8- google: a brief history
If you type into Google's search engine the question "How does Google work? ", Google itself offers a curious explanation: PigeonRank. According to this obvious joke, Google uses clusters of trained pigeons to "compute the relative value of web pages faster than human editors or machine-based algorithms." Pigeons, they tell us, can spot minute differences between web pages and will peck when a relevant result appears on the screen. Pages with more pecks move to the top of the list. Google assures us that the pigeons are well treated and not overworked.
Two things are clear. Google wants the workings of its successful page-ranking search engine to remain secret, and Google does not mind if you believe pigeons are involved. Fooling aside, what actually accounts for Google's success? How does the search engine, in 0.18 seconds, find 273,000,000 pages relating to "Batman" and put the ones you are most likely to be interested in near the top of the list? How does Google make any money doing this?
The Google story begins in 1996 at Stanford University in California. Two graduate students, Larry Page and Sergey Brin, wanted to find a better way to search websites. Current search engines ranked search results according to how frequently the search words appeared on a page. This approach had several disadvantages. Users had to sort through too many listings to find relevant information. Plus, people could trick search engines to get their page listed at the top of a search query. A user who types in "Batman" does not want to see a web site selling sports equipment at the top of the rankings. Larry Page and Sergey Brin hypothesized that a page is more valuable if other sites link to it. If someone links to a page, then the page has at least some importance. If a very important website links to
the page, that indicates even greater importance. So Brin and Page designed a search engine that could "crawl" the web, download every web page, and analyze its relevance using a secret, constantly changing formula. Pages with higher scores get listed toward the top.
Unable to sell their search engine software at the $1 million asking price to companies like Yahoo!, the two left Stanford in the fall of 1998 to found Google.com. The obvious superiority of their search engine quickly attracted financial backing. So the two set up a data center in a garage and several rooms of a house, a venue they soon outgrew as the popularity of their search engine increased. In less than a year, prominent investors provided (25 million to aggressively grow the company and improve its search engine. Sergey Brin promised a perfect search engine that "will process and understand all the information in the world" and without charging anyone to use it.
But could Google make money? A free search engine that worked well quickly attracted users, an increase of about 50 percent each month, but that required investing in more computing power, and expensive supercomputers could cost (800,000. To avoid this expense, Brin and Page purchased thousands of ordinary PCs. Using software they designed, they linked these computers together to make the equivalent of dozens of supercomputers with impressive storage space—all this for about one third the cost of what their competitors were paying for computing power. To deal with the inevitable problem of individual computers failing, Brin and Page wrote software that simply ignored a failing computer rather than bothering to replace it. By locating computers in multiple locations and duplicating their functions, they were protected against losing data when trouble occurred.
Even with operating costs kept down, the company still needed to generate cash. One obvious tactic was to sell advertising space on Google's home page. By the end of 1999, Google averaged 7 million searches each day. But research showed that large banner ads and pop-up ads seemed more annoying to the user than profitable for the advertiser. Users already loved Google's uncluttered and easy-to-use home page. Why crowd it with ads for products that users were not interested in? Brin and Page had a second problem with ads. Advertisers did not want to spend on advertising unless their ad was near the top of the search results. If Google pleased advertisers, relevance to the user would no longer be the primary page-ranking consideration.
Brin and Page's solution allows ads but does not bias the page ranking results in favor of advertisers. The Google home page remains free of ads. On search results pages, ads are text-only and appear in a clearly marked "sponsored links" area along the right margin of the page. To place an ad, advertisers bid on specific "keywords" that relate to the products they sell. If the user searches for "running shoes," a dozen or more ads appear because advertisers suspect iio that the user wants to buy running shoes. If the user types in "gorilla species," few or no ads will appear since the user is most likely not interested in purchasing anything.
The cost of an ad ranges from a few cents per click to $30 or more, depending on how much advertisers are willing to bid. Since advertisers are charged only if the user clicks on their ads, advertisers must maintain an acceptable "click-through rate" for each keyword. If the click-through rate is too low, Google suspends the ad or places it lower on the page even if it outbid other ads. Ads clicked on frequently are assumed to be relevant and not likely to bother users. By clicking or not clicking, users decide what ads appear. Clever, indeed, but does it work? In 2001, at a time when most dot-coms were closing their doors, Google earned a profit of $7 million, and in 2002, $100 million. Pay-per-click advertising worked.
In 2004, the privately-owned company arranged for an initial public offering (IPO) of shares. Taking their company public was a frightening prospect for Brin and Page. It would raise lots of cash, but it also meant competing companies could see how profitable Google had become, and shareholders might have the power to change the company's goals. On August 19, 2004, Google went public, offering 19,605,052 of its 270 million shares at (85 per share on the NASDAQ stock exchange. At the end of the first day of trading, over 22 million shares changed hands, with the shares valued at $100.34. Google now had a market capitalization of $23 billion dollars. In late 2007, the price of a single share of Google peaked at $716 U.S. per share, making Google one of the highest priced companies in the United States.
Drawing on that success, Google continues to expand its services to achieve its goal of making all the information in the world available online. Google Books, for example, aims to have searchable versions of every book ever published online, including rare books from university library collections. Google Earth offers up-close satellite photographs of the entire planet. In October 2006, Google announced its purchase of YouTube, the popular online video site, for $1.65 billion. And its Android technology has made Google a strong competitor in the smart-phone market. To strengthen its position, Google announced in August 2011 that it was acquiring Motorola Mobility Inc., a major producer of smartphones.
Has Google reached its peak? Can it keep growing and generate enough sales to justify the high price of its stock? So far Google is financially sound. Google's earnings have continued to rise, with profits of $8.5 billion U.S. on sales of over (29 billion in 2010, while holding nearly $40 billion in cash—numbers that suggest that Google can continue expanding without taking on debt. Larry Page and Sergey Brin are no doubt brilliant and innovative, but the odds say they will make mistakes, and other bright people may figure out a way to cut into their search engine business. Plus, as a company grows, its talent becomes diluted. Has Google already captured so much of the Internet search and advertising market that it will now have to expand into areas where Google's brilliant team has less expertise?
If you want to follow the ongoing Google story, it is simple. Just type "goog" into Google's search engine to see how its stock is doing.
