Googled Part 4

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 ownership. 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 Washington 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 shire 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-shirt 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 shift 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 relationship 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 relationship. 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 leadership, 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."

Andrew Lack, then the chairman and CEO of Sony Music, who is a friend of Schmidt's, remembers an incident at the 2005 World Economic Forum in Davos. Arthur Sulzberger, Jr., the chairman of the New York Times Company and publisher of its flagship newspaper, spoke at a dinner attended by Schmidt and about fifty media executives and journalists. Schmidt remembers the evening vividly, thinking, "I was the guest." What he did not know, said Lack, was that he "would become a target." Sulzberger, who despite his august position can be surprisingly supercilious, rose and accused Google of "stealing his business," his advertisers, his content. Sulzberger has another side, as a staunch defender of journalistic values-a reason many in the Times newsroom believe he n.o.bly stands between them and the financial barbarians-and he then made an eloquent plea for the importance and future of newspapers, before coming back to Schmidt and underscoring his animus toward Google.

The room was tense when Schmidt rose to respond. He defused it with humor, said Lack, referring to himself "as the skunk at my garden party. I can feel in this room, shall we say, a certain indifference towards my contribution to all of our work together, and I feel sorry about that, because I think there are great contributions to be made working together." Schmidt acknowledged that Google and the Internet can negatively affect newspapers and other media businesses, but ended by urging them to talk and search for ways to work together. Sulzberger said he had "no recollection of the specific incident," adding, "You can certainly check with Eric on this." Eric Schmidt confirmed Lack's account.

"I admired Eric for the way he handled himself," Lack said. "There was no armor to him, no bluff, no bravado."

By 2004, relations between Schmidt and the founders were harmonious. The founders are happy with Schmidt, said one longtime Google executive who did not want to be quoted, because "Eric does everything they don't want to do." Bill Campbell sees it from another angle. He lavished praise on Page and Brin for their entrepreneurial brilliance and inquisitiveness. But he added, "Here's the part you don't see: Let's a.s.sume they had ten ideas they thought were great. Let's a.s.sume they applied six of them. That gauge of what you can apply and what you can't is where Eric comes in big time. These guys decide this is what they want to do, and Eric will say, 'This is worth fighting for. This is a really important thing. Let's go do that. Let's pull that, it will take us a little off track.' What Eric has, and the founders are the first to say, is judgment, judgment, judgment. He knows when to take their initiatives and drive them to a conclusion, or to talk them out of it."

SOMETIMES ENGINEERS CAN BE CLEAR about the wrong thing. By relying so heavily on algorithms and science, the Google founders-and Schmidt-have sometimes been clueless about right side of the brain issues, as they were with their original approach to Gmail, or book search, or their clumsy dealings with traditional media companies. Google collects an enormous amount of data about the people who use it. It asks users to trust them with private information, much as a credit card company asks users to trust it won't share card numbers. The difference is that Google's business model is based on selling advertising. And the data Google collects-the amount of time users spend with an ad or reading something, what they click on, what they search for, what they seem to like or dislike-is invaluable to the advertiser. Although Google does not hand over the data to an advertiser, it does use the data to help advertisers target customers. As Winograd points out, Google is really saying, "'We're smart guys. We have integrity. Trust us.' They see things not from an inst.i.tutional, political point of view but from this personal and engineering point of view: 'We would never do that sort of thing.' They believe that in their hearts." Winograd believes them too. But the engineer's pa.s.sion, he said, drives them to also believe that they are "smart enough to make sure that it won't happen by accident." With the air of an empathetic but rigorous professor grading a smart but innocent student, Winograd arches a huge white eyebrow and concludes that this entails "a certain amount of technical arrogance-'The system cannot fail, cannot fail." But the system can fail, he added, because it is managed by fallible human beings, not machines.

Google, at least abstractly, is aware of this danger. Their IPO filing acknowledged that "privacy concerns" could sabotage the trust the company requires from users. In disclosing to investors the various ways in which Google could fail, they write: "Concerns about our collection, use or sharing of personal information or other privacy-related matters, even if unfounded, could damage our reputation and operating results. Recently, several groups have raised privacy concerns in connection with our Gmail free email service.... The concerns relate princ.i.p.ally to the fact that Gmail uses computers to match advertis.e.m.e.nts to the content of a user's e-mail message."

If users lost trust in Google, believed their private data was being exploited and shared with advertisers (or governments), the company regularly judged one of the world's most trusted brands would commit suicide. Do Google's engineers, in their gut, believe they could lose the user trust they have earned? Unclear. What is clear is that there is often a fine line between cert.i.tude and hubris.

CHAPTER SEVEN.

The New Evil Empire?

(2004-2005).

In Edgar Allan Poe's story The Purloined Letter, The Purloined Letter, an incriminating letter disappears from the private residence of the French queen. The Parisian police prefect takes on the case, but even after an extensive search, he cannot find the letter. And though he manages to narrow the search to a chief suspect, a government minister, he lacks evidence to arrest him. The prefect decides to consult the noted amateur detective C. Auguste Dupin. He explains that each night for three months, he has slipped into the minister's home to a.s.siduously search for the letter, removing cushions, the bottoms and tops of bedposts, the floorboards, the bindings of books-without success. The prefect is agitated; the suspect is a mere poet, he says, and he cannot believe such a "fool" could outwit him. Dupin, however, disagrees; he thinks the prefect and his detectives are the foolish ones, limited by their experiences, their routines, and "their own ideas of ingenuity." They could not comprehend the ac.u.men and cunning of a mind schooled not just as a poet but as a mathematician who follows his own "mathematical reasoning." an incriminating letter disappears from the private residence of the French queen. The Parisian police prefect takes on the case, but even after an extensive search, he cannot find the letter. And though he manages to narrow the search to a chief suspect, a government minister, he lacks evidence to arrest him. The prefect decides to consult the noted amateur detective C. Auguste Dupin. He explains that each night for three months, he has slipped into the minister's home to a.s.siduously search for the letter, removing cushions, the bottoms and tops of bedposts, the floorboards, the bindings of books-without success. The prefect is agitated; the suspect is a mere poet, he says, and he cannot believe such a "fool" could outwit him. Dupin, however, disagrees; he thinks the prefect and his detectives are the foolish ones, limited by their experiences, their routines, and "their own ideas of ingenuity." They could not comprehend the ac.u.men and cunning of a mind schooled not just as a poet but as a mathematician who follows his own "mathematical reasoning."

Months go by, and the prefect returns, still unable to prove the minister's guilt and ready to sign over the reward. Dupin, after persuading the prefect to sign a check, pulls the letter from his desk drawer. He explains that he cracked the case by climbing inside the supple mind of the suspect and imagining what he would do to conceal the letter. He imagined that the minister tricked the police by not attempting to conceal the letter. Rather, to avoid detection the letter was soiled, slightly torn, and crumpled in a card rack lying in plain sight in the middle of the minister's room. Dupin found the letter where it had always been: under the nose of the prefect and his detectives.

Until 2004, most traditional media executives treated Google the way the prefect treated evidence: they failed to see the digital threat right under their noses. But soon after the IPO, their heightened awareness was captured in an eight-minute Flash-based movie that virally spread across the Internet. Called Epic Epic 2014, it was a faux doc.u.mentary by two young journalists, Matt Thompson and Robin Sloan. With a voice-of-G.o.d narrator, it recounted how year by year a new media giant, Googlezon (the merged Google and Amazon), acquires or murders media companies, including the New York Times Company. By 2014, this Orwellian colossus employs its algorithms and computers to snare advertising and customize packages of news for individuals, whose wants are revealed by the cookies Googlezon gathers to track the behavior of its users. 2014, it was a faux doc.u.mentary by two young journalists, Matt Thompson and Robin Sloan. With a voice-of-G.o.d narrator, it recounted how year by year a new media giant, Googlezon (the merged Google and Amazon), acquires or murders media companies, including the New York Times Company. By 2014, this Orwellian colossus employs its algorithms and computers to snare advertising and customize packages of news for individuals, whose wants are revealed by the cookies Googlezon gathers to track the behavior of its users.

Not surprisingly, this depiction jarred Googlers. When Sheryl Sandberg joined the company in late 2001, she believed she had a public mission, a mission parallel to the one she felt as a ranking member of the Clinton administration. Yet to her shock, not long after the IPO, she first heard Google referred to as the "evil empire." She was attending a Google conference-"I was standing there with our partners and they said, 'How do we sustain ourselves against the power of-' I thought they were going to say Microsoft. Instead they said, 'Google.'"

The hostility, said Eric Schmidt, "did not begin until Google went public and people realized how much money we were making." The reaction had more to do with fear than envy. It took Microsoft fifteen years to exceed one billion dollars in revenues; it took Google just six years. The evidence was now visible that Google was attracting more Internet advertising than anyone else, and these dollars were being siphoned from traditional media. This was perceived as a threat to most traditional media companies, and perhaps none more so than the advertising industry. Google was able to sell advertising with just a few search words, and without charging the same 2 to 5 percent fee extracted by the media buying agencies. The buy was better targeted. And for advertisers it was more efficient, for Google only charged the advertiser when the consumer actually clicked on an ad. "There's that same 'think big' att.i.tude about markets and opportunities," Steven I. Lurie, a former Microsoft executive who had friends at Google, told the New York Times New York Times at the time of the IPO. "Maybe you can call it arrogance, but there's that same sense that they can do anything and get into any area and dominate." at the time of the IPO. "Maybe you can call it arrogance, but there's that same sense that they can do anything and get into any area and dominate."

IT WAS IN THE CONTEXT of this growing backlash that the fight with book publishers, begun a few years earlier, started to come to a head. Like the Googlezon film, the uproar over digitizing books seemed to surprise Googlers. In their a.s.sessment, by scanning books and making them part of search, they were performing an ambitious and n.o.ble public service-they thought of the effort as their "moon shot"-and they a.s.sumed that they could do this without seeking permission of the copyright holders. Google knew that only about a third of the more than twenty million books ever published were no longer protected by copyright. But the mission was to scan all all books. With books under copyright, Google said it would merely show "snippets," which it claimed was permissible under the fair use clause of copyright law. Google did not precisely define the maximum number of words in a "snippet." Nor does the law, but the rule of thumb is that fair use involves only enough text to briefly explain a book or briefly quote from an article or song. books. With books under copyright, Google said it would merely show "snippets," which it claimed was permissible under the fair use clause of copyright law. Google did not precisely define the maximum number of words in a "snippet." Nor does the law, but the rule of thumb is that fair use involves only enough text to briefly explain a book or briefly quote from an article or song.

Google believed it had provided protection to authors and publishers. In its contracts with libraries, Google said that if, within three years of the digital transfer of material, "Google decides not to use that content" (a particular book) because of a copyright dispute, the library would destroy the digital copy. They believed authors and publishers would see Google Books as a wonderful way to promote authors and their works, and to bring back books no longer in print. Google had earlier launched a Partners Program, signing up publishers who agreed to allow snippets to be shown for certain books, along with a link to an online bookseller. But publishers did not agree to allow all books to become part of search. The gulf between Google and the publishers and authors was vast. Google wanted to push the envelope of copyright, expanding the definition of fair use to allow more extensive quotations from books. It stressed the rights of search users, echoing the views of Web pioneers like Kevin Kelly, the "senior maverick" at Wired Wired magazine, who said that in return for government copyright protection, authors and publishers had a "copyduty" to "allow that work to be searched." Google was offering to pay the cost of moving and scanning the books; what publisher-or library or university or author-could refuse that offer? magazine, who said that in return for government copyright protection, authors and publishers had a "copyduty" to "allow that work to be searched." Google was offering to pay the cost of moving and scanning the books; what publisher-or library or university or author-could refuse that offer?

One clue of Google's fundamental att.i.tude toward books-and fundamental innocence of the publishing process-is a conversation I had with Brin while reporting this book. It was the second of our three interviews and upon entering the small conference room down the hall from the second floor gla.s.sed office he shares with Page, Brin playfully ribbed me for writing this book. "People don't buy books," he said. "You might as well put it online." He meant: You might as well publish it for free.

"You might make more money if you put it online," he said. "More people will read it and get excited about it."

There's little evidence that such a free book succeeds, I said. Stephen King tried it, and gave up the effort because he thought it was doomed.

"I guess that's true," he acknowledged a little sheepishly.

Following Google's business model, would he expect authors to generate their income by selling advertising in their books? If there was no advance from a publisher, who would pay to cover the writer's travel expenses? (I made thirteen week-long roundtrips to Google from New York, rented a car, stayed at hotels, and paid for dinner interviews most nights.) With no publisher, who would edit and then copyedit the book, and how would they get paid for their work? Who would pay lawyers to vet it? Who would hire people to market the book so that all those potential online readers could discover it? The usually voluble Brin grew quiet, ready to change the subject.

But our rhetorical go-round hinted at something fundamentally true about Brin and Page and the dynamic company they have forged. Their starting predicate is that the old ways of traditional media are usually inefficient, and scream to be changed. This is a reason Google fundamentally misread the reaction of publishers and authors. While Google did reach various agreements with a variety of libraries, including Harvard, Stanford, the University of Michigan, Oxford University, the Library of Congress, and the New York Public Library, publishers did not like the idea of not getting paid for the use of their books. The a.s.sociation of American Publishers denounced Google's plan as an invitation to piracy, for the books stored on servers would be vulnerable to hackers. Publishers claimed they could be hit by the same thunderbolt that struck the music industry: free downloads.

Richard Sarnoff, the chairman of the a.s.sociation of American Publishers and the executive vice president of Random House, said, "Google went to libraries and said we will digitize all your books and just use snippets of copyrighted books. They said it would be good for libraries and for users. This is true. But we have laws in this country which govern what we can do and not do. Like copyright, which prevents people from copying things for their own commercial use. And this is for Google's commercial use, for search." The publishers demanded that Google seek their permission before digitizing any book that was still protected by copyright. "The Internet is a grazing medium," Sarnoff said. "Books tend to be a longer term experience." Grazing can be a great way to promote a book, he said. "But we want to be extremely careful to make sure discovery does not become consumption." To ill.u.s.trate his fear of piracy, he pulled out his iPhone and said that the small device can hold fifty thousand books, all easily down-loadable. This, he noted, is the approximate capacity of a midsize bookstore. In October 2005, the publishers announced that they had filed a lawsuit.

Paul Aiken, the executive director of the Authors Guild, wanted authors to share in any profits from their books, but said his primary concern was piracy. He mentioned "the huge risk" posed by backup copies in Google's possession and the libraries. "Google is giving back to the University of Michigan a digital copy of each book for their own use. What happens to the University of Michigan copy?" What happens, he said, when they share the copy with other Michigan libraries? What happens "if they lose the backup?" Or it's hacked into? Sarnoff was also concerned that Google's definition of "a snippet" was vague. A longer snippet from a novel is likely too brief to rob the book of value, he said. But a snippet of a reference book may be "taking real value" from the author. In a fundamental sense, the differences between Google and its Silicon Valley allies, who want to share information, and publishers and authors, who want to be compensated for it, boil down to a definition of property rights. On the Internet, it is common to make copies of pages and share the information of those who produce content. In traditional media, such "sharing" is often considered theft. The Authors Guild also filed a lawsuit against Google.

To David Drummond, Google's senior vice president of corporate development and chief legal officer, the difference came down to this: "Fair use is as important a right as copyright infringement. It is a balance that is struck between encouraging people to innovate, and a public sphere." He defined a snippet as similar "to a Google search. You see just two or three lines." He rejected the idea of sharing revenues with publishers and authors for the snippets that would appear in a book search, likening a Google search to a book review, which no one claims as a violation of copyright law. As for pirated copies from the libraries, he said, "We've got provisions in the library agreements that they agree not to abuse. We would hope that these are major inst.i.tutions that take their copyright responsibilities very seriously. These are also research organizations that have not insignificant expertise in data security." The president of Stanford, John L. Hennessy, who is on the Google board, agreed that university libraries have to "guarantee" the security of digital books. But he wants to keep the focus on "finding a way to move forward," to bring the information in books to people. "We need to rethink our copyright framework that is still a remnant of the past. In the digital age, for example, why should the library buy a physical copy of a book? Why can't the library just buy a digital copy?" Physical books, he adds, are "too big. They cost too much to store. They're too hard to deal with, and they're too hard to search."

Columbia University law professor Tim Wu supports Google's efforts to digitize books, which he also sees as essential for comprehensive search. But he thought Google was being evasive. "If they had a copyright lawyer among their founders," he said, "they never would have started the company. The basic business of a search engine is to copy everything. To make your copy, and then search it. The first thing that happens, arguably, is infringement of copyright law. I say 'arguably' because there's never been a case on it. From day one, Google went out and copied the whole Internet. Can you imagine a company starting in the film world and the first thing they did was make a copy of every film in existence? That company couldn't have gotten started. The Web is always about copying, but copyright law is all about making copying illegal." There is an unavoidable disconnect between the two.

Over the next several years, the a.s.sociation of American Publishers and the Authors Guild lawsuits wended their way through the legal system. While they did, another disconnect surfaced: a contradiction between Google's push to liberalize the intellectual property rights of others while protecting its own. Buried in Google's 260-page 2004 IPO prospectus is this admission: "Our patents, trademarks, trade secrets, copyrights and all of our other intellectual property rights are important a.s.sets for us. There are events outside of our control that pose a threat to our intellectual property rights." They cited the politics of other nations, the various legal interpretations. Then they provide a sentence that could have been uttered by a publisher: "Any significant impairment to our intellectual property rights could harm our business or our ability to compete."

Looking back, many of Google's nonengineers admit, when asked, that Google made a mistake by not more closely consulting and coordinating their efforts with publishers and authors. "I think that's true," said Megan Smith, Google's vice president of business development, who explained that "we moved too fast" and "involved the Authors Guild much later" than we should have. "We're a technology company," chimed David Eun, vice president of strategic partnerships. "We thought people would understand that we had good intentions." Asked if Google was guilty of innocence or arrogance, Paul Aiken of the Authors Guild said, "It's probably both."

MEL KARMAZIN THOUGHT it was arrogance. Having left Viacom earlier in 2004 after an unhappy half decade with Sumner Redstone (and before it was split into two companies, Viacom and CBS), he was now the CEO of Sirius satellite radio, which blankets the United States with a cornucopia of radio options. He described an early meeting he had with Tim Armstrong, Google's sales chief. "The first thing he said was, 'We have so many advertisers that we don't have enough content in which to put all of this advertising, so we would like to get into selling radio advertising.'" Armstrong proposed to sell national satellite radio spots the way Google sold search words, in an auction.

"How much money will you guarantee me?" Karmazin asked. Armstrong made an offer that Karmazin considered way too low. "I believe the system would have been successful," Karmazin now said, "but it would have had the effect of lowering prices." Again, he was struck, as he had been on his 2003 visit to its campus, by Google's boundless ambitions. Again, he believed that its mathematical approach was all wrong. Google didn't understand that you were "selling the sizzle, not selling a cost per point"-each rating point signifying the size of the audience is sold at a set rate. "You're selling a spot in Desperate Housewives." Desperate Housewives." To those at Google, Karmazin was slavishly following a formula that digital technology had proved wasteful. To those at Google, Karmazin was slavishly following a formula that digital technology had proved wasteful.

It wasn't just Google that loomed as a threat to traditional media. Yahoo was pushing into content-hiring a former Hollywood executive, Lloyd Braun, to produce and package shows for the Web, in addition to such popular features as Yahoo Finance-and in 2005 had more than four hundred million worldwide users. That year, Yahoo generated profits of $1.1 billion, and was valued by Wall Street at a whopping $50 billion, equal to the combined value of Viacom and CBS or to the Walt Disney Company. Jaws dropped when media executives read in 2005 that Yahoo CEO Terry Semel cashed in $230 million in stock options, and had another $396 million yet to exercise.

Google believed, with merit, that traditional media too often blamed digital companies for events they did not cause-for the disruptive impact of the Internet, for slowed or declining profits, for their shrinking stock price or budget cutbacks, for their rampant insecurities. It was inevitable that the Internet would alter the way consumers received and used content. But Google became a convenient pinata.

The company gave its critics a big target to swing at: in 2005 alone, Google acquired fifteen smaller digital companies and partnered with various others, including a smaller search engine, Barry Diller's Ask.com, to which Google directed advertising as it now did for hundreds of thousands of Web sites. Google had 7,000 employees working out of 62 offices, 30 of them outside the United States, which produced nearly 40 percent of its revenues. By the end of 2005, the company had indexed 8 billion Web pages in 116 languages; its revenues soared to $6.1 billion and its net income to $1.5 billion.

Meanwhile, the tide was running against traditional media. In December of 2005, 77 percent of Americans had Internet access at work and 37 percent of all adults had high-speed access to the Internet. The slight but steady decline in newspaper circulation suddenly steepened in 2004 and 2005. The circulation of daily newspapers would plunge 6.3 percent between 2003 and 2006, with Sunday circulation falling 8 percent. Newspaper advertising revenues, which had grown on average in the high single digits since 1950, beginning in 2001 fell in four of the next seven years, and in 2006 began to fall more steeply. With investors convinced that companies like Google would grow while newspapers would not, the stock price of newspaper companies also plunged-falling 20 percent on average in 2005-leaving them less capital to diversify by acquiring growth businesses. With search and Google News and other news aggregators culling reports from all over the world, readers could easily fetch their news for free online. Newspapers cried that Google and other Web sites that aggregated news lacked what elite newspapers offered: bureaus in Baghdad and state capitals, investigative reporting, professional editors, and familiar brand names that often stood for quality. But readers could effortlessly view their stories through Google News or Google search. By the end of 2005, 40 percent of American broadband users said they got their news online.

Much of the rest of old media was also challenged. Book sales were steady, but not robust, and the industry was anxious about the decline of independent bookstores and the new leverage exerted by giants like Barnes & n.o.ble and Amazon.com. This anxiety was only inflamed by Google's thrust into digitizing books. The movie and television and music industries were fretting about piracy. U.S. content and software companies lost an estimated $6.9 billion in revenues to piracy in 2005, and in China about 90 percent of all content and software was pirated. About one billion songs per month were swapped on illegal file-sharing networks. Although digital companies claimed piracy was hard to control, media executives rarely believed this. They believed digital companies were building their own audiences by stealing their content, particularly that of music companies. The lubricant of trust was missing. "I don't believe they have any incentive to solve it," said Sony CEO Sir Howard Stringer. With the rise of high-speed Internet connections, Hollywood knew its movies and TV programs were becoming more vulnerable to hackers and illegal downloads.

Television broadcasters were antsy about new user-generated online video companies like YouTube, a site that threatened to steal not just eyeb.a.l.l.s from TV but perhaps its content as well. And YouTube was not their foremost threat. New consumer choices drained audiences from traditional media. Three years earlier, in 2002, there was a total of 308 cable and video networks, a number that had tripled from just eight years earlier, and would double over the next four. The radio industry was also squeezed by newer technologies that allowed the iPod and Internet and satellite radio to subvert their traditional ad-supported broadcast model. The phone companies nervously watched their traditional landline business erode, and with the 2005 acquisition by eBay of Skype, a largely free Internet phone/voice service, and Google's voice-chat software also released that year, the erosion would accelerate. The cable companies were unsettled-as were all existing media-by how new media, from sharing networks like Mys.p.a.ce.com or or Meetup.com to video games, captured the attention of their customers. Mys.p.a.ce was only three years old in 2006 but already had seventy million members. to video games, captured the attention of their customers. Mys.p.a.ce was only three years old in 2006 but already had seventy million members.

And, of course, there was the advent of online advertising, which alarmed the traditional advertising industry. Google was able to sell advertising with just a few search words. The buy was more efficient because it was cheaper, better targeted, and Google only charged when the consumer actually clicked on an ad. Google could render traditional ad agencies extraneous middlemen to their clients. Irwin Gotlieb, the global CEO of GroupM, the world's largest media buying and planning agency with a pool of sixty billion in advertising dollars, said that the bigger problem for his business was not Google supplanting his services, but its market power. With the IPO placing a value on Google greater than GroupM's parent, the WPP group-plus the world's four other advertising/marketing giants combined-Google had very deep pockets.

The CEO of one media conglomerate describes the media paranoia Google provoked as intense, adding, "It's where Microsoft was. That paranoia is even greater about Google. The service is free. It's hard to see how anybody knocks them out when it's free. The brilliance of its business is that consumers love them. Consumers never loved Microsoft. They never loved the phone company. They don't love the cable company. Because we have to get money! Advertisers get a better deal than they've ever gotten. Consumers get a better search. And it's all free." What terrifies media companies, he added, is Google's ability and appet.i.te to reach into other businesses, from mobile phones to computer operating systems to video and advertising and even banking. "Name a business that they're not going to disrupt."

In Google's 2004 annual report, published in the spring of 2005, the founders gave old media executives more cause for concern. In the report was a letter to their shareholders announcing what they called their 70- 20-10 strategy. "Seventy percent of our effort goes to our core; our web search engine and our advertising network," Brin wrote on behalf of himself and Page. He went on to say that it was desirable for Google to diversify and that is "why we allocate 20 percent for adjacent areas such as Gmail and Google Desktop Search. The remaining 10 percent is saved for anything else, giving us freedom to innovate." The letter cited some new products Google invented or acquired: Google Maps, which allowed users to map directions; Google Earth, which provided satellite images of the earth's nearly sixty million square miles, allowing users to zoom in to search teeming Calcutta streets or war-torn Baghdad; Google Scholar, which allowed researchers to access academic papers and research; Google Video, which allowed users to search television programs; and Gmail. Any media company paying attention saw that Google was not just a search engine.

Even new media was put on notice when, in 2004 and 2005, Google swooped in at the last minute to beat both Microsoft and Yahoo in auctions. The first came in October 2004. Brin and Page were on an overnight flight, heading to a Madrid sales conference on a chartered Boeing 737, when they learned from Omid Kordestani that AOL Europe was close to renewing its European contract with Yahoo. (Although AOL was losing subscribers, it still had more than twenty million worldwide in 2005, making it a valuable platform to generate more searches.) "We told the pilots to head to London," where AOL's European headquarters were located, recalled Brin. The founders' families were aboard to accompany them from Madrid to Rome, where they were to receive an award from the prestigious Marconi Society for their scientific contributions. When they awoke, they were astonished to find that they were not in sunny Madrid but instead at Stansted Airport outside gray London.

Brin and Page drove to AOL's European offices. Jonathan Miller, the chairman and CEO of AOL at the time, recalled the jolt he felt Monday morning when th