Why Google's technology may have reached its peak

By John Gapper, Financial Times
Published: Oct 28, 2003

Now for the hard part. In five years, Google has grown from the dream of two Stanford University computer science students to a household name with a cult following. If an initial public offering comes in spring, can disappointment be far behind?

Already the bulletin board of Slashdot, provider of "news for nerds", is full of gripes that Sergey Brin and Larry Page are taking the stock market shilling. How could a search engine originally intended to be, as its co-founders put it in a Stanford paper, "transparent and in the academic realm" be squaring up as a public company against the likes of Yahoo and Microsoft?

Even those unperturbed by Wall Street's ways fear for an enterprise with the wisdom to reject the late-1990s bluster about "sticky" portals. Instead of struggling to keep users on its site, Google encouraged them to leave once they had found what they wanted. "It is a thing of beauty, and I hope they don't screw it up," sighs one veteran of Silicon Valley.

Messrs Brin and Page have fretted about whether Google will be forced to lower its standards under the pressure for smooth earnings growth. It does not need the cash - it earns a reported $100m (£59m) a year on revenues of $700m - and critics complain that it is seeking an IPO mainly to make billions for its venture capital investors.

The cynics could be wrong. It is equally possible that Google's directors know what they are doing, and realise they must move fast to obtain the best valuation on Wall Street. Not only is competition becoming more intense but the golden age of its business model may also be passing.

Google occupies a fond place in the hearts of many internet aficionados because of its purity. From the early days at Stanford, Messrs Brin and Page wanted to create an algorithmic machine that would seek out the sites and pages valued most by internet users, rather than favouring the websites of companies that paid other search engines for promotion.

They also broke with the idea that a search was merely part of an array of services provided by portals such as AOL. Google was a search engine, pure and simple, that made money by licensing its technology in different ways. That focus was reflected in its uncluttered home page.

The loudest complaint against Google is that it has lost some of its original arm's-length attitude to commerce. Its AdWords programme allows companies to place targeted advertisements alongside the results of related searches - putting a car dealership promotion next to a search for "Chevrolet", for example.

These worries are overdone: there is no sign of Google's trying to blur the line between an impartial and a commercially sponsored service. Indeed, the biggest gripes have come not from disinterested idealists but from bloggers unhappy about being excluded from AdSense, a programme that allows other sites to take a feed of AdWords and thus share in Google's revenue stream.

The more pertinent question is whether its business model will retain the lead. To start with, it can no longer rely on others failing to grasp the importance of search. Algorithmic search engines are tough to design and maintain but others such as Teoma, owned by Ask Jeeves, and Yahoo's Inktomi are catching up.

So is Microsoft, which is developing an algorithmic search engine that may be launched by spring next year - the likely time of Google's IPO. By 2006, it will be bundled into the next generation of Windows - Microsoft's usual tactic when faced with superior technology owned by others.

There must also be doubts about whether Google - particularly as a public company - can continue with its dual roles as a site that offers its own search engine and related services, and a provider of technology to other companies and portals. Once it has gone public, it is more likely to be regarded as a rival by existing customers such as Yahoo.

Having bought Inktomi and Overture, the paid-for search service company that owns Fast and AltaVista, Yahoo seems likely to drop Google once it has sorted out its own service. Even internet companies that lack their own search technology are likely to pause longer before licensing Google's service the larger the company becomes.

The biggest uncertainty is whether its focus on internet searches to the exclusion of anything else will remain the best strategy. Although it has clearly been popular so far - Google performs 200m searches a day and is responsible for an estimated 75 per cent of all referrals to websites - it could become an Achilles' heel. It means that Google has no unique content, and no long-term customer relationship with the individuals who use its technology; it is only as good as its last search. That contrasts with sites that have their own databases and customer networks, such as Yahoo, with its 100m registered users, or Amazon, which holds a mass of data about the products that it sells.

The difficulty for Google will come as rivals combine search with other resources in ways that it will find hard to match. The launch of Amazon's "Search Inside the Book", which allows customers to search pages on its database for references and information, is one example of how search technology can be applied to data within internet sites.

Yahoo is augmenting internet search with its own information. Its Yahoo Shopping service not only allows users to search for the cheapest outlet for different models of digital cameras but also combines the results with its own guide to buying cameras, and with user reviews. Google's own shopping service, known as Froogle, also displays the cheapest prices but looks flat by comparison.

Google has beaten past attempts to embed search facilities in broader services because its search engine was better than those of others. But as the playing field levels, consumers will have a choice of going to Google to scan the internet alone, or sticking with websites that enrich internet search results with their own pictures, music and data.

Of course, Google's founders have shown before that only a fool underestimates them, and its technology remains hard to match; there is still plenty of scope for further growth. Still, if I were on the board, I might well think that it was time to sell a few shares. john.gapper@ft.com