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What's Next: Do One Thing Right

Smart companies are finding ways to make money on the Net.

What's Next

Actor Jack Palance, in his Oscar-winning portrayal of Curly the trail boss in City Slickers, said the secret to happiness was "one thing," with the challenge being to find out what that thing is for you. Well, the same appears to be true for finding business success on today's Internet, where the best companies choose a specialty and stick to it. Amazon.com sticks to selling, eBay sticks to auctions, and Google limits itself to searching, which might be the most important Internet business of all.

This is a good time to reconsider the whole idea of Internet business. Investors' rolling eyes and dreary business-school case studies notwithstanding, the Internet remains the most successful failure in the history of enterprise. For while the bubble may have burst and a trillion dollars or more of shareholder equity may have evaporated, the truth is that more people than ever are using the Net. Growth in both the number of users and the Internet bandwidth they require has never faltered. Half the Internet companies have disappeared, but more of us are online than ever, and that means business opportunity. The trick is to do it differently this time around, and Google is a prime example of how to do it right.

We've been here before. A decade ago I met six boys who were running a company in the archetypal Silicon Valley garage. Their start-up was capitalized at $15,000 borrowed from parents. The day I came on the scene the company still had more than $12,000 of that in the bank. Their invention was one of the first search engines, a tool for finding information in huge volumes of text data. Over the course of a few months I helped the tiny company find its first customer, its first outside investor, and its first venture capitalist. Somehow I forgot to grab any stock for myself, which made me look stupid six years later when, at the height of Internet mania, the company -- by then called Excite -- was sold for $6.7 billion. Excite today is at best another portal, but there is much to be learned from its humbling and from comparing it to Google, which is very much Excite for a new millennium.

One reason Excite and so many other Internet businesses from the 1990s stumbled was that they saw their original business idea not as an end but as a means. Excite had the best searching technology of its day, but the company saw searching as a steppingstone on the way to becoming the Internet equivalent of a television network. Searching would attract users, but what would keep them was to turn the search engine into a portal on the Web. At least that was the idea. So Excite, Yahoo, and others added staff and increased expenditures, driven by the idea that searching alone wouldn't be enough to sustain a significant Internet enterprise. They were wrong.

All Google does is searching. As I am writing these words, Google's index comprises 3,083,324,652 webpages, or about one page for every two people on earth -- everyone from rain forest tribesmen to members of the Russian mafia. This is a number too large to comprehend, but it helps us put the challenge of searching the Internet in some context. Looking for a particular webpage is like looking for two specific people on earth without knowing either their names or where they live. Every Internet product or service is utterly dependent on searching.

Nearly all search engines use programs called "spiders," which roam the Internet finding new webpages and "dragging" them back for analysis. How that analysis takes place can vary a lot from engine to engine. All search engines look at the words on the page and some stop there, ranking the results solely by the frequency of keywords on the site. By this way of thinking, a website that says "Inc. magazine" 20 times is more likely to be useful than one that says those same words only once. But all is not as it seems, since clever website operators can fool these simple search engines by inserting keywords -- "Inc. magazine" 20, 50, or 100 times over -- written in a tiny font and hidden behind the pictures on a webpage. We can't read these tags because they are hidden, but the spider programs can read them and be fooled.

Google's approach to searching is different. The spider program is still there and it still reads both the real and hidden text on a page. But when it comes to ordering the 4.23 million pages that contain both the words "Inc." and "magazine," and presenting them to users in order of relevance, Google is smarter. Google orders the results not purely by how often keywords appear, but also by how many other webpages are linked to the webpages containing the keywords. In essence the system gauges a given webpage by how relevant the designers of millions of other pages have found it to be. This technique, which was invented by Google co-founders Larry Page and Sergey Brin when they were graduate students at Stanford University in the mid-1990s, is unique to Google and patented.

Finding useful search results is one thing, and making that a good business is another. Google also had to make its results load faster to further attract users, it had to keep transaction costs down in search of profitability, and it had to find a way to gain revenue from searching. Keeping costs down was simple: Where Excite ran on banks of Unix servers from Sun Microsystems linked to massive disk arrays from EMC, Google runs on personal computers using the Linux operating system, which is free. Admittedly, we are talking about the world's largest Linux cluster, with more than 10,000 computers, but they are generic "white box" computers just like what you might have at home.

To make the pages load faster, Google did not sell banner ads on its site, so only the search result itself had to be transmitted across the data line. Banner ads had been the sole source of revenue for the first-generation search engines, but by the time Google came along in 1998, banner ads were going down in both price and popularity. There had to be a better way to make money.

Rolling eyes notwithstanding, the Internet remains the most successful failure in the history of enterprise.


The other successful second-generation Internet search engine came up with a simple way of generating revenue -- it sells its listings to the highest bidder. Overture Services (originally GoTo.com) sells the top three positions in its search results. Those search results, which are available through Yahoo, AltaVista, MSN, and many other sites, represent a very commercial view of the search. Searching for "sports cars" on Overture.com on the day I checked yielded as the top result a site called endorphin.com, where users could see sponsored sports car videos. Endorphin was paying 17¢ per click for that position. Google, on the other hand, was giving its top honors to a sports car enthusiast site. No wonder Overture, which is traded on the Nasdaq, posted $667 million in sales and $78 million in profit last year.

Back when Overture was still called GoTo, there was great controversy in the search industry about this selling of positions. Google, too, decided to sell listings, but in a very direct way: It labeled the paid listings as paid listings. "I can't believe we missed the ad words, 'paid-placement model," says a veteran of the early search-engine wars. "Everybody had their arms up about corrupting the search results but Google did the simple/smart thing and just placed text boxes to the right of the results. Not rocket science, but we didn't do it."

Selling clearly marked paid listings ("sponsored links," they're called) has made Google profitable. Though the company doesn't disclose its financials, insiders say that last year it made a profit of about $10 million on about $75 million in sales. Obviously those aren't Overture-level numbers, not yet. But Google has the technology, the customer loyalty, and the business focus -- it knows the importance of doing that one thing -- to have the much bigger future. Today on Google you can search more than 400 million images in addition to websites. You can search the news. Searching on a name and city and state will yield a phone number and address if they are available. The result is that Google is the sixth most often visited site on the Internet. Google is so well-regarded by users that large portals like AOL and Yahoo have no choice but to buy Google services for their own users. The big money will come when Google becomes a dealmaker: It will start trading its search services for pieces of promising companies.

You can imagine where this is heading: an initial public offering. Google's principals say they're in no hurry, and that would be consistent with the sensible way they've gone about building the business. But as soon as the economy turns, expect a massive Google IPO reminiscent of the old Internet.

Contributor Robert X. Cringely is a writer, broadcaster, and entrepreneur specializing in technology. Contact him at cringely@inc.com.

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Last updated: Jun 1, 2003

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