Part 4 (1/2)
CHAPTER SIX.
Google Goes Public (2004).
To grow, Google needed investment capital, but its growth forced a difficult decision. In 2003, Google pa.s.sed the five-hundred-shareholder mark, and federal regulations stipulate that a year after reaching this threshold companies had either to offer their shares for sale or open their books. Either way, the innards of the Google rocket would be revealed. Page and Brin didn't want to go public, said Schmidt; they were fearful of revealing to compet.i.tors proprietary information and the company's true trajectory, but also of having to cope with what they considered the short-term mania of Wall Street. They abhorred the idea of doling out fees to investment banking advisers, of going on road shows to sell their story to investors, of allowing Wall Street to set the initial stock price-in short, of doing things the usual way.
The founders knew an initial public offering of stock was necessary, but they refused to listen to the experts, or to Schmidt and the three other board members: John Doerr, Michael Moritz, and Ram Shriram. They approached the IPO as if it were a science problem, with Page and Brin crafting their own solution. Instead of allowing bankers to arbitrarily set the floor price of the stock or allocate shares at a predetermined price to favored clients, the founders came up with a more egalitarian method. They would run an auction similar to the one Google used to sell advertising. Google would set a floor price, and anyone who made an online bid that matched or exceeded it could acquire a minimum of five shares. Instead of paying the usual 7 percent fee to Wall Street underwriters who were necessary to sell stock, they would cut this fee to about 3 percent. And to protect what they saw as Google's ”core values” and maintain a long-term focus, they would implement a dual cla.s.s stock owners.h.i.+p. The cla.s.s A shares sold to the public would receive one vote; the cla.s.s B shares, retained by the founders and by Schmidt and senior managers, would receive ten votes per share, and would comprise 61.4 percent of the voting power.
When the founders proposed this stock structure, Doerr and Moritz objected, and strenuously. Like many on Wall Street, the two board members recoiled at the thought of treating some shareholders as second-cla.s.s citizens, and of potentially insulating management from accountability to shareholders. ”It seemed to me vaguely undemocratic,” said Doerr. Shriram was caught in the middle. ”I didn't want to take a position until we reached agreement on the board,” he said. The VCs had another concern, said a partic.i.p.ant in these discussions, about the precedent this might set with their other start-up clients. But the founders had done due diligence, consulting with Barry Diller, who serves on the board of the Was.h.i.+ngton Post Company, which, like the New York Times Company, has two cla.s.ses of stock. Diller noted that other companies, including Warren Buffett's Berk s.h.i.+re Hathaway, also have dual voting stock.
The founders were unbending, and Coach Campbell was called upon to help coax Doerr and Moritz to go along. To be even more transparent about their intent, Page and Brin decided to prepare ”A Letter from the Founders,” to accompany the SEC filing. Written by Page, the letter began, ”Google is not a conventional company. We do not intend to become one.” To ensure Google's continued creativity and focus on users, rather than investors, they would be unconcerned with ”quarterly market expectations,” did not ”expect to pay any dividends,” and would not partake in the usual corporate ritual of offering ”earnings guidance” by predicting quarterly performance. ”A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half-hour,” the letter declared. They would make big investment bets, even if these only had ”a 10% chance of earning a billion dollars over the long term.” They would continue to ”run Google as a triumvirate,” even though this management structure ”is unconventional.”
They minced no words about the implications of this stock structure: ”The main effect of this structure is likely to leave our team, especially Sergey and me, with increasingly significant control over the company's decisions and fate, as Google's shares change hands.” They were also telegraphing that the two founders, who together owned 32 percent of the shares, were more equal partners than Schmidt (who owned 6.1 percent), or Doerr, Moritz, and Shriram (with 8.7, 9.9, and 2.2 percent respectively). Years later, Page described his and Brin's motivation: ”We were concerned in going public that we would have to change the way we operated, compromise our principles. It ended up being a good way of stating upfront the kinds of things we were thinking about and making sure that everybody who was partic.i.p.ating was comfortable. By going public you take on a lot of shareholders, and the shareholders obviously have some amount of rights. But we, who are running the company, also have some degree of rights. We felt like it was better to be explicit ... and allow us to be able to do the kinds of things we wanted to do.” While candid, the letter could have used the skill set of someone with a liberal arts education; say, an editor. Eight times in six pages they repeat a variation of the same messianic vow: to make ”the world a better place.”
When Google announced it was going public in the spring of 2004, it had to disclose its finances in an SEC filing. As Google's director of global communications and public affairs, David Krane said reporters suddenly realized, ”Holy s.h.i.+t, this is a business story we missed here!” Krane and his then boss, Cindy McCaffrey, were bombarded with queries, but because SEC rules require a ”quiet period” from companies between the time they file and the time their stock goes on sale, they could not answer. Reporters would call and say, ”I need to talk to Sergey. I need to talk to Larry. I need to talk to Eric.” The pressure ”to get the Google story” was intense. Once, Krane spotted a photographer hiding behind a bush at the Googleplex, hoping to snap a picture of the founders.
On the eve of the auction, there was rampant speculation about the price the stock would fetch. On the day of the offering, August 19, Page did a highly unusual thing: he wore a suit, not his usual black T-s.h.i.+rt and jeans. He and Schmidt had flown overnight to New York to open trading on the NASDAQ floor. They were accompanied by investment bankers and a team of about ten Google executives, including Marissa Mayer. They went back to Morgan Stanley and watched, rapt, as their stock was traded, rising one minute, falling the next. They had suggested in their IPO a floor price of eighty-five dollars, but were hoping to better that. They were now engaged in a spectator sport, one with enormous personal financial consequences. ”Will it break one hundred dollars? Will it break one hundred dollars? I kept asking,” said Mayer. She and Page and Schmidt and the others were mesmerized by the Morgan Stanley trader who spoke so fast to those on the trading floor that the Googlers found him unintelligible. They watched him finally coax the stock to settle in at one hundred dollars. At last, he rose from his chair and, as if he had put a baby to sleep, calmly told them, ”It likes to trade at one hundred dollars.”
Page, Schmidt, Mayer, and David Krane hopped into a waiting SUV that took them to Google's New York offices, which were then on West Fortieth Street. As soon as the car doors closed, recalled Mayer, Page pulled out his cell phone and announced, ”I'm going to call my mom!” The others pulled theirs out and chorused, ”I'm going to call my mom!” When they got to Google's offices, Page and Schmidt and Mayer went back to work, meeting for ninety minutes with a team of engineers.
Where was Brin? He had stayed out of the public eye in Mountain View, working. Page and Schmidt had urged him to come to New York, but he refused, saying, ”It would send the wrong message.” By treating this as a normal workday, he declared that the IPO was not about getting rich but about building Google.
The stock reached $108.31 the next day, and by January 31, 2005, had jumped above $200. It soared, in large measure, because investors had for the first time peeked at Google's ledger sheet. They saw that Google's revenues had shot up from $86 million in 2001 to $1.5 billion in 2003, and seemed destined to double by the end of 2004. Net profits reached $105.6 million in 2003, and were expected to almost triple the following year. They saw that the young AdSense program now contributed half of all revenues, and that Google raced well ahead of its two primary search compet.i.tors, with nearly twice the users of Yahoo and more than three times Microsoft's. Google had little debt, and though Yahoo had terminated their search contract, it had generated only about 3 percent of Google's revenues. They also saw that the Overture patent lawsuit hanging over Google was withdrawn by its corporate parent, Yahoo, which exchanged its warrants for 2.7 million Google shares. And they saw that Google's skilled work force was deeply invested in their company's success, with Google regularly setting aside about 12 percent of its revenues to award nearly 40 million stock options to its employees.
Envy raced through the corridors of traditional media companies. By the standards of media conglomerates (or investment bankers), Google's compensation was extremely modest. Schmidt was the highest salaried employee at $250,000 and received a bonus of $301,556 in 2003, and Page and Brin each earned a salary of $150,000 and a bonus of $206,556. But the value of traditional media executives' stock holdings were usually leaden. By contrast, a total of 19 million share options had been granted to Google employees, more than half of these at an option price of 49 cents per share, and none at a price above $15.95. When the stock price leaped with the IPO, it produced more than nine hundred Google millionaires. Eventually, four employees-Page, Brin, Schmidt, and Omid Kordestani-and the three outside directors would become billionaires. Andy Bechtolsheim, who signed the first check, owned 1.5 percent of Google's stock, and David Cheriton of Stanford, who tirelessly promoted Google, owned 1.4 percent. Stanford University, which received stock and royalties from Google for their investment in Brin and Page, owned nearly 1.7 million shares. If the first thirty Google employees held their stock, said a knowledgeable insider, by 2008 they would each be worth about $500 million; the next seventy employees would each be worth about $100 million. Even Bonnie Brown, the first ma.s.seuse hired by Google in 1999, who smartly opted for stock options and a lower hourly rate, retired a millionaire and established her own foundation.
There was more to unsettle traditional media companies. On page 80 of the Google IPO was this strategic declaration: ”We began as a technology company and have evolved into a software, technology, Internet, advertising and media company, all rolled into one.” And on page 11: ”In addition to Internet companies, we face compet.i.tion from companies that offer traditional media advertising opportunities.” Google went on to say that, increasingly, they would be vying with these media companies to induce advertisers to s.h.i.+ft their ads online. In an appendix that accompanied the filing, Google produced a chart showing that while magazine and newspaper advertising declined between 2000 and 2007, and television ads only rose 8.8 percent, Internet advertising jumped 101.9 percent, becoming ”the fastest growing medium for advertisers.”
While Wall Street focused on the money Google was making, Benjamin A. Schachter, then the senior Internet and video game a.n.a.lyst for UBS, focused on the dollars they were investing in computers and servers and data centers, two hundred million dollars in 2003 (and soon to climb to nearly three billion dollars annually). ”This said they were doing much more than selling advertising. You don't need that computing power for text searches. You need it for mobile phones and applications, for cloud computing.” A ”cloud” of servers could store a consumer's information and hold a suite of software products, including spreadsheets, word processing, and calendars.
Google has dozens of data centers all over the world (the exact number is a state secret at Google), and within these data centers are housed what may be the world's most ma.s.sive computer system, millions of PCs that have no keyboards or screens and are arranged in stacks and have been repurposed as servers to process searches. The servers in these data centers provide an array of software services that users can access from any device. By geographically spreading these data centers all over the world, Google became more efficient. ”In a second, light can go around the world seven times,” said software engineer Matt Cutts, who joined Google in 2000. ”That's a couple of milliseconds between a data center on the East Coast and a data center on the West Coast or in Europe.” When we log onto Google, it instantly identifies our approximate geographical location from the Internet Protocol address on the browser that connects us to the Internet. Thus the query is dispatched to the closest data center, which produces a speedier result.
But the data centers are meant for more than search. Eric Schmidt, Schachter noted, has been proselytizing for cloud computing for two decades, since he was a Sun executive touting ”network computing.” That same year, 2004, John Markoff of the New York Times New York Times spotted it too. While others saw Microsoft training its guns on search, he saw Google taking aim at Microsoft's software. The scale of the Google computer system, as well as the backgrounds of its management, he wrote, ”suggests that while Microsoft may want to be the next Google, the Web search company has its own still-secret plans to become the next Microsoft.” spotted it too. While others saw Microsoft training its guns on search, he saw Google taking aim at Microsoft's software. The scale of the Google computer system, as well as the backgrounds of its management, he wrote, ”suggests that while Microsoft may want to be the next Google, the Web search company has its own still-secret plans to become the next Microsoft.”
A STRIKING TAKEAWAY from the Google IPO and letter is that Google's two thirty-one-year-old founders were driving the company with a clarity of purpose that would be stunning if they were twice their age. Their core mantra, which was echoed again and again in their IPO letter, was that ”we believe that our user focus is the foundation of our success to date. We also believe that this focus is critical for the creation of long-term value. We do not intend to compromise our user focus for short-term economic gain.” The IPO declared, as they had from day one, that Google will ”not accept money for search result ranking or inclusion”; that no attempt is made to keep users in a walled Google garden but instead to steer them quickly to their destination; that if the ad does not attract user clicks, it will be dropped ”to a less prominent position on the page, even if the advertiser offers to pay a high amount.” And those ads deemed more relevant because they attract more clicks, move to the top ”with no need for advertisers to increase their bids.” Since Google only gets paid when ads are clicked, this ranking system ”aligns our interests equally with those of our advertisers and our users. The more relevant and useful the ad, the better for our users, for our advertisers, and for us.”
How did Page and Brin achieve such clarity?
Page's answer: ”Being less experienced, you have benefits and you have costs. We were willing to do things differently because we didn't know better. I think our propensity to do that is higher than most people's. I'm not sure it's clarity. It looks like clarity in retrospect because you see the things that work.” Page's modesty is becoming, but falls short of a full explanation.
Brin gave a parallel answer: ”A lot of it is common sense, a combination of common sense and questioning rituals. Experience is a benefit, but it can also be a handicap.” He also attributes their success to their math backgrounds and a thirst ”to be precise.” The idea to give employees 20 percent of their time to pursue their own pa.s.sions he credits to graduate school, where ”you're always going off” on your own projects. Stanford was a huge influence: its bikes and buses, its open cafeteria tables and time to work on your own projects. ”They wanted to replicate the Stanford culture in the business world,” said Ram Shriram.
The precision argument is picked up by senior vice president of Operations Urs Holzle, who said the logic flows from a focus on the user. Start there, and it is relatively easy to decipher whether users want a Google home page cluttered with ads, or want relevant ads, or want to rapidly move to different sites. ”They predicted things that did not make sense to me, but turned out to be true. Larry said, 'The ad results have to be better than the search results.' I thought he was wrong. Yet today studies show that people value the ads as an essential part of their search results.”
One of their mentors at Stanford, Terry Winograd, thinks their ”clear, coherent point of view” is ”an engineering point of view: Don't a.s.sume things are done the right way because they were always done that way. Question everything.” And after you question, revert to ”an engineering optimization att.i.tude: 'Make it more efficient.'” What stands out to another Stanford mentor, Rajeev Motwani, the Stanford professor Brin remained closest to and who died in a tragic accident in 2009, are their one-word questions: ”The number of times they made me change my opinion by asking, 'Why?' They asked like a child.”
It would be a mistake to ascribe Google's success to the generic category of engineers. Larry Page brilliantly conceived search, and Sergey Brin's math skills were vital to its success. But Google also succeeded because it forged teams of engineers who were not territorial, who formed a network, communicating and sharing ideas, constantly trying them out in beta tests among users, relying on ”the wisdom of crowds” to improve them. Building communities of engineers and hackers and users was the ethos they shared. They believed it was virtuous to share, for it embraced the construct framed by Eric Steven Raymond in a paper originally presented at a conference of Linux developers in 1997, ”The Cathedral and the Bazaar.” Instead of a solitary engineering wizard crafting software as if it were a cathedral and releasing it when perfected, Raymond argued that the Linux model was more like ”a great babbling bazaar” that would ignite the creativity of communities of engineers and users. This ethos was one that infected Page and Brin and Google engineers, led them to the clarity of a free search engine designed to serve users.
Eric Schmidt had another theory: Page and Brin actually have more experience than their age suggests. He recounted a recent discussion he had had with Page. He and the founders were upset with a product user interface presentation they attended. Page said the problem was that the engineers were young and had no experience. ”The reason you and I agree on this is that I started on this when I was very young, and I've been thinking about it for a long time,” Page said. At first, Schmidt was stunned, wondering how Page grouped himself with someone who was two decades older. Then it dawned on him that Page nearly matched him for experience. Like Brin, he said, ”He looks like a kid to you, but he's been in the industry as long as I have in a way.”
The experience of the founders stems, as well, from four things they shared. First, each was raised in an academic home, where clear thinking was prized. They were trained to be precise. Each also ”are quintessential Montessori kids,” said Marissa Mayer. ”They didn't have a lot of structure. They got to do what they want to do. They were taught to question authority and think for themselves. They fundamentally believe that people on many levels know what's best for themselves. Like the Montessori kid who paints when he wants to paint.” Montessori, Page said, taught Brin and him ”to question everything.” A third vital shared life experience was Stanford. The fourth was that Page and Brin shared each other. ”There's kind of a strength in the duo,” said Coach Campbell. ”So when they come out the door at the other end, they are even more convinced than they were going in.”
”We agree eighty to ninety percent of the time,” Brin said of his relations.h.i.+p with Page. Page thinks they agree about two-thirds of the time, but said their disagreements are usually over small things. ”If we both feel the same way,” Page said, ”we're probably right. If we don't agree, it's probably a toss-up. If we both agree and n.o.body else agrees with us, we a.s.sume we're right!” He smiled as he said this, an awkward, tight smile, yet one that conveyed both merriment and resolve. ”It sounds like a tough thing to say, but that's sort of what you need to do to make progress.”
Susan Wojcicki, who rented them her garage, believes they gave each other strength-strength ”to be different. They think alike. They had a shared vision. So when things got tough, they were able to support each other in being different.” They don't always agree, said Jen Fitzpatrick, who is Google's engineering director and was among the first thirty Google employees, but ”having a mental sparring partner is a good way to drive your own thinking.”
”Having the two of them being completely in sync” is a huge advantage, said Kordestani. He remembers his experiences as an executive at Netscape, where the three senior executives-founder Jim Clark, CEO James Barksdale, and the browser's inventor, Marc Andreessen-”were not in sync.” Pulling in different directions, Netscape lost its focus.
Page and Brin bucked each other up in another way: they burned with an idealism that sometimes bordered on messianic. They launched Google with a fervent belief that advertising tricked people to spend money, that the Internet would foster a democratic ethos that would liberate people. They gave employees their 20 percent time, Page told Schmidt, in order ”to force a conversation” with managers, removing some managerial power.
There is a real sense of loyalty to Page and Brin at Google. Their vision has made Googlers obscenely rich. Employees love the freedom that the 20 percent time and generous benefits grant. Like Steve Jobs or Bill Gates, their knowledge can be intimidating, though terror is not commonly part of their motivational a.r.s.enal. Their approach can be subtle. Sheryl Sandberg recalled a project she supervised in her role as vice president, global online sales and operations. The story she related could be interpreted as an ill.u.s.tration of a company careless about how much is spent, or as a reason employees like Sandberg saluted the founders. At the time, her project awarded free search ads to nonprofit groups. ”Some companies would be worried about the bottom line. Larry and Sergey just wanted to know why the program was not bigger, faster,” she said. She increased the size of the effort-too fast, it turned out. ”We were giving much more ad inventory to a handful of nonprofits than we should have.” She trekked to the founders' office in Building 43 to explain. Page was there alone, and she explained her ”really big mistake,” said she ”should have noticed,” and apologized.
Page interrupted her, she recalled. ”He said, 'I'm so glad these are the kinds of mistakes you're making because it means you're moving quickly and doing too much. I'm going to be very upset when the mistakes you're making are by going too slowly and missing opportunities.”' She volunteered a ten-point plan to avoid similar mistakes, asking if he wanted to review it.
”No, I totally trust you,” he told her.
Of course, clarity is not a trait unique to Google's founders. Steve Jobs has demonstrated prescience with several transformative innovations: the first Macintosh, Pixar, the iPod and iTunes, and now the iPhone. Bill Gates was clear about the value of software, a clarity IBM lacked when it ceded the operating system to Microsoft. By insisting that craigslist.org be a free site for most cla.s.sified ads, Craig Newmark knew, he said, that by sacrificing revenues ”people saw values we believed in and picked up on it.” He knew he was building trust. be a free site for most cla.s.sified ads, Craig Newmark knew, he said, that by sacrificing revenues ”people saw values we believed in and picked up on it.” He knew he was building trust.
Page and Brin's clarity was abetted by the CEO they chose as their partner, Eric Schmidt. Aside from the b.u.mps they had the first few years, it is the overwhelming opinion of those who work with them that the three men have a smooth working relations.h.i.+p. Sheryl Sandberg observed that the reason the troika ”works is that whoever you go to for an answer, that answer sticks.” When you have two parents, a child can usually play one off against the other, she said. But at Google even if one of the three disagrees, he will back the decision. Brin said of Schmidt, ”Eric is the leader for the company. Larry and Eric and I all share in the top-level leaders.h.i.+p, but mostly Eric takes on the hardest challenges. Larry and I can spend more time on products and technology.”
Success in the Valley requires more than good engineers and pa.s.sion, said Bill Campbell, pointing to the brilliant engineers and divided management that could not save Netscape, or how the pa.s.sion of founder Jonathan Abrams, who founded Friendster, the pioneer social network site, was no subst.i.tute for missing management, and is a reason Friendster was eclipsed by Facebook. ”I can't imagine that anyone could have done what Eric has done. He matches what this company needs. You've got founders that have their unique pa.s.sions, and they have an unusual amount of strategic insight. Applying that to a business model and making sure that the trains are running on time-and at the same time never losing the technology vision-is a feat. Eric's technology skills mean that no one can bulls.h.i.+t him. You can bulls.h.i.+t me. I'm not an engineer.”
Being an engineer, alone, is not enough. Oracle has thrived for a long time as a company founded and headed by Larry Ellison, who is not an engineer. Ditto Apple under Steve Jobs. This point is made by Dan Rosensweig, the former COO of Yahoo who is today the CEO of Activision Blizzard's Guitar Hero franchise. What makes a successful CEO, he said, ”is a balanced appreciation” of the many factors, including engineering, an entrepreneurial and business culture, plus good management. In defense of his friend Terry Semel, he added, ”When Terry ran a movie studio he wasn't a director or an actor. Yet he and Bob Daly ran one of the great studios.”
The youth of the founders sometimes leads to sneering that an adult like Schmidt was essential to managing Google. ”It borders on insulting to say that Eric provides 'adult supervision.' It is insulting to both,” Elliot Schrage said. Yet there are times when Schmidt does supervise, playing a role he likens to ”a catcher” who retrieves ”loose b.a.l.l.s.” For example, at the conclusion of a Google Zeitgeist conference, the founders and Schmidt hosted a lunch for fewer than a dozen journalists in a conference room on campus. In an earlier interview, I had asked Schmidt how he felt about the federal Patriot Act, which grants the president superseding power to tap phones or e-mails to investigate potential terrorism. ”I'm not a big fan,” Schmidt said. ”I'm offering you my personal opinion as a citizen.” At the press lunch, the three men sat at the head of a long table, and as a preface to a question I mentioned that two years earlier Google had challenged a Justice Department subpoena that the company share information about search queries involving p.o.r.nography, and Google took them to court and won. Given that, I asked, what was Google's posture toward the Patriot Act?
”I'm not an expert on the Patriot Act,” Brin began, ”but it's certainly a long-standing issue prior to the Patriot Act....”
”Can I?” Schmidt interrupted. Not waiting for permission, he proceeded to say: ”The best way to answer this question is to say it's the law of the land and we have to follow it.”
”Or in some cases we fought it in court,” Brin began again, referring to the court victory on whether Google must turn over search requests involving p.o.r.nography. Again, Schmidt interrupted, steering Brin away from any possible don't-be-evil proclamations. Schmidt said, ”We fought it legally, and we followed the law, and we won in court.”
There are times when Schmidt appears obsequious to the founders, as when he introduced Page at the annual meeting of Google shareholders as ”the best business partner in the world.” But then, ”every once in awhile,” a Google executive said, ”he does this unintentional condescending thing, and he does it in public settings.”
What Schmidt clearly brought to Google was experience the founders lacked. Experience often brings seasoned judgment. ”Eric is the person who said, 'We did this at Sun,”' said Sandberg. ”Eric instilled some business discipline. Before Eric started, our engineering team was going to build a finance system.” She recalled that he told them ”This is not a good use of our resources. We'll buy the software program.” Michael Moritz, who as a director was unhappy with Schmidt's toughness during his first year at the helm, now said, ”I've become a huge cheerleader and fully paid-up member of his fan club. He's done the most important thing for a chief executive, and that's to recruit and lead a wonderful management team.”