Google
Inside the Googleplex
Aug 30th 2007 | SAN FRANCISCO
From The Economist print edition
Itis rare for a company to dominate its industry while claiming not to bemotivated by money. Google does. But it has yet to face a crisis
Corbis
Get article backgroundINAMERICA a phenomenon might claim to have entered mainstream cultureonly after it has been satirised on “The Simpsons”. Google has had thathonour, and in a telling way. Marge Simpson types her name intoGoogle‘s search engine and is amazed to get 629,000 results. (“And allthis time I thought ‘googling yourself‘ meant the other thing.”) Shethen looks up her house on Google Maps, goes to “satellite view” andzooms in. To her horror, she sees Homer lying naked in a hammockoutside. “Everyone can see you; get inside,” she yells out of thewindow, and the fumbling proceeds from there.
And that, ina nutshell, sums up Google today: it dominates the internet and guidespeople everywhere, such as Marge, to the information they want. But italso increasingly frightens some users by making them feel that theirprivacy has been intruded upon (though Marge, technically, could nothave seen Homer in real time, since Google‘s satellite pictures are notlive). And it is making enemies in its own and adjacent industries. Thegrand moment of Marge googling herself, for example, was instantlyavailable not only through Fox, the firm that created the animatedtelevision show, but also on YouTube, a video site owned by Google,after fans uploaded it in violation of copyright.
Google evokesambivalent feelings. Some users now keep their photos, blogs, videos,calendars, e-mail, news feeds, maps, contacts, social networks,documents, spreadsheets, presentations, and credit-card information—inshort, much of their lives—on Google‘s computers. And Google has plansto add medical records, location-aware services and much else. It mayeven buy radio spectrum in America so that it can offer all theseservices over wireless-internet connections.
Google couldsoon, if it wanted, compile dossiers on specific individuals. Thispresents “perhaps the most difficult privacy issues in all of humanhistory,” says Edward Felten, a privacy expert at Princeton University.Speaking for many, John Battelle, the author of a book on Google and anearly admirer, recently wrote on his blog that “I‘ve found myself moreand more wary” of Google “out of some primal, lizard-brain fear ofgiving too much control of my data to one source.”
Google itselfhas been genuinely taken aback by such sentiments. The Silicon Valleycompany, which trumpeted its corporate motto, “Don‘t be evil”, beforeits stockmarket listing in 2004, considers itself a force for good inthe world, even in defiance of commercial logic. Its founders, LarryPage and Sergey Brin, and Eric Schmidt, its chief executive, have saidexplicitly and repeatedly that their biggest motivation is not tomaximise profits but to improve the world.
Such talk canmake outsiders wince. Book and newspaper publishers, media companiessuch as Viacom, businesses which depend on Google‘s search rankings anda lengthening queue of others are tired of moralising sermons. Somefeel their own livelihoods are threatened and are suing Google. Evensome employees (called “Googlers”) or former employees (“Xooglers”) arecynical. Google is “arrogant” because it feels “invincible”, says aXoogler who left to run a start-up firm. The internal attitude towardscustomers, rivals and partners is “you can‘t stop us” and “we willcrush you”, he says. That “kinder, gentler” image is “mythology” and,he reckons, Google gets away with it only because of its impressivelyhigh share price.
That shareprice has quintupled since 2004, making Google worth $160 billion. Thecompany has not yet had its tenth birthday. Yet Piper Jaffray, aninvestment bank, expects it to have revenues of $16 billion and profitsof $4.3 billion this year. With so much money pouring in sceptics sayit is easy to ignore shareholders and talk about doing good instead ofdoing well. But what happens when earnings fall short of Wall Streetexpectations or some other disaster strikes? Yahoo! and other rivalshave gone through such crises and been humbled. Google has not.
Google‘ssuccess still comes from one main source: the small text ads placednext to its search results and on other web pages. The advertisers payonly when consumers click on those ads. “All that money comes 50 centsat a time,” says Hal Varian, Google‘s chief economist. For this successto continue, several things need to happen.
First,Google‘s share of web searches must remain stable. Thanks to its brand,this looks manageable. Google‘s share has steadily increased over theyears. It was about 64% in America in July, according to Hitwise. Thatis almost three times the volume of its nearest rival, Yahoo!. In partsof Europe, India and Latin America, Google‘s share is even higher. Onlyin South Korea, Japan, China, Russia and the Czech Republic does ittrail local incumbents.
Second,Google must maintain or improve the efficiency with which it puts adsnext to searches. And here its dominance is most impressive. In arecent analysis by Alan Rimm-Kaufman, a marketing consultant, it took awhopping 73% of the budgets of companies that advertise on searchengines (versus 21% and 6%, respectively, for Yahoo! and Microsoft). Itcharged more for each click, thanks to its bigger network ofadvertisers and more competitive online auctions. And it had far higher“click-through rates”, because it made these ads more relevant anduseful, so that web users click on them more often.
Perhaps mosttellingly, advertisers do better with Google. Mr Rimm-Kaufman foundthat Google‘s ads “converted” more often into actual sales, whichtended to be larger than those originating from Yahoo! or Microsoft.This is astonishing, given that Yahoo! has just spent a year on anall-out effort, codenamed Panama, to close precisely these gaps.
But evenlucrative “pay-per-click” has limits, so Google is moving into otherareas. It is trying (pending an antitrust inquiry) to buy DoubleClick,a firm that specialises in the other big online-advertising market,so-called “branded” display or banner ads (for which each view, ratherthan each click, is charged for). And Google now brokers ads ontraditional radio stations, television channels and in newspapers ofthe dead-tree sort.
Scepticspoint out that with each such expansion, Google reduces its profitmargins, because it must share more of the revenues with others. If aweb surfer clicks on a text ad placed by Google on a third-party blog,for instance, Google must share the revenue with the blogger. If Googleplaces ads in newspapers or on radio stations, it must share therevenues with the publisher or broadcaster.
Yet Googledoes not look at it that way. Its costs are mostly fixed, so anyincremental revenue is profit. It makes good sense for Google to pushinto television and other markets, says Mr Varian. Even if Google getsonly one cent for each viewer (compared with an average of 50 cents foreach click on the web), that cent carries no variable cost and is thuspure profit.
The machinerythat represents the fixed costs is Google‘s secret sauce. Google hasbuilt, in effect, the world‘s largest supercomputer. It consists ofvast clusters of servers, spread out in enormous datacentres around theworld. The details are Google‘s best-guarded secret. But the result,explains Bill Coughran, a top engineer at Google, is to provide a“cloud” of computing power that is flexible enough “automatically tomove load around between datacentres”. If, for example, there isunexpected demand for Gmail, Google‘s e-mail service, the systeminstantly allocates more processors and storage to it, without the needfor human intervention.
Thisinfrastructure means that Google can launch any new service atnegligible cost or risk. If it fails, fine; if it succeeds, the cloudmakes room for it. Thus Google can redefine its goals almost on a whim.Its official strategy recently became “search, ads, and apps”—theaddition being the apps (ie, software applications). Sure enough, aftera string of acquisitions, Google now offers a complete alternative toMicrosoft‘s entrenched Office suite of programs, all accessible throughany web browser. A new technology, called Google Gears, will make theseapplications usable even when there is no internet connection. AndGoogle is hawking these applications not only to consumers but also tocompanies. Ultimately it does so because, thanks to its supercomputer,it can.
With Google‘scashflow and infrastructure, the freedom to do anything it fanciesgives rise to constant rumours. Often, these are outrageous. It used tobe conventional wisdom that Google would build cheap personal computersfor poor countries. This turned out to be nonsense, because Google doesnot want to make hardware. Now there is talk of a “Gphone” handset.This is also unlikely because Google is more interested in software andservices, and does not want to alienate allies in the handsetindustry—including Apple, which shares board directors with Google anduses Google software on its iPhone.
Sometimes therumours are both outrageous and true. Google is experimenting with newways of bringing broadband connections to consumers, by blanketingparts of Silicon Valley with Wi-Fi networks. It is planning to enter anauction for valuable radio spectrum in America, and thinking ofradically new business models to make money from wireless data andvoice networks, perhaps a free service supported by ads.
Beyond itsattempts to expand into new markets, the big question is how Googlewill respond if its stunning success is interrupted. “It‘s axiomaticthat companies eventually have crises,” says Mr Schmidt. And historysuggests that “tech companies that are dominant have trouble fromwithin, not from competitors.” In Google‘s case, he says, “I worryabout the scaling of the company.” Google has been hiring “Nooglers”(new Googlers) at a breathtaking rate. In June 2004 it had 2,292 staff;this June the number had reached 13,786.
Its abilityto get all these people has been a competitive weapon, since Google canafford to hire talent pre-emptively, making it unavailable to Microsoftand Yahoo!. Google tends to win talent wars because its brand is sexierand its perks are fantastically lavish. Googlers commute on discreetshuttle buses (equipped with wireless broadband and running onbiodiesel, naturally) to and from the head office, or “Googleplex”,which is a photogenic playground of lava lamps, volleyball courts,swimming pools, free and good restaurants, massage rooms and so forth.
Yet for someon the inside, it can look different. One former executive, now suingGoogle over her treatment, says that the firm‘s personnel department is“collapsing” and that “absolute chaos” reigns. When she was hired,nobody knew when or where she was supposed to work, and the balloonsthat all Nooglers get delivered to their desks ended up God knowswhere. She started receiving detailed e-mails “enforcing” Google‘soutward informality by reminding her that high heels and jewellery wereinappropriate. Before the corporate ski trip, it was explained that “ifyou wear fur, they will kill you.”
Google is a paradise only for some, she argues. Employees who predate the IPOresemble aristocracy. Engineers get the most kudos, people with otherfunctions decidedly less so. Bright kids just out of college tend tolove it, because the Googleplex in effect replaces their universitycampus—with a dating scene, a laundry service and no reason to leave atweekends. Older Googlers with families tend to like it less, because“everybody, even young mums, works seven days a week.”
AnotherXoogler, who held a senior position, says that by trying to create a“Utopia” of untrammelled creativity, Google ended up with “dystopia”.As is its wont, Google has composed a rigorous algorithmic approach tohiring, based on grade-point averages, college rankings and endlesslogic puzzles on whiteboards. This “genetic engineering of theirworkforce,” he says, means that “everybody there is a rocket scientist,so everybody is also insecure” and the back-stabbing and politics arereminiscent of an average university‘s English department.
Then there isthe question of what all these people are supposed to do. “We kind oflike the chaos,” says Laszlo Bock, the personnel boss. “Creativitycomes out of people bumping into each other and not knowing where togo.” The most famous expression of this is the “20% time”. In theory,all Googlers, down to receptionists, can spend one-fifth of their timeexploring any new idea. Good stuff has indeed come out of this,including Google News, Gmail, and even those commuter shuttles andtheir Wi-Fi systems. But it is not clear that the company as a whole ismore innovative as a result, as it claims. It still has only one provenrevenue source and most big innovations, such as YouTube, Google Earthand the productivity applications, have come through acquisitions.
In practice,the 20% time works out to be 120% time, says another Xoogler, “sincenobody really gets around to those projects for all their other work.”The chances of ideas being executed, he adds, “are basically zero.”What happens to the many Googlers whose ideas are rejected? Once theirshare options are fully vested they consider leaving. The samephenomenon changed Microsoft in the 1980s, when allegedly T-shirts popped up saying FYIFV (“Fuck you, I‘m fully vested”). Already some are going to even “cooler” start-ups, such as Facebook or Twitter.
This weekGeorge Reyes, Google‘s finance chief, said he would retire. At 53, heis a multi-millionaire. Mr Reyes has maintained the company‘s policy ofnot providing guidance to Wall Street on future earnings, although hiscomments on growth prospects have moved its share price.
Besides theslow risk of calcification that comes with growth, there is also therisk that Nooglers will dilute Google‘s un-evil values. Worse, Googlemight inadvertently pick up a rogue employee, as the late Barings Banknotoriously did with Nick Leeson. Indeed, Google is fast becomingsomething like a bank, but one that keeps information rather thanmoney. This applies equally to its rivals, but Google is accumulatingtreasure fastest. Peter Fleischer, Google‘s privacy boss, argues thatthe risk of a malicious or negligent employee leaking or compromisingthe data, and thus the privacy of users, is minimal because only a“tiny” number of engineers have access to the databases and everythingthey do is recorded.
But theprivacy problem is much subtler than that. As Google compiles moreinformation about individuals, it faces numerous trade-offs. At oneextreme it could use a person‘s search history and advertisingresponses in combination with, say, his location and the itinerary inhis calendar, to serve increasingly useful and welcome search resultsand ads. This would also allow Google to make money from its many newservices. But it could scare users away. As a warning, PrivacyInternational, a human-rights watchdog in London, has berated Google,charging that its attitude to privacy “at its most blatant is hostile,and at its most benign is ambivalent”.
At the otherextreme, Google could decide not to make money from some services—ineffect, to provide them as a public benefit—and to destroy data aboutits users. This would make its services less useful but also lessintrusive and dangerous.
In reality,the balance must be struck somewhere in between. Messrs Schmidt, Pageand Brin have had many meetings on the subject and have made severalchanges in recent months. First, says Mr Fleischer, Google hascommitted itself to “anonymising” the search logs on its servers after18 months—roughly as banks cross out parts of a credit-card number,say. This would mean that search histories cannot be traced to anyspecific computer. Second, Google says that the bits of software called“cookies”, which store individual preferences on users‘ own computers,will expire every two years.
Not everybodyis impressed. The server logs will still exist for 18 months. And thecookies of “active” users will be automatically renewed upon expiry.This includes everybody who searches on Google, which in effect meansmost internet users. Then there is the matter of all that otherinformation, such as e-mail and documents, that users might keep inGoogle‘s “cloud”. Mr Schmidt points out that such users by definition“opt in”, since they log in. They can opt out at any time.
As thingsstand today, Google has little to worry about. Most users continue togoogle with carefree abandon. The company faces lawsuits, but those aremore of a nuisance than a threat. It dominates its rivals in the areasthat matter, the server cloud is ready for new tasks and the cash keepsflowing. In such a situation, anybody can claim to be holier thanmoney. The test comes when the good times end. At that point,shareholders will demand trade-offs in their favour and consumers mightstop believing that Google only ever means well.
