Google "went public" this week, filing its S-1 application with the Securities and Exchange Commission in Washington, DC. predictably, speculation is running rampant across the Web as to how this will affect Google users and investors.
(At this point I should say that I'm not an accountant or financial advisor and if you're reeally interested in investing in Google, then you should consult experts in the investing field.)
Reading through all the material posted on the Web this week, I've concluded that Google's IPO, which will become official in about 60 days, will be unique, if nothing else.
For one thing, the value of shares sold is expected to quickly reach the $20 billion level, higher than any IPO in recent years and reminiscent of the dot-com boom of the 1990s. Google's method of offering the shares for sale is unique however: They are being offered at an auction that will be conducted over the Internet. This has never been done in the US before, but has been done with varying degrees of success in Europe.
Google has been a highly successful private company, exceeding its founders' wildest dreams. Its unique corporate structure and altruistic goals recall the early days of the Open Source movement, while its business "enthusiasm" recalls the many optimistic and exciting startup days of the high-tech businesses of the 1990s. On a technical level, Google's search engine algorithms and advertising methods have so far outstripped all competitors, including MSN and Yahoo. Its hardware solution, Google Search Appliance, has been embraced by numerous high-profile corporations, including BankOne and Kaiser Permanente.
Now for some statistics. According to Google's filing notice, the company's first-quarter net income this year was $64 million, while its revenue was $389.6 million. (This adds up to a higher profit margin than either Yahoo or Microsoft.) According to Bloomberg News Service link] the Google Web site was used for 34.7% of all Internet searches in the US in February, 2004. Yahoo was used for 30% and MSN for 15%. It should be added, of course, that Yahoo has used Google's search engine in the past. In the future, however, both companies will be using their own search technologies, and will provide competition for Google.
In other words, there has been some major search engine churning over the past year and with Google's IPO we shall be seeing more churn as a number of smaller engine companies begin to startup.
Questions
Some financial obsevers, however, like Bill Mann of Motley Fool have questions about the future of Google:
"...I'll be keeping my investment dollars very far, far away from Google. It doesn't matter where the thing gets priced - people are going to buy, and they're going to think that riches await. After all, people who got in early on eBay, Amazon. com, and Yahoo did spectacularly, no?
"Keep in mind though, that none of these companies came public anywhere near market capitalizations of $25 billion. People got wealthy with these companies because they got in on the ground floor... This IPO is for the benefit of the insiders..."
If Google was such an innovative and successful company already, why did they decide to go public? Most companies go public to attract additional investors' cash so they can expand.
If the company does go public, what changes will be made? Will there be more advertising? Will stockholders want the company to become more profitable, at the expense of quality service?
According to the New York Times:
"A list of the others who stand to be enriched should Google go public seems to prove that the rich get richer. It reads like a "Who's Who" of Silicon Valley insiders, including Frank P. Quattrone, the former investment banker now on trial in Manhattan on charges of obstruction of justice and witness tampering.
"It includes some of Silicon Valley's greatest entrepreneurial successes, including Marc Andreessen, the founder of Netscape; Pierre M. Omidyar, a founder of eBay; Shawn Fanning, the creator of Napster; and Bill Joy, the software innovator who recently left Sun Microsystems."
The Players
The Google search engine is the invention of two men, Sergey Brin and Larry Page. Brin, 30, came to the US with his parents when he was six. He eventually studied computer science at the University of Maryland and at Stanford, where he met Larry Page. Page, 31, was given his first computer by his father, a computer science professor at Michigan State University. In 1996, Page and Brin were developing a new Internet search technology they called Back Rub (for its ability to analyze " back links", the pointers from one Web site to another.
In 1998, their work received the attention of Andy Bechtolsheim, a cofounder of Sun Microsystems loaned them $100,00 to start their business. By 1999, their service, now named Google, was attracting the attention of major Silicon Valley investors, and the company moved to a new suite of offices in Palo Alto.
Today, Google has 1,900 employees working in the "GooglePlex", the company's current headquarters/campus. Since that time, numerous new executives have been hired, including the present CEO, Eric Schmidt. Schmidt's considerable track record includes a PhD in Computer Science and past executive positions at Novell and Sun.
All three men credit Google's success partly to its working environment, which includes casual dress, "meals free of charge, doctors and washing machines."
"Don't Be Evil"
"Don't Be Evil" is the recurrent slogan and philosophy in the Google Owners' Manual. Brin and Page elaborate on it this way:
Sergey and I founded Google because we believed we could provide a great service to the world-instantly delivering relevant information on any topic. Serving our end users is at the heart of what we do and remains our number one priority. We believe a well-functioning society should have abundant, free and unbiased access..."
Our goal is to develop services that improve the lives of as many people as possible-to do things that matter. We make our services as widely available as we can by supporting over 97 languages and by providing most services for free. Advertising is our principal source of revenue, and the ads we provide are relevant and useful rather than intrusive and annoying. We strive to provide users with great commercial information.
The Auction
At its online auction, Google plans to sell up to $2.7 billion in stock.
The auction will make shares available "equally" to institutions and individuals willing to pay the going price. However, the SEC filing notice declares that all 1900 Google employees, as of March 31, already own shares. These employees and other insiders own what is called Class B stocks which are valued at ten times the Class A stocks which Google is offering to the public through this auction. This two-tiered stock ownership structure will insulate management from the pressure of having to crank high quarterly earnings. It also discourages short-term goals. Obviously, this gives the current stockholders not only more monetary value, but also ten times the voting power of the Class A stockholders.
According to the founders:
We are creating a corporate structure that is designed for stability over long time horizons. By investing in Google, you are placing an unusual long-term bet on the team, especially Sergey and me, and on our innovative approach. We want Google to become an important and significant institution. That takes time, stability and independence. We bridge the media and technology industries, both of which have experienced considerable consolidation and attempted hostile takeovers. In the transition to public ownership, we have set up a corporate structure that will make it harder for outside parties to take over or influence Google. This structure will also make it easier for our management team to follow the long term, innovative approach emphasized earlier.
In other words, the company's shares will not be subject to the whims of Wall Street and its brokers, eager to make commissions on the frequent buying and selling of stock - any stock. Also the Class B insiders will have a vested interest in the company; i.e., their wealth will be directly dependent on the future success of Google. This will hopefully eliminate the insider trading scandals like the ones that recently brought down Martha Stewart and several mutual fund companies.
But there are other problems with this seemingly democratic auction method:
1. If the price bid by the initial buyers goes too high, there may be few takers later, when the shares start trading on the New York stock exchange.
2. Is a stock really like a painting or an antique, whose value is a lot easier to determine?
3. The Owner's Manual itself warns of the "winner's curse." Investors will bid up the clearing price and then quickly unload their shares. This will not be a problem for long-term investors, however, only day-traders looking for the quick turn-arounds.
Competition and Risks
But will Google be a truly good long-term investment?
In its S-1 statement, Google owners mention several dozen risk factors that come with the stock, not the least of which is competition from rival search engine companies. Both Yahoo and MSN are mentioned by name, but there are smaller upstarts as well, including Quigo or Industry Brains. These companies are aiming for more "personalized" search result methods. They are also hoping to jump aboard the search advertising market, which Google has been dominating so far, because of its unobtrusive advertising methods. Other goals of the smaller search companies include the development of algorithms "to decode the themes of Web page content to better match queries." For example, startup Dipsie's motto is "Find what You're Looking for within 2 clicks." They are developing a proprietary semantics-based technology while Quigo is working on a method for Web publishers to deliver contextually relevant ads.
The reason for the rise of smaller search engine companies? "The common gripe of many publishers is that with the enormous networks of Overture or Google, they're often lumped in with many other publishers not of the same caliber, hampering their ability to get higher rates from advertisers. Advertisers, on the other hand, complain that they can't target their text-based listings to specific sites.
Yet other search companies are working on tools to organize search results around specific topics. For example, a query for "Paris Hilton" would separate results for the luxury hotel chain from the publicity-seeking heiress of the same name."
Other Risks
Many of the risks mentioned in the Owners' Manual are those included in any IPO, but there are several unique to Google:
Proprietary document formats may limit the effectiveness of our search technology by excluding the content of documents in such formats.
New technologies could block our ads, which would harm our business.
If we fail to detect click-through fraud, we could lose the confidence of our advertisers, thereby causing our business to suffer.
We are susceptible to index spammers who could harm the integrity of our web search results. More individuals are using non-PC devices to access the Internet, and versions of our web search technology developed for these devices may not be widely adopted by users of these devices.
Acquisitions could result in operating difficulties, dilution and other harmful consequences.
We do not intend to pay dividends on our common stock.
Additionally, Google might need to expand its services.
Yahoo, for example, is getting much new revenue from selling email storage space. online dating services and a broadband service in partnership with SBC communications.
In response to this, Google is currently developing a new free email service, G-Mail. They're trying to this without " diluting" their search pages with too many extra services. Google's current "additional services" include Froogle, an e-shopping search service which displays merchandise based on individual consumer search criteria. There is also Adwords, which now appear on thousands of Web sites, and a hardware device called the Google Search Appliance.
Well, this has been one person's viewpoint, and as always, the WST would like to hear yours. For additional information on Google's IPO, check these sites:
http://www.msnbc.msn.com/id/4864177/
http://www.searchenginejournal.com/index.php?p=505
And in case you're interested...
How Froogle works
Google's spiders locate products for sale. Merchants also submit information. Ranking software generates search results. This provides a speedy way to search stores online for products. No shopping cart, wallet, no promotion of stores or products. No "preferred" merchants allowed to appear first. (User doesn't buy products directly from Froogle.)
Google Search Appliance
They call it "Google in a box".
The technology that powers Google.com was put to work in a plug-and-play search solution, integrating hardware, software and support.
The Search Appliance crawls all platforms without distinction, capturing data on highly distributed, heterogeneous networks in a single coherent view. Intelligent algorithms automatically detect network settings, heuristics recognize date formats, languages, and spelling mistakes.
