Authors: Douglas Edwards
The idea of not doing evil seeped into conversations as a criterion for evaluating products, services, and life decisions. People brought their own spin to interpreting what it meant:
"If the ads looked more like search results they would generate more revenue. But wouldn't that be evil?"
"Resist evil. Don't make the toolbar less functional to appease Microsoft."
"You took the last éclair and didn't finish it? You are evil incarnate."
"I've noticed that people have this strange definition of evil," Paul observed, "which is, 'Anything I don't like.' In my mind, I can not like something, but it can still not be evil." But even strict adherence to Paul's original concern about selling placement in search results put us at odds with our industry. If pay-for-placement was evil, the market was in league with the devil. Overture was growing at an enormous clip and building a sprawling advertising network of sites running their ads.
*
When we posted "Ten Things We've Found to Be True" on our website, we earned a handful of kudos from users for our stand in favor of integrity. But that did nothing to slow the growth of Overture, a juggernaut that now threatened to lock up all the advertising dollars flowing to search.
Overture's deal with Yahoo seemed to put them out of any competitor's reach. In December 2001, they signed a three-year agreement with Germany's biggest ISP. In January 2002, MSN announced they were testing Overture ads. They were everywhere and they were unstoppable.
Except. Except that by January 2002, Googlers had already been banging away in the Googleplex for almost two months on a working prototype of our new ads system. Just before midnight on November 15—two days after Overture's Yahoo announcement—Eric Veach had flipped the switch. The prototype had multiple bugs and lacked key features, but it could serve ads sold on a CPC basis through a real-time auction.
While Salar and Berkeley economist Hal Varian refined the bidding system, I thought about how we would sell the system itself. I compiled a spreadsheet comparing it to the original AdWords and to Overture. It looked very compelling on paper, but in reality it wasn't yet ready for public exposure. The gears and wires still showed through some parts of the interface, and some of the steps required to create an ad seemed counterintuitive. Birthed in the middle of the night, the newborn product could not yet survive in the cold competitive world into which it would soon be thrust. It needed to be wrapped in a user-friendly UI and given a name.
This time, the branding went faster. I convinced Salar we needed to make it easy to distinguish the new system from the original while planning for an endgame with just one AdWords system. I proposed "AdWords Select," because it would be easy to drop the "Select" when the original system shut down. He agreed and sold it to Larry and Sergey.
The new interface bothered me more. Overture had a simple three-step process for creating ads, an experience as comfortable and easy as driving a golf cart. AdWords Select was a MiG fighter, loaded with technical terms, incomprehensible gauges and dials, and a long checklist before your ads actually took off. I wanted us to have a shortcut with preset options, but Salar felt the granularity of the system made it powerful and that was its selling point.
Sheryl Sandberg, an economics wunderkind and former chief of staff at the Treasury Department, joined Google the week the new prototype went live. She was immediately handed responsibility for advertising customer support and the team of five people who managed that for Omid. One quit that day. Sheryl also wanted things simplified, but there was no working around Salar, who had developed a deep attachment to the product. Salar obsessed about the UI, the sign-up process, the auction mechanics, even the text of the emails going to users. His power as product manager over everything but the code was absolute. The system's thousand moving parts demanded total focus to keep things moving forward. Decisions had to be made quickly, often at four in the morning. Salar was in his element, running at full capacity and pushing the role of PM to a new and significant place.
Salar asked me for text to explain what set AdWords Select apart in a field dominated by Overture's promise of "pay for performance." Something that would stir the souls of advertisers and compel them to try a new system when Overture already worked well for them. Something in fewer than seven words.
"It's all about results," I suggested. The wording felt right. It emphasized the unequaled quality of our search and the importance of real return on investment. We slathered the tagline liberally over the sales materials we had in preparation. If we were going to win Yahoo and others, we needed to tout our strengths as a provider of both search and revenue.
Word on the street was that Yahoo's trial of Overture was not going well. One of our clients had heard Yahoo complaining about the high level of irrelevancy in Overture's listings. A few days later Overture overhauled their advertiser guidelines and introduced stricter controls on URLs, ad titles, and descriptions. "Given our commitment to providing a world-class search experience," Overture announced, "it's important that we provide highly relevant search results to our users." Evidently some users didn't want to just keep clicking until they found what they were looking for.
Overture's blithe confidence derived from the forty thousand advertisers whose listings appeared across their network of tens of thousands of client sites. Google only sold ads that appeared on
Google.com
. No matter how big our search engine grew, it could never compete with the reach of a web-wide network.
In January 2002, Omid let slip a hint that things were about to change. "A lot of the companies that we power searches for want us to start syndicating advertisements to them in some sort of revenue share," he told a reporter for
Revolutionmagazine.com
.
*
"We are looking at that, and it is an area where we may potentially compete with Overture. But it isn't our core business, as we aren't dependant on third-party traffic to generate income."
Omid. What a sandbagger. We already had our first syndication deal signed. Our sales team had inked a contract with Earthlink to supply our original AdWords ads a week earlier. They had been an Overture client until their contract expired, making it our first win in a head-to-head contest. We hadn't even offered them CPC ads. I doubt Overture worried—Earthlink was a trivial account compared to their major partners Yahoo and AOL. But we saw the contract as a very big deal. It proved we could syndicate our ads. Our formerly cold war with Overture began to simmer.
Omid celebrated by telling the entire company to work harder. We needed to increase the revenue per ad we generated to pressure Overture. The more we earned, the more we could offer potential partners in a bidding war for their business. We knew we could improve relevance faster than Overture, because they employed human evaluators to determine ad relevance. People couldn't possibly keep up with a good algorithm.
The Earthlink deal held only one danger for Google—the guarantee of a minimum payment, even if the advertising didn't generate sufficient revenue to cover it. It could turn out like Netscape's CPC death spiral. The exposure was small, but as deals grew bigger and competition more intense, guarantees swelled like great gas-filled dirigibles, casting shadows over our balance sheet. The threat was the "overhang"—the cumulative amount of money guaranteed to all partners. Reduced search volume or quality issues that hurt ad clickthrough rates could spark an explosive expansion of Google's debt and obliterate the company.
Even with Larry and Sergey's high tolerance for risk, no one wanted the company to die under a load of corporate IOUs, especially the new CEO, Eric Schmidt. "Don't make me bankrupt," Sheryl Sandberg recalls Eric telling Salar. "Don't run out of cash."
The guarantees would become a weapon in the battle for syndication market share, as each search superpower tried to bluff the others into spending themselves into economic oblivion.
On February 5, 2002, CNET broke the news that Google had been quietly providing Earthlink with search results and advertising for weeks. It was too late in the day for a market reaction, and the story garnered little attention.
The next morning, Overture's stock tumbled forty-one percent. A day later, Google and Earthlink issued a joint press release announcing that Google would provide search results for Earthlink's network of sites. No mention was made of our syndicating ads for the first time, the shift that changed our industry.
Meanwhile, Overture and a supporting cast of adoring stock analysts downplayed Google's new direction. Safa Rashtchy of US Bancorp Piper Jaffray called the lower stock price a "major buying opportunity" for investors considering Overture. In his view, people were overreacting. Earthlink was an aberration. Its business model didn't apply to the big portal players.
Ted Meisel, Overture's CEO, fired back at us with a press release touting raised expectations for the quarter and stating there would be no "material impact" from the loss of Earthlink as a client. He also announced that the company had extended its relationship with Yahoo to the end of the second quarter of 2002.
Overture's stock recovered over the next few days, in part buoyed by the rosy prognostications of the Wall Street analysts enamored with the company's prospects. Salomon Smith Barney predicted that Earthlink's impact would be minimal since "the major portals can (and do) operate their own CPM-based search advertising models, and they are unlikely to ... share those economics with Google." Besides, SSB noted, privately held Google was tied to CPM-based ads and couldn't afford to compete for contracts with big guarantees in a cost-per-click, pay-for-performance world.
"You ain't seen nothing yet," Rashtchy crowed to investors a week later. He believed Overture's strong fourth quarter and its deal with MSN had set the table for "huge growth leverage."
Larry and Sergey played it cool. They had a stack of aces up their sleeves. Google would prevail because of the better quality of our search, the greater relevance of our ad matching, and our willingness to commit fearlessly (but prudently) to enormous partner guarantees. And because what everyone else saw as our biggest impediment was actually an enormous advantage: we maintained a site that competed directly with our potential partners. Overture didn't have such a site.
In what Larry termed "the first well thought out article I've seen about Overture," George Mannes of
TheStreet.com
pointed a sharp stick at Overture's Achilles' heel.
*
"Compared with traditional media practices," he wrote, "Overture retains an exceptionally large portion of the money it collects from advertisers." They were keeping forty-nine percent of the revenue from the ads they sold and giving only half to the sites where the ads ran. Traditional media-placement agencies kept only fifteen percent for themselves.
That's where we had them. Overture was entirely dependent on its network for revenue, and if its margins slipped, the company would be in trouble. We kept all the money for the ads we ran on
Google.com
, and that swelling river of cash subsidized our expansion efforts.
We could give a bigger share of our revenue to our partners. Our costs were low since we had to process the ads to run on Google anyway and additional distribution would be almost entirely added profit. Plus, running our own site gave us an edge in understanding how users responded to keyword-based advertising.
Google.com
was a living laboratory processing priceless data that revealed what was effective and what was not.
We could—and would—send margins into a nosedive, and that went a long way toward assuaging our partners' concerns about Google as a potential competitor. We were now the good guys, cutting costs for everyone and helping to fill the coffers of search-enabled sites across the web.
Overture CEO Ted Meisel, interviewed by CNET the day the Mannes article appeared, wasn't concerned about the future of paid search. Portals that had not yet augmented their search results with Overture's paid listings, he told a reporter, had "been essentially providing the largest ad giveaway that I can think of," because they were delivering customers to businesses without monetizing the traffic. Meisel noted that Overture's forecasts for the coming year were based only on extension of the Microsoft deal and added, "We certainly regard AOL and Yahoo as important potential partners, but our business can live without them."
Meisel would have reason to be thankful he had hedged his optimism. On February 19, 2002, we posted a "NEW!" option on the web page describing Google's advertising offerings. CPC-based AdWords Select was live.
Overture's stock dropped ten percent. Safa Rashtchy tried to stem the panic by again beating the "buying opportunity" drum. "Overture has a lock on the major portals," he reiterated. Large partners would never sign with Google as long as we had our own site. Besides, Rashtchy pointed out, Google had only a thousand advertisers using its program. Overture had fifty-four times that.
Merrill Lynch analyst Justin Baldauf concurred, telling CNET, "Because Overture is much bigger than Google, Overture can afford to pay distribution partners more money." He explained that Google couldn't increase distribution without more advertisers and wouldn't get more advertisers until we increased distribution. That may have been true for CPM ads, but the underlying economics for CPC ads were far different. Advertisers paid only for the clicks they received, so the return on investment was almost always positive—search-targeted ads paid for themselves. Therefore the market for our ads was limited only by the advertiser's product inventory and production capabilities. CPC search-targeted ads were like crack for marketers. Advertisers pulled money from other direct-marketing budgets to buy as many relevant keywords as they could. We didn't need to take advertisers away from Overture—the pie was plenty big enough for both of us.