.)
Mr. Brin and Mr. Page, the co-founders, spent nearly a year searching
for a chief executive before settling on Mr. Schmidt almost two years ago.
In the words of Mr. Brin, who is now 29, "He was the only candidate who
had been to Burning Man," a counterculture techno-arts festival held
annually in the Nevada desert.
WHILE Mr. Schmidt's no-nonsense business approach to business is welcome, the founders remain highly influential so much so that Mr. Schmidt recently had to scramble to convince them that there was no immediate reason for Google to enter the space-tethering business, a popular techie idea for low-cost space launchings.
Recently, Mr. Page, a 30-year-old software designer, sought to declare the company's newest office building off-limits to telephones, under the belief that it would improve programmer productivity. He almost succeeded. He relented just a week before the building was to open, when someone pointed out that the law required a phone in the elevator. The building now has a phone system.
With its recent explosion as a business, Google has ignited a scramble for position in what was once a niche overshadowed by ad-heavy portals, Web sites that offer full menus of online services and digital content.
The shift to the supremacy of search engines indicates how swiftly business realities can change in Internet commerce. Giant portals have long tried to fence in Web surfers and keep them pacified. Google is exploding that strategy by taking advantage of the basic strength of the Internet: the ability to go instantly from one place to any other at no cost beyond the basic connection.
Yahoo, the Web's most popular portal, priced a $750 million bond issue
this month. The move led some analysts to say the company was considering
either buying or making an equity investment in Google's chief rival for
Microsoft has also taken notice of Google and is improving the Web search engine that powers its MSN site. The company, which uses Overture to handle its keyword ads, acknowledges that the surge in search-related advertising from an estimated $400 million in 2000 to $1 billion in 2002 and even higher this year demands a response.
"We see Google as a competitor with their search services," said Lisa Gurry, a product manager at MSN. "Our search is strong and will continue to improve our time."
While Yahoo and Microsoft may slow Google's growth, there is a widespread belief among industry analysts that the company's tools appeal to the democratic spirit by lessening the control of advertisers who try to thrust ads indiscriminately in the face of Web users.
"We are learning that old-fashioned interruption marketing just isn't working," said Hans Peter Brondmo, a technologist who is an executive at Digital Impact, a direct-marketing firm in Silicon Valley. Examples of interruption marketing are banners, pop-up advertising and ads that take over the screen for several seconds, along with unwanted e-mail, or spam.
Google's approach to Internet advertising also means that it appears positioned to avoid a repeat of the Netscape story. After becoming the most successful initial public offering ever in 1995, Netscape was overwhelmed in a head-to-head competition with Microsoft. Its market strength shattered, Netscape ultimately became a unit of AOL.
Less clear is whether Microsoft will try to add commercial searches directly to its Windows operating system a strategy that would echo its attack on Netscape during the browser wars of the 1990's.
"Netscape antagonized Microsoft," Mr. Brin said. "We are not putting ourselves in the bull's-eye as Netscape did."
Perhaps. But Google's problem is much more general, according to Marc Andreessen, a co-founder of Netscape, who is now chairman of Opsware Inc., a Sunnyvale, Calif., maker of software for corporate data centers.
"When you create a new market, huge new revenues stream in," he said. "The dynamics of the market change. A year later, everyone in the world is shooting at your head with high-powered ammunition."
Still, Google hopes that by helping Web rivals gain more advertising revenue and by bringing them new users through its search references, it can avoid costly attacks on its booming business.
"In every case where we've done a deal with a portal," Mr. Schmidt said, "their traffic has gone up."
AS Google rises, some of its new challenges are in the form of imitation. Yahoo and
Google executives believe that the company can hold off these threats if it stays focused on Web searches while investing heavily in new hardware and software.
But because search quality is so difficult to measure, the company acknowledges that it is constantly at risk from a new competitor or a new feature from an existing rival.
Google is quietly betting on techniques from the world of artificial intelligence. The company is trying to improve its search quality beyond its original ranking formula by developing software that can infer what a questioner wants by mining a database of millions of queries.
Still, in the fickle world of Web surfing, there is no guarantee that Google has any permanent claim to its throne.
"Even though Google is shining, it's still hard to say it is a sure bet
10 years out," said Mr. Zander, the former president of Sun. "Google has
done a heck of a job dominating a category. Now it has to watch the hype