Google Part I: Origins of Search

0:00 All right, David, last episode we are doing in our studios before Radio City. Oh, that's right. How do you feel? Uh we're about to go from like the stage of one, very, very small audience of one, to the very, very big stage. Where if we make a mistake, no one will notice. Yeah. And we just re record it and it's like it never happened. We should try that at Radio City, just be like ah strike that. All right, let's take that again. Yeah, hey, this is authentically acquired, you guys. This is how we do it. You're gonna look at the inside.

0:25 Probably not though. Alright, let's do it. Let's do it. Who got the truth? Is it you, is it you, is it you Who got the truth now?

0:37 Is it you, is it you, is it you Me down Another story Welcome to the summer twenty twenty five season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal, and we are your hosts.

0:56 Artificial intelligence. is the story of our time. It is definitively the next trillion dollar technology wave after PCs, the internet, and mobile. And to understand AI You have to understand the company most responsible for its technical foundation.

1:13 and the wave that came before it. Google. This episode begins our multi part Google saga. Finally, as I'm sure many of you out there are saying right now. Google has been the front door to the entire internet for twenty five years now, a quarter century.

1:29 But it wasn't always this way. No, it was not. Back in nineteen ninety eight. When Google was founded. There were a dozen other search engines that already existed, but And there were a variety of different business models.

1:42 Most of which were not very interesting. Yeah. None of which were very interesting. Yes. So today we will try to answer the question, why did Google work? And once it did How did it go from clever technology and nice product? To the single greatest business of all time.

1:59 I'm not being facetious listeners. Google and I should say alphabet today. generates more net income or profit than any other US company.

2:09 More than Apple, Microsoft. Exxon Mobil, JP Morgan Chase. Berkshire Hathaway, this is a cash Gusher. It is

2:18 A super high gross margin, but B. in a giant market. And C According to the US government, as of today, they are a monopoly in that market with ninety percent market share.

2:30 That is three enormous numbers multiplied. Together. To create that most profitable company in the US stat that I threw out earlier. Well, I'm glad we don't need to get to uh the government and all that until

2:43 Much, much later in our series. But yeah. This is the creation of The most beautiful business of all time. And Google's market position has been seemingly unassailable, at least until really this year until the AI war is really heated up.

2:57 So of course it was that clean user experience that everyone talks about with just a search box on the homepage. and the focus on the users and the high quality fast search that spread virally through word of mouth. But good product is far from the only reason that Google became dominant. So today we'll tell the story of why While Google was nowhere near the first search engine.

3:19 It was the last. Well, you know, uh Microsoft may take a little issue with that with thing, but But only a little issue. Few percentage points of issue. Few percentage points of issue. Yeah. Well, listeners, if you want to know every time an episode drops, check out our email list. It is also the only place where we will share a hint at what our next episode will be, share corrections, updates, little tidbits we learned from previous episodes. That's acquired.fm slash email. After this episode, join the Slack to talk about this with us and the whole acquired community.

3:49 acquired dot fm slash slack. And if you want more acquired between each episode, check out ACQ two. our interview show where we talk with founders and CEOs building businesses and areas we've covered on the show. The most recent was with Jesse Cole from the Savannah Bananas. David, that was the most fun I've ever had recording basically any podcast episode.

4:10 It was banana. It was awesome. Yes. So with that, this show is not investment advice. David and I may have investments in the companies we discuss. In this show is for informational And entertainment. Purposes.

4:21 Only David Rosenthal, when is the first time any human being searched for anything ever? Ha ha ha. Uh I have no idea. That's a great question. Not that far back. Where do we start? Yeah. Well, you know what? We should ask Google.

4:37 But to do that We need to tell the story of Google. And that Story starts. In March of nineteen seventy three, in Lansing, Michigan, where Larry Page

4:47 is born as the second child and second son to Carl and Gloria Page. And Larry, of course, grows up in Lansing because his dad, Carl Page Senior is a professor of computer science in nearby East Lansing at Michigan State. University.

5:02 Now before my dad, who went to MSU and is an M SU eleven, gets too excited here. I regret to inform Him, my dad, and you, Ben that Carl got his PhD from Michigan. I'm sorry about that. And uh would send his son there as well. Yeah, yeah, both of his sons and

5:21 Unfortunately, Larry's mom also went to Michigan. Also got a C S degree there and also teaches programming as a programming instructor at MSU. Yeah. Pretty Michigan heavy. Pretty Michigan heavy, but

5:33 Uh. Pretty amazing childhood in, you know, the early mid seventies here for Larry and his older brother. I mean, maybe not unique. I'm sure there were A few other households in America in the world that grew up with

5:47 Both of their parents. Steeped in computers is computer science professors. But really pretty unique. Incredibly unique. Are you kidding me? Larry Page grew up with two computer science academics as parents.

6:00 In the seventies, which would have meant that his parents would have needed to start in the fifties, very, very few households. Like right at the same time. As The PC era is coming online and Microsoft and to just have that be your air, your daily existence growing up as a kid, like how incredible is that.

6:19 Amazing. So Even more so for future Google to come. For the Nineteen seventy nine to nineteen eighty academic year when Larry is six and seven years old.

6:29 His dad does a sabbatical year at Stanford. So the whole Family goes out and lives in Palo Alto. And Stanford and early Silicon Valley there makes a big impression.

6:40 on young Larry. And then He continues to kinda be influenced by this because I mentioned his older brother, Carl Junior. Carl goes to Michigan, majors in C S, just like Larry Wood.

6:53 And then when he graduates, he goes out to the West Coast, actually to the Pacific Northwest, and he works fairly early at Microsoft and then uh mentor graphics down in Oregon. Ultimately also come down to Silicon Valley and uh play a little role in this story as we will see in a little bit. But back to Larry here.

7:11 Part of the reason I say all this, and I want to include Sergei too in what I'm about to say, even though we haven't introduced him yet in the story. I think there's this perception today that Larry and Sergey were these like bumbling academic guys who weren't really business minded and Google was a research project, and this all sort of happened by accident that they built the best business of all time. Like

7:32 Absolutely freaking. Not we want to dispel that notion right now. You know, one of the things we heard over and over again talking to people in research is How hugely ambitious the two of them were. Not just for the products they were building, but for

7:49 Google for the business. Larry's a different generation and a very different personality than Mark Zuckerberg, but You should think about his ambition and his desire to build a Huge.

8:01 World changing company. At the same level as him. Yes. To your point, Google did not happen by accident. Or another reasonable comparison the generation before Bill Gates. I think they

8:12 Publicly. Larry and Sergey don't get the same sort of ethos that those two get, but the same fire was there. Larry would say later, this is a quote from him. Probably when I was twelve, I knew I was gonna start a company eventually. I wanted to make the world better.

8:28 And in order to do that, you need to do more than just invent things. And he would say another time later. You need to use business and entrepreneurship to make these things real. It's not enough just to invent them. Yeah, and he's alluding to two things there. One is companies are the vehicles by which you bring ideas to the masses. And two is

8:46 In a capitalist society, a company is the vehicle that can accumulate profits, which then you can reinvest. to build something of your great scale and ambition. Yes. And Larry got this. All along, and Sergei did too.

9:00 Okay, so as we all know Larry goes to Michigan undergrad. He graduates in nineteen ninety-five, and then he goes off to Stanford to get his PhD in computer science, where business partner, friend, soulmate. Sir Gabriel.

9:15 And isn't the way this all went down that Larry was visiting and Sergey was already in the program. I think Sergey was leading some kind of tour to try to sell Larry on joining the program. And Larry is even though he's like the new guy there, he's like Challenging Sergey at every little

9:33 corner he's bringing up wouldn't a better system be this? And they're talking about cities and transportation and civic design and they're almost sort of like Bickering back and forth in this verbal sparring of who's smarter, even though they just met. That's sort of like the story that I read and I don't know, what did you and I read? Probably six or seven books between us on the history of Google. Yeah.

9:52 Many, many versions of this story out there. As I was doing the research, I talked to One of our good friends, Anna Patterson, who was been in the Google Orbit for a very long time. She was an early employee. left, started a company, Google reacquired, was a VP of engineering there for a long time. She told me another little bit of this story that has never

10:12 I think before been told publicly. Well, it turns out Anna was a postdoc at Stanford at this time, and she's the one who organized this new student's weekend. So she organized Larry and Sergey meeting. And she told me that the first night of the weekend, so like the first event The first time that they actually met. was at drinks at the British Bankers Club in Menlo Park.

10:33 Yeah. Magical friendship, bickering back and forth, but you know, real partnership was started there and it was already going that night. So Larry and Sergey They end up shutting the bar down that night. And another.

10:45 Famous local Stanford alum. Picks up the tab. For the group. Can you guess? Who that person was.

10:54 Yeah. Uh I don't know, lay it on me. Charles Schwab. No way. Yep. Apparently lived locally in the area. Went to the British Bankers Club all the time and he'd do this. He'd just see Stanford students there and be like, All right, I I got you guys. That's awesome. So Charles Schwab funded the first date of Larry and Sergey. Yeah. Amazing. And Charles Schwab accounts would go on to hold.

11:15 Billions and billions and billions of dollars worth of Google stock because of that. Amazing. But yes, I think the spirit of all these stories is true. It was a Instant. Electric. Friendship, partnership between the two of them.

11:28 And that would carry on. Forever. I mean they shared an office at Google. I don't think we've really covered founders before that were true partners in the way that Larry and Sergey are. It reminds me a little bit of you and me. On a very different scale. On a very different scale. But that's interesting. Equal co-founders, I'm racking my brain maybe Bill Gates and Paul Allen, but even then it became very clear very quickly Bill Gates is the guy. Yeah. That was reflected in their equity ownership.

11:56 Exactly. I'm sure we've covered other companies where They were equal. equity ownership amongst founders, but where it was a real true partnership. One plus one equaled like A hundred.

12:07 It's fascinating. Yeah, maybe Jensen, Curtis and Chris and NVIDIA. But over time, you know, it kinda became Jensen. Yeah, you're right. This is sort of unique for us to be covering true Founder partners.

12:21 That made it decades together. I mean even Warren and Charlie. Charlie was never full time at Berkshire Hathaway. Right, and certainly owned way less. The closest I can think of is maybe Capital Cities with Tom Murphy and Dan Burke.

12:36 Hm. It's really interesting. Okay, so Sergey, what's his story? Sergey was also born in nineteen seventy three, uh a few months later in August. In some place even colder than Michigan.

12:46 Moscow, which of course then was part of the Soviet Union, and Sergei's family was Jewish. Soviet Union was Not exactly a great time and place to Be Jewish or you know? Probably to really be. Anything there.

12:59 His family lived in a three room apartment in Moscow And what I assume was state allocated housing. They shared it with his paternal grandmother.

13:09 But his dad was a Extremely talented mathematician. And so when Sergey's four years old His dad attends an international mathematics conference. This is like nineteen seventy seven, nineteen seventy eight.

13:22 And realizes Oh. I gotta get my family to the West. We gotta get out of here. So it takes them two years to be able to immigrate out of the Soviet Union, but they eventually come to the US. His dad becomes a math professor at the University of Maryland. His mom becomes a researcher at NASA's Goddard Space Flight Center. Okay, so Larry's parents are both computer science professors.

13:41 Sergey's dad is a Math. Professor and his mom works for NASA. Yes. The pool is small of people with backgrounds like that in the eighties. Yes.

13:54 As you would imagine, Sergei is very precocious. He graduates high school at age sixteen. goes to the University of Maryland gets his undergrad degree in both math and computer science. In three years.

14:06 Graduates at age nineteen. And then of course gets into Stanford for his PhD. Do you know what he did in the summer? Before coming. To Stanford.

14:15 Ooh, I have no idea. He interned at Wolfram Research. No way. Really? Steven Wilfram. Oh, shout out to friend of the show Steven. I know, I know. Developers of Mathematica, then Wilfram Alpha. I guess eventually another search engine. So yes, Sergey

14:31 Every bit Larry's intellectual equal. Every bit. His sparring partner and Maybe a little more zany too. More of a love for rollerblading than Larry, let's put it that way. Yes. And frankly, kind of pencils now that you're starting to get the picture of these two over time.

14:47 you know, in the far future closer to today. Serge is the one doing stuff like Google Glass and skydiving videos, the zany parts of Google are sort of Sergei's DNA. And the really honed products.

15:01 and products that make the business work. are a little bit more Larry's DNA, but to be honest, there's incredible overlap everywhere between the two of them. Yeah. Okay. So fall of nineteen ninety five.

15:12 Larry arrives at Stanford, Sergei's already there. Terry Winegrad is his PhD advisor. And Larry and Sergey are already building this great friendship. Larry, that academic year. Presents a

15:24 Dissertation topic. In collaboration with Sergei. And the idea they have is this world wide web thing. Seems to be becoming a thing. You know, here we're nineteen ninety five.

15:38 were what, a year after Netscape was started, a couple years after Mosaic. I have a stat for you on this era in the internet. Oh, yeah, way on me. This is from John Battell's book The Search, which is excellent. From nineteen ninety three to nineteen ninety six, the web grew from one hundred and thirty sites. to more than six hundred thousand. And if you compute that rate of growth

16:00 Over that four year period, it is seven hundred and twenty-three percent growth year over year for four years. That is exponential. Yeah. This is the version of the Jeff Bezos realization where it's like, I gotta leave DE Shaw and I gotta build Amazon. Like nothing like this has ever happened before. Right. The internet is A phenomenon like no other. And if it keeps going, I mean It's amazing for something to grow seven hundred percent year over year at all.

16:24 But it happens. But for that to keep happening year over year over year for the half a decade. That is worth quitting your job, dropping everything, changing your whole life. Yeah. And

16:35 Just a couple years before. Two other PhD students at Stanford. Had started this thing called Yahoo. And so I think perhaps inspired by what Yahoo was doing.

16:46 Larry proposes That They're gonna work on this idea of a system that will allow people to make annotations and notes directly on websites instead of in a centralized directory like Yahoo, because Yahoo was human hand curated. Commentary directory of websites. And so the idea is like, oh, this could be a decentralized

17:08 annotation system where anybody can Say what's interesting about a website. Oh, that's funny. I thought I knew the whole history of Google, but I somehow missed this. So Terry, Larry's advisor, is like Okay. You know, I like the uh problem space, shall we say, of the web for, you know, your dissertation here, Larry, but Why don't you go refine this idea a little more and come back to me.

17:30 So Larry goes off and of course he's collaborating with Sergey on this. Uh As they think about it, they realize that Uh actually there's sort of a fundamental flaw. In what they were.

17:40 planning for the sanitation system, which is that For a big site like say the New York Times or something. It's just gonna get overrun with hundreds, thousands, millions of users commenting.

17:52 And you need a way to separate the wheat from the chaff, so to speak, of The comments. You need to be able to have the good ones rise to the top. You need a A way to rank them, you might say.

18:04 And so Larry has a quote here. It wasn't that we intended to build a search engine. We built a ranking system to deal with annotations. We wanted to annotate the web. Build a system so that after you'd viewed a page, you could click and see what smart comments other people had about it.

18:19 But how do you decide who gets to annotate a big site like Yahoo? We needed to figure out how to choose which annotations people should look at. Which meant we needed to figure out. Which other sites contained comments that we should classify as authoritative.

18:33 Hence. Pay Drake. Ah yes. We should say page. Is ironic that the things that were being ranked were web pages, because the actual page and page rank is

18:45 Name for a Larry page, not for the pages they would rank. Right. Exactly. So uh Larry goes back to Terry and he's like Okay. This ranking idea, this seems like a really interesting computer science problem.

18:58 The annotation thing seems messy. Why don't you just Focus on. rankings. So Larry he goes back.

19:05 And ultimately has the breakthrough leap. Oh. We supply rankings. To web pages themselves. Like says.

19:13 Wow. The big problem here is not annotation. We should use it not for ranking annotations, but for ranking searches. Ding ding ding ding ding. And thus

19:22 At least the germ of the idea for Page rank as we all know it today. It's born. So essentially just the mechanics of what the idea is. is try to rank websites

19:34 Based on how authoritative they are. Based on how credible they are. And this is something that has been done somewhere before the web. Very close to home for all these Stanford folks. Academia. Of course. Yes. How important is a research paper? Well, that depends how many other people cited the research paper.

19:54 And in particular, not just How many raw number of other papers. Cite a research paper. How many important papers cite your research paper. If you're in an important journal.

20:07 What did those papers say? And this becomes the inspiration for how they're gonna do the ranking of web pages. And this was actually a research field before the web, the study of academic citations. There's already sort of a body of work around how to do this well. Oh, interesting. I didn't know that actually. I mean it makes sense. It's kinda like how Hollywood loves making movies about Hollywood.

20:28 Academia loves doing papers about papers. Yeah. So there are some examples to look at of how might one Use references or citations to

20:39 weight importance. Right. So We're almost all the way there. To the

20:46 Huge leap that. would become pay drink and Back rub and ultimately Google. But there's Still one missing piece.

20:52 They've got the theory of how to do this, but What's a citation? On The web.

21:00 It's a link. Hyperlink is the exact same model as an academic Citation. And Not only

21:08 Is it The same as a citation, it's even better. Because there's this metadata embedded Within the link Which is the anchor text.

21:18 Anytime you click a link, you know, anybody who's creating a link can make anchor text for it, I feel like uh write whatever they want and then just Today command K on your keyboard and then you can make that Text into a link. Well, that's pretty easy to identify as metadata.

21:34 on an HTML page and so you get Not only A citation of the link. But a few words of what the author of that link thought about it. Yes.

21:43 When someone is linking to you They often do a better job of describing your website than you do on the page yourself. Anybody that's just sort of looking at your website to try to figure out What's this about? The actual words on your website tend not to do as good a job as everyone who links to you in aggregate.

22:02 What words did they use to describe your website? So this whole thing. is a genius idea. And We're gonna talk about all the work that they had to do to implement it.

22:11 It basically works right away. the notion of hey, what is the output if we try to create a system that ranks all websites? For authoritativeness. based on how many other reputable websites are linking to it. And then later on we can use the anchor text.

22:27 But right now just This ranking system. It spits out. A list that's sorted exactly as you would hope. It is the most authoritative websites first.

22:36 And all the crap all the way at the bottom. Yep. So Terry's like. Yeah.

22:42 Do this for your dissertation. Like, great, let's do this project. Reputation on the web, that's gonna be valuable. So there's one more thing to making this brilliant. Page rank idea work. Which is a little problem. Which is that the way the web is architected

22:58 Any given Web page. Only shows outgoing links. There's no way to query a page and say, Oh, who links to me? You can only query a page and say, Who do you link to?

23:11 Right. It's kinda like It's easy for me to answer the question. Who's in my phone book in my phone today. It's hard for me to answer the question, whose phone books am I in? Exactly.

23:21 And so the only way you could figure that out Is if you somehow went and got a copy of Everybody's phone book. And then could back trace all the links. Well. That's what they do.

23:34 Google could not have been built at any other time in history. Yes. Because the web was actually small enough that you could go suck it all up then. Exactly. It was small enough that as a research project. It was not totally insane. Pretty insane. It's still pretty insane.

23:52 To say oh I'm gonna go crawl the entire internet. Make a copy of every web page out there. Stor it in Something, which we'll get to. And then trace back all the links. And then reverse compute all the links to answer that one seemingly simple question of what web page is linked to me. If you had tried to undertake this as a brand new project,

24:15 Even just a year or a couple years later. It would have been impossible. Because the web would have already gotten so big. That to just start de novo. And create a

24:26 index copy like this, like a full copy. Even one year later would have been tens of millions of dollars, and within a couple of years would have been hundreds of millions of dollars. Yeah. Prohibitively Expensive. So we're in what ninety six, ninety seven here? Yep. We're in ninety six, kind of the back half of that first academic year of Larry at Stanford.

24:45 Great. So with Terry's encouraging Larry and Sergey go forth to undertake this ambitious project. They set up a page on the Stanford internet. They decide that they're going to call

24:58 The project. back rub since it uses back links. For Ranking web pages so they

25:06 Spin up. Backrub dot Stanford. Dot EDU. And Larry writes the first implementation of PageRank and the crawler to go do this.

25:17 He writes it in Java and it's like Super buggy and Basically doesn't work. So they asked. One of their friends there at Stanford.

25:25 Guy named Scott Hassan. to help them. He Scott's a better coder than Larry and Saga is. So he codes it up in Python. And It actually

25:34 Sort of works. Scott. Not an employee. of Google never would become an employee of Google because it's not a company yet. It's a research project. Right. And they hadn't even come up with the name Google. I mean nothing about this. It's not a search engine. Exactly. So if you go to that.

25:50 Project homepage and you can find cache versions of this on the internet or images. Uh, I think there's even a recreation of it out there. Yes. With the really weird black and white picture of a back rub with the red text over it. Yeah. I think that picture actually was on Backref.stanford.edu. It looks like somebody's back. They certainly didn't search Google images for it, I know that. Yeah, exactly. Exactly. So the text on the page says Backrub is a quote unquote web crawler. Which is designed to traverse the web.

26:18 Currently we are developing techniques to improve web search engines. So yeah, Ben, they're not thinking of background as a search engine yet. They're thinking of back rub as just a implementation of A crawler and the page rank algorithm. Oh, that's interesting. But they have the insight that this method Of ranking.

26:37 If it turns out to be better. could contribute to better search engines. Yep. Again. Even though Larry really wants to start a company

26:44 He's thinking he's gonna get his PhD in That go forth here. Kinda like Mark Zuckerberg got years into Facebook before we're realizing, Oh, this is my company. So Larry and Sergey are building Background here.

26:55 I mentioned Scott. Hassan, their friend who helps code it up in Python. Doesn't end up. Joining Google. Well, what happened to Scott?

27:03 Scott leaves while all this is going on. And starts. A company. Because it's nineteen ninety six, nineteen ninety seven, you're here in Silicon Valley. Right. The bubble is inflating. Like what do you do? You go start a company. It's your obligation to go take it smash this pinata.

27:19 So Scott leaves. Starts A company called e Groups. That

27:25 company a couple of years later ends up getting acquired by Yahoo, becomes Yahoo Groups for about four hundred million dollars. Do you know who Co founded E Groups with Scott. Ugh, man, you're stumping me today. No.

27:38 Larry's older brother. Carl Page. Oh, that's this company. Yes. Wow. So here we are, we've got Larry and Sergey. Doing this. research project to improve

27:50 Search. Engines. Meanwhile their buddy who helped code that and Larry's older brother They just went, they started a company and then they raised money. Sequoia and Mike Moritz would end up funding e groups.

28:01 And then they sell it for four hundred million dollars to the leading web company at the time? That seems like a good idea. Yeah. Larry and Sergey start thinking Mm. Wait, maybe we should

28:12 do something commercial around this. This seems like it would have value. So that leads them in the spring of nineteen ninety seven before School is out. To start

28:24 shopping this back rub technology around to the other existing search engines at the time. They're not yet thinking that this could be a company that they're thinking we're gonna sell this technology. to another search engine. They're gonna pay us a lot of money for it. We'll go come help implement it and then we'll go back and finish our PhDs. 'Cause they effectively have it working at this point, even though it's not

28:46 you know, hardened. They have a crawler that has run On a small number of websites. They have a very modest index that has been created. It's not all efficient and everything, but they sort of have the proof of hey, look, this ranking is actually a good ranking of how authoritative these websites are.

29:05 But other than some demo proof of concepts. They haven't yet built the consumer version of hey, you can go query this thing and anybody can use it. Right. So They're shopping it around that spring, that summer, they get a bunch of meetings, they meet with InfoSeq, Glycos, all the existing search engines. And we should say There was a

29:22 large list of other Search engines, portals, internet properties. Search engine like things. Yes, that existed. It had Traffic. Archie.

29:34 Gopher. Alta Vista. Hot butt. Inktomy, Lycos, Yahoo, excite. Info seek. The list goes on and on and on. Yes.

29:43 So The closest they get. That spring and summer. Is with excite. This story's amazing.

29:49 So Supposedly this is according to In the Plex, Stephen Levy's book, great book that we used as a source for the episode. They end up Getting a meeting with Vinod Kosla. A legendary founder of Sun Microsystems.

30:02 By this point in time He's one of the top BC is in the valley. He's at Kleiner Perkins alongside John Door. The two of them are running the firm. And Vinode is on the board. of excite.

30:13 And so somehow Larry and Sergey and I think they bring Scout along. Get a meeting with Vinod and they hammer out a deal. That excite is gonna license this back rub. Search technology. From the two of them for about a million dollars.

30:28 Part of that's in cash, part of that's in excite stock. And Larry and Sergey are gonna come. Work and excite that summer. Implement back rub for their search. You know, basically make excite into Google.

30:41 And then they're gonna leave and they're gonna go back to Stanford in the fall. And They get so far that They Run a test.

30:49 Uh side by side test of excites Search results. The original Yeah, algorithm and then the back rub algorithm. And the legend goes

30:58 That they're demoing this test to excite CEO. As like a final step to finalizing. This deal. And the results are so relevant with back rub. You know, you get exactly what you search for, exactly what you want.

31:14 It's right there, you click, you go to it. And the usual excitement. Search is bad. You have to like click around, you go forward, you come back, you spend a lot of time on the site. And the CEO is like

31:26 Why on earth? Would we move to your algorithm? I want people to stay on my site. I make money when people stay on my site. I don't want them to leave my site. You guys are crazy. Get out of here, I'm killing the whole deal. It is amazing that as early as nineteen ninety six, seven this time period.

31:46 This Very important. Conflict of interests. is teased out. This is

31:52 Basically why Google beat Yahoo. I mean, there's a lot more to it. But The portals. all had this mentality of we want to

32:00 build more and more and keep people on our site in our ecosystem continue to look at our banner ads. And Google from this point Basically forever. was how quickly can we deliver someone something relevant so they can leave Google and have had a good experience what they really wanted. Now all this is

32:19 laughable in hindsight. But made total sense at the time. Because What was the business paradigm for all these sites? What was the model? It was banner ads. It was CPM. Cost?

32:31 Per thousand? views. You wanted page views and impressions on your site. And here what Backgrub is doing is they're gonna kneecap your page views. Right. They're gonna dramatically reduce the number of page views and allocate them to other properties on the web so they can leave your property. This deal was never gonna happen with Excite or anybody else because it broke the business model. Right. It was not strategic for them. It was a conflict of interest to implement this type of

32:57 Better ranking. better search, faster technology. So back to the lab, right? No deal. Yeah. Exactly.

33:05 That fall nineteen ninety seven, Larry and Sergey go back to school, all these Get rich quick deals have Falling apart. Nobody wants back grab. And Larry's just like Well,

33:15 F it. All right. This is how I believe search should work. We're gonna build this thing ourselves here at Stanford. Quote from him, we couldn't get anyone interested in buying back rub. We did get offers, but they weren't for much money. So we said, Whatever.

33:28 We went back to Stanford to work on it some more. These companies weren't gonna focus on search. They were becoming portals, i.e., they wanted eyeballs, page views. They didn't understand search and they weren't technology people. Yeah. And I mean when he says we talked to others, they tried to sell PageRank to Yahoo for One milyen dollars.

33:46 And were rejected. And there's gonna be chapters of this story that you can mark by the different times that Yahoo discussed buying Google and didn't. But this is the very first They showed the tech to InfoSeq.

33:59 also didn't happen. InfoSeq was bought by Disney and later shut down. They showed the tech to Lycos. They were shopping it all around town. So they get back to campus. You're like all right. We're gonna build a real search engine ourselves.

34:11 First order of business. The name. Back rub, uh probably not gonna fly. Yeah. Describes the Technical underpinnings but doesn't really describe The searching. Yeah. So they're casting about trying to find the right name to encapsulate what they're doing. This sort of new good form of search.

34:32 And the story is that Larry's dorm mate Suggest the term. Google. Oh wait. Do you know the name before this?

34:40 Oh no. Do I know something you don't? Oh, this is great. Ooh, go for it. The name is what box. What box? What box? It rolls right off the tongue.

34:51 You know, it's a box that you type stuff into is sort of the question. I got it I get it. But they decided that that sounded too close to a porn site. So they decided not to go with it. Well, hey, I guess if Facebook Can be a product name and a company. Yeah. Maybe we could all be what boxing things. I mean, we are all whatsapping, so to be fair. Yeah.

35:10 It wasn't that crazy. But yes, what box out? Next name. How did Google come about? Larry's dormate suggests that they might want to use the

35:22 Term. Google. G O O G O L Which is the mathematical term For one followed by a hundred zeros.

35:31 Ten to the one hundredth power. Yes. And The legend is that Larry Loves the name.

35:38 Sergeant likes it. They go to register. the domain name and Larry misspells it. And thought that Google was spelled G O O O G L E. Misspells, really? I thought G O O G O L dot com was taken. Oh, maybe that's it. Maybe that's it. Uh like anything here, you know, there's a lot of legends floating around. Yes. But the misspelling is actually great because You kinda should spell it the way

36:01 Yeah. other people are most likely to spell it. Right, exactly. So This is before uh you've got the Google Did You Mean in the search box. Yes. Spelling was important. So Sergei designs

36:15 The home page and makes the first logo using the open source drawing program GIMP. You ever use Gimp back in the day? Oh, and you can tell it is drawn using GIMP. A lot of people probably can think of the earliest Google logo you've ever seen. Even the real nerds out there are like, Oh yeah, I I know about that one that was real colorful before the drop shadow thing.

36:35 There's even one before that that's like completely illegible. And this is the the one that we're talking about. But it was rainbow colored. Yes, it was. We'll link to it in the show notes and on social media. It's fun to look at. Yep.

36:48 But Basically. That Homepage. Design.

36:53 Of That was it then? That's it today. Ninety seven onward. So at that ninety seven, ninety eight academic years when they're building

37:04 Back rub into Google. Bye. Sprar of that year. Google, Google.com. is doing ten thousand queries a day.

37:15 This has started to spread virally first on the Stanford campus and then to other academic universities and communities out there get wind of what they're doing and then it start spreading into Silicon Valley and It's like bringing the Stanford network to its knees with all the traffic that is happening on Google.com. out of Stanford. So at one point they actually did bring down the Stanford network.

37:37 This is how fast it all happened. It's all during this academic calendar where They're Taking back rub. They're working in a search box. So there's now a keyword that we're ranking things for, not just arbitrarily rank them. That keyword relies heavily on the anchor text description. So there's sort of these two early key innovations. There's waiting

37:59 results based on backlinks. And there's description from anchor text. And It really did just kind of work. The technical underpinnings are extremely difficult. They're having to do things like steal computers from other research projects. Do you know about the loading doc stuff, David? Oh yeah, yeah, yeah.

38:16 There's these famous stories of other researchers that have ordered computers, but they actually aren't gonna start the project for a few months. So Larry and Sergey would go grab him off the loading dock, spin him up. use'em for Google just for a few months until they Need to go and hand them over for the other research projects. David, to your point, they bring down the Stanford network because there's so much traffic. There's so much demand for something that is just clearly a better way.

38:40 of ranking websites than what everybody else was doing. You know, everyone else is basically just using keywords on pages. And saying, Well what pages exist out there with the word dog. And if they have a whole bunch of instances of dog

38:54 then that's gonna be the top of your results for dog, no matter how authoritative they are. And so obviously that's A problem. So this is just a better way to do search. And They're really starting to sop Stanford's network bandwidth at one point.

39:08 They're using about half the bandwidth. Of the entire university. To be serving out. Google.com pages. And

39:17 David, to your point, it's not a heavy website. I mean, it's a white page with an image, a search box. And then when you go to the results page, there's no images. And so if they're consuming an incredible amount of bandwidth, for something that's so asset light. People are using the crap out of this thing. Yep. So here we are.

39:34 End of the nineteen ninety eight academic year, it it's clear. This is gonna be a company. This has to be a company. Stanford's about to Tip over if it stays as a project anymore. Stanford has been very kind to say we're gonna keep

39:47 housing all the infrastructure for this thing, but at some point This needs to be a company so that you can get it off of our network and fund it on your own. And nobody should. shed a tear for Stanford here because as part of the tech transfer to spin it out. of the university, they end up getting like one percent of the company or something like that. Stanford did very, very well.

40:06 For their large S here. Yes. So Larry and Sergey go to A professor in the C S department at Stanford named Dave

40:14 Sheridan. And Dave had started an Ethernet company called Granite Systems with Andy Bechtelsheim from Sun. While also staying as a professor at Stanford at the same time. He was uh founder of Granite Systems and it stayed as a Professor. Cisco.

40:32 had just acquired granite. For two hundred and twenty million. And so Larry and Sergey are like, Oh, okay, Dave, he's one of our professors, he knows how to do this stuff. And He's like, Well Why don't you talk to Andy about how we could spin this out and

40:45 Make it into a company. So Dave emails Andy that evening. And he replies right away, he's like sure. Kinda busy tomorrow, but

40:54 How about we meet at your house at eight AM in the morning? I'll come by on my way to the office. And thus begins The story of Google's legendary Seed financing around. And the crazy cast of characters involved in it.

41:08 All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chat bot out there. Lagora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do.

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43:01 to a hundred million in ARR. In about. Eighteen months. truly insane numbers. And that is the real test.

43:09 Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, You can learn more at Lagora.com slash acquired And just tell'em that Ben and David sent you. All right, David.

43:32 The Google Seed Round. Yes, here we go. So eight AM. The next morning. Larry and Sergey rouse themselves out of bed over on the Stanford campus.

43:43 Head on over to downtown Palo Alto at Dave's house. And Andy Drives up, he's like All right. I'm in a hurry.

43:49 Show me what you got. They demo Google for him. Andy loves it. He's like great. I'm in. Hundred thousand dollars? Larry and Segarly about

43:59 raising money. We just wanted some advice to start a company. And he's like Great, I'll go get the check from my car. He writes a check to Larry and Sergey made out to Google Inc. For a hundred thousand dollars. Basically just throws it at them.

44:14 hops in his car and takes off. Google Inc. does not exist yet. This is actually true. This actually happened. And he's like, you guys figure this out. That's your problem, not mine. I'm good for the money. No investment documents, no valuation, just here's a hundred thousand dollars. I assume I will get something for my investment. Yep. Exactly. And this Was the forcing function. For Google Inc.

44:40 To get founded. So Larry and Sergey need to be able to like spin up an entity Have that own the intellectual property from

44:50 Stanford. And set up a bank account for that entity such that they can deposit this check before it expires. It takes a a couple of months to get all this done. Yes. Which depending on who you ask is either very good or very bad. Because in the intervening months.

45:07 Dave himself decides to throw in another hundred thousand dollars to the funding here. And Larry and Sergey meet a former Netscape guy named Ram Shri Ram. Who started advising them on starting this company, spinning things out. And longtime acquired listeners will recognize this name from our Amazon episode. Oh yes. Rom

45:28 had left Netscape And joined a startup called Jungly. That Amazon.com Then acquired.

45:36 And so Rom had a little bit of liquidity. He throws in for two hundred and fifty thousand dollars. End of the round. And he's like, Hey, do you guys want to meet Jeff?

45:46 Jeff Bezos. Who at this point, it's kind of interesting. You think about Amazon and Google as kind of equally old companies. Jeff is sort of the elder statesman of the internet. His company was started in ninety four, this is ninety eight. Amazon just went public the year before. I mean

46:02 It's kind of crazy that at this point in time it was little old Larry and Sergey's grad students meeting public CEO Jeff Bezos. Yeah, yeah. It's almost like when you're six month old baby is hanging out with a 14 month old, you're like, Oh my God, they're so different. But like they're gonna be classmates in a couple of years. They're basically the same age. Exactly.

46:21 So Rom arranges a meeting. And the next time. That Jeff is in Silicon Valley. They all meet at Rom's house. And similar to Andy Bechtelsheim.

46:30 Jeff Sleek. Great. Rom, what are you in for? Two fifty? I'm in for two fifty two. And so all in, they end up raising a million dollars.

46:41 at a ten million dollar post money valuation. And yes. Jeff Bezos. Does a quarter of Google's See drowned.

46:49 It's so crazy. You know, we knew about this in the past because we talked about it on the Amazon episode, but whenever I heard someone reference Jeff Bezos was an angel investor in Google, I always thought Well, yeah, but you look at any of these startup cap tables and there's fifty founder friends in addition to the Main VC of uh that's not surprising at all. But Jeff is a quarter of the money in the seed round. Yeah. One of four investors, is that right? That's right. Yep. Dandy, Dave, Rom. And Jeff.

47:15 Jeff has never said Whether he sold Any of his Google shares along the way. But by my math, if he didn't That stake is worth about twenty billion dollars today.

47:26 And even if he did sell at IPO, he turned that two hundred and fifty K into something like two hundred million at IPO. Right, right, right. Nice returns. And Amazon stock was probably in the dumpster when it went public. So, you know. Could have used the money. Anyway.

47:42 Google is now an official company. They've got a million dollars in cash from there. Crazy seed round. It seems like they might Burn through that? Kinda fast because of their uh business model of trying to store the entire internet.

47:55 on uh their servers. But You know. You got a million bucks, you're no longer a Stanford project, you're spun out. You got investors. What's next?

48:04 Well first Office space. So famously they go. Find space in a Menlo Park garage. A house owned by one Susan Wajiski.

48:16 who was a manager at Intel And soon would become herself an early Google employee and then eventually CEO of YouTube. Yeah, exactly. But besides office space, it's time to Put your product out into the world. And

48:31 I think it's worth drilling in here. What was the state? Of search. in nineteen ninety eight, when Google becomes a company. Yep, I think it's worth saying a little bit more.

48:42 About two other players to set the context. The first Is Alta Vista. Folks who are Old enough might remember.

48:51 Alta Vista. Pre Google was like Pretty good. It was pretty good. Ultimate. has a fascinating

48:58 History. This is wild. I didn't know this until doing research for this episode. Do you know where Altimista came from? I do. But most people don't. Deck.

49:07 Digital Equipment Corporation Dick. Digital equipment corporations. Western Research Laboratory, which was their Palo Alto Research lab.

49:17 Their equivalent of Bell Labs. But Deck. I mean the company we talked all about in our Microsoft series, where Dave Cutler came from. Yeah. Windows N T legendary, legendary company.

49:28 Right. Hardcore Enterprise Big hardware computing company. Judy Faulkner wrote Epic on a deck mini computer, right? Yep. This is where Alta Vista came from.

49:42 And the big Was You can go crawl the web to build the index and In parallel.

49:51 So before Alta Vista, all the other web crawlers out there that were building search engines They were just like Single threaded. Processes. You go crawl one page, and then you go crawl another page, and then you'd go crawl another page. And the internet was small enough back then that People didn't really think to do it any other way,'cause remember it's all growing so fast.

50:10 Oh fascinating. And it's a super parallelizable process. Why not? Oh, and this makes sense because Deck Hardware would be pretty well suited for this. They've got a big enterprise appliance that they need applications for. Exactly. This is why it was a research project at DEC. It was a way to show off the power of their latest Enterprise class servers that they were hawking.

50:33 So If you think about What are the competitive vectors of search? What makes one search engine better than others? It's not Just

50:42 the ranking. Today people think about PageRank and Google and the innovation and the ranking and the relevancy. That was the most important thing. There are actually two other vectors that are critical. Yep. One is speed. How fast are you gonna return the result. Which we take for granted today, but not too long before Google's founding Search was a thing where you'd kick off a query and then go do something else and wait for it to come back. Right. It was like AI today. You're doing deep research. You're just like okay, great, send the query, you know, go get some bludge, come back. So funny. Exactly. We'll get more into speed in a minute.

51:13 But the other attribute that's super important Is the index. How Big is the index of pages. That you're searching across.

51:23 And Before Alta Vista. And parallelization of crawling. All the indexes of all the other search engines were super small. Maybe a million pages was like the biggest. So

51:33 You could have the best search engine in the world. But if you're only getting a small percentage of the actual sites out there that it's searching, it's not gonna be that useful. And the funny thing about this period of time too is Very rarely were people actually updating their index. So when something would say like a million pages crawl, that was cumulative.

51:53 And they just kept adding new sites to it and assuming you weren't doing many updates. Right, right, right. Oh man, how times have changed. So when Alta Vista spins out of deck and launches as a commercial. Company, an entity in and of itself. Its big claim to fame is its index.

52:09 It has sixteen million pages in its index versus the competitors. Alta Vista still kinda sucked at relevancy and Speed. So the information retrieval algorithms that Altivist and others were using.

52:22 Was highly based on how many times a given query word appeared on the page. So if you wanted to rank highly For dog food.

52:33 You just spam dog food and invisible text all over your page. Or even not invisible. You just want to make the dog foodiest dog food page on the web. Exactly. And the other thing that we're going to do. Yeah, I guess Alta Vista was probably fine at this, but Not good was speed.

52:50 And that was a particular problem. I mean Alta Vista had great hardware from deck. And really expensive hardware, too. That's a Main thing to underscore here is That yeah, they're doing this cool parallelization thing, which leads to a bigger index, but If they had to be their own company, it is an extremely expensive company to run to have all that deck hardware for search. Which we should say.

53:10 doesn't have a great business model yet. The business model is just banner ads, low price. Not very targeted. That would all come later. And so the whole search market, why would anyone take it seriously?'Cause to date

53:23 It doesn't feel like there's a good business there, and to do a really good job at it, it would be very expensive to run. Yes. It is funny. As you can imagine, the powers that be at deck are pushing really hard on Can we sell more of these boxes?

53:39 Do they really want to be the ones developing the best search engine? Or really what they want is for other people to be developing stuff like this. See it as a proof of concept. and then start their own companies to buy more and more deck hardware. Yes, exactly, Ben. Search

53:55 as a industry was not interesting. One because the economic upside was Capped. And two also People love Directories and portals.

54:07 And Yahoo, like Yahoo was the big player, not Altivista or Excite or Lycos or InfoSeek or any of these others. So Yaho was the site that was taking off like wildfire. They'd gone public in nineteen ninety six at a billion dollar market cap.

54:23 By nineteen ninety eight when Google dot com is launching as a company Yahoo's a twenty billion dollar public stock. This is The juggernaut. And what was so great about Yahoo, like yes, it was started by Jerry Yang and David Philo, you know, two other Stanford PhDs.

54:39 But it wasn't technology driven. It started as Dave and Jerry's guide to the internet. Yes. It didn't start as their like academic research. What Yahoo was was Exactly that. It was a hand curated

54:53 Guy. directory to the internet. It was kind of like the yellow pages. With even Better annotations. to why you would want to look at a particular given site. And that's what people thought, like oh

55:06 technology search engines will never be able to replace human curation and human thought about what the most interesting sites on the web are. Now, this is why Larry's original idea was this annotation idea. It was humans who are gonna rank things. And for the size that the web was at the time, Yahoo. Yes.

55:26 when you have a small number of total websites Curating them is interesting. But when you have ten thousand times more websites and ten thousand times more niches that people are interested in. directory is not going to be an efficient way to surface what people are looking for.

55:43 If you believed that the internet was gonna get as big as it did, search became a more interesting front door. But for this period of time, directory was an amazing front door to the internet. Yeah. No. Here we are in nineteen ninety eight. The Internet is already big enough that

55:58 Yes, it's clear there are a lot more interesting web pages out there. So Yahoo has search? To address that. Exactly. So the model was hybrid. All these portals and Yahoo included went hybrid of when you search on Yahoo. The results you get at the top of the page are their hand curated

56:16 Directory driven results. And then they backfill with a search engine. And so they would partner With these search engines to provide backfill. Results and people thought that this was the ideal solution.

56:28 So interesting. It is the epitome of kind of just good enough technology was so different than Google. Google wants to be the very best technology solution for a problem, the most elegant And I think the Yahoo solution was very Yeah, search just has to be good enough. The curation is sort of the thing that matters. We're a media company. We having enough human editors to cover all the big categories.

56:50 But the business is showing banner ads. They may or may not be relevant to whatever page you happen to be looking at right now. And we're effectively a media company that has search just in case. Yes. Okay, so that's what's going on at Yahoo and all the portals.

57:05 the opinion of Larry and Sergey Is A we don't want to do a home page like that. We don't want to clutter it up. Our whole point is to help people find what they want. Which of course raises the question, well, what's the business then? Because

57:21 If you're not keeping people on site to see your banner ads, the only moment that you really have is on the search box page and on the search results page. And they were extremely against Well, really ads generally. They didn't think it was good for users. But they were just against

57:36 Especially banner ads. And there's this sort of scary thing, which doesn't seem scary now because we know how it played out. But just imagine trying to evaluate this company. It's growing like wildfire. Everyone's using it. There's one known business model for this entire sector. It's not a great one, but it is known. And these guys are dead set against using it.

57:56 But on the other hand Let me pitch it to you a different way. These guys are building the front door. to the internet, which was just growing seven hundred percent year over year.

58:07 So isn't that going to be really valuable? Yes, but we don't know how yet. But The problem is actually even more dire than what you're saying. As usage is growing.

58:17 They need more infrastructure. But they're not making any money. Right. And for each piece of this, you need more infrastructure. You need

58:25 The crawler to go and Crawl the whole web. And store you know, not entire web pages, but little pieces of web pages that you can

58:34 Reference from your index. You need the index itself. You need to serve the web pages up for when people are doing the searches. There's a bunch of components of this infrastructure. That all need to scale and they all need to scale differently. Yep.

58:47 Which brings us to really what is The second Big reason. why Google worked so well and became the Google we all know today. One is accurate, relevant, fast search results and page rank and everything we've been covering.

59:01 Two though. Is the infrastructure to actually make this whole thing work and scale efficiently. Yes. So right after they raised the angel round, Larry and Sergey go out. And they recruit just like

59:13 Unbelievable. Top tier. Engineers and computer scientists. To come rewrite the code. And work on this infrastructure problem.

59:22 So Pretty quickly they get Urzholza. And then Jeff Dean. Absolute legends. They are both still at Google today.

59:29 Us is now a fellow. But he ran all of Google's infrastructure from nineteen ninety nine until twenty twenty three. Before joining, he'd done his PhD at Stanford and he was a professor at UCSB. He'd also Written.

59:42 the primary Java virtual machine. That Sun used as like the official Java virtual machine. Oh wow. And Larry and Sergey recruit him out of academia. To come join as employee number eight. And his initial job title was Search engine mechanic because quote, everything was broken. So that's Earth. And then he builds all this incredible infrastructure.

1:00:06 Jeff Dean, who they also recruit around the same time. From the deck engineer deck, yes, yes. And Jeff is basically like Google's Dave Cutler. So Today

1:00:16 Jeff runs AI at Google. He also Implemented the first version of AdWords. Build AdSense. rewrote the core search pipeline five times, co-invented and implemented big table, map reduce, tensor flow, and Gemini. He actually keeps his resume up to date online. We'll link to it in the show notes. It's

1:00:35 Incredible. We're bearing a little bit of a lead here. We we spoke with Jeff to prep for this episode and I watched a handful of talks he's given, uh Delightful human and God, what a great engineer. Just generational talent. But this is like that

1:00:48 Early nucleus of engineers. that Google recruited It's amazing that they attracted them because Prospects were not good that all of this would work in scale. And it was only because of these guys that it did. Well, and here's the crazy thing. Later, there's an easy point to make, which is Google got to hoover up all the best talent because they were a solid business.

1:01:09 after the dot com crash. But this in ninety eight, ninety nine We're in the go go times. The dot com bubble hadn't burst yet. And Larry and Sergey managed to recruit this talent. I think this is like a

1:01:21 uh history turns on a knife point or like a make or break the company thing, the fact that they were able to get these guys in a hot talent market really speaks to Larry and Sergei's vision, the excitement around the idea. How novel their approach was, everything.

1:01:38 Yeah. And part of the reason why This talent was attracted to Google. Sure, some of it was like, Oh, the product's really good and people are using it and so that makes the company interesting. The other part of it though is that the technical challenges

1:01:52 And the architecture. Coming out of Stanford. Was super unique and novel. This was a really, really interesting thing to work on.

1:02:01 And Why was that? So the Google Index. that they needed to build and operate on.

1:02:08 For the search engine for PageRank to work. was so much bigger than any other index out there. Google needed like The entire page.

1:02:18 to compute all the rankings and find the links, find the back links. They needed to architect Google With this huge distributed computing system. So the index was so big. Then it wouldn't fit.

1:02:31 On A single machine or a single server, no matter how big or how expensive. So what they do to store the index and to operate on it with this distributed file system.

1:02:43 The giant index into tons and tons and tons of little chunks. They're called. Of individual sixty four megabyte files. Small files, tractable files.

1:02:55 And They get stored on lots and lots of different disks and lots of different machines and lots of different servers, and ultimately different data centers all over the world. And then There's a separate server that keeps a master mapping.

1:03:09 Of all the chunks, like where the chunks physically are. And so when a query comes in and needs to operate On The index data. The master server

1:03:18 Just returns only the chunks that it needs. Not the whole index. And that makes the whole thing possible. So basically that one server you're talking about can kinda just say

1:03:28 Oh, all the chunks are here on all these different machines that are distributed throughout my data center. Just look at those chunks. And that way it can kind of just pull. And in a parallel way, prol from all those different Chunks.

1:03:40 Concurrently. Yep. And I think that's even abstracted. Like from a compute perspective. They see the master map. They feel like they have access to The whole file.

1:03:50 But then What's actually getting returned to them to operate on is only just the chunk data that they need. Hm. So Google was sort of forced to do distributed computing because their index file was too large to store on any one machine, no matter how big or fancy it could be.

1:04:05 Yep. I think that's right. Which sort of enables the whole thing in the first place and is technically extremely interesting. But now the physical infrastructure side, right? Because you have all these chunks. And they can live.

1:04:18 Anywhere. And Larry and Sergey already had to grab commodity hardware, you know, hard drives and Motherboards directly back at Stanford. Well, Erz comes in and he's like, Well, we can just keep going with this. Let's

1:04:30 Keep using cheap. commodity components and hardware. And yeah. They'll suck and they'll fail a lot. And things will burn out.

1:04:39 But that's okay. Because we've got this distributed file system. We'll just replicate everything like three or five times. Right. And we can cleverly design software to account for the fact that we have commodity hardware, commodity RAM.

1:04:53 These systems that were not assembled with the notion of being enterprise grade. We can sort of design Google with the idea to take into account the fact that the hardware is not enterprise grade and that means we can get

1:05:05 Cheaper hardware. And run in a distributed computing way. And frankly, I think this makes it interesting to a lot of engineers who kind of want to work on hard problems. How do I design a system when I can't count on a whole bunch of stuff from the underlying hardware that I would get to count on? If it was a fancy Deck server.

1:05:26 So I read that industry average server hardware failure rate at the time. Was around like Three to four percent per year. Google's hardware failure was over ten percent. But the whole system was designed that it didn't matter. It was all just replicated. Super interesting.

1:05:44 So this keeps scaling up and up and up. Over the years. With Google. Pretty quickly. Maybe even while Google is still a private company.

1:05:54 They technically become the world's largest computer manufacturer? Oh wow. Because they're not buying fully baked servers. They're just buying components and assembling them into this sea of components. Proto data center in there Data center and then data centers.

1:06:12 And the early data centers, they're never really putting them in PC Housing, right? Yes. So these early, you know, quote unquote machines they're building. They're not even putting P C cases on them. They just

1:06:24 Mount the motherboards Directly on corkboard. And then they put like the RAM in there and they put hard drives in there. And then they just stuff'em in their data center racks. The photos of these early Google quote unquote server racks.

1:06:38 Are crazy because The way that their agreements worked in the co-located data center facility is they would lease by square footage. Not by energy consumed, not by number of mach by square footage. And so when you give a computer scientist a constraint, they will optimize for it. And the goal is

1:06:57 How much of Google can I power in this square footage. And the way that you optimize around that is Well Incredible density of hardware.

1:07:07 So we're not putting cases on these computers, we're putting cork boards. In And imagine just a sheet of cork, which is an insulator, so you know that these electrical components that you don't want to conduct between each other or not going to conduct between each other.

1:07:21 And you just stuff a server rack full of cork boards with All this commodity hardware sort of strewn about it. And it looks unbelievably messy. It's extremely economical. And then you just kinda handle it all in software. And

1:07:36 The net of this is that Google can scale Period. But also can scale way more cheaply as search traffic rises and as the index keeps growing and getting bigger.

1:07:48 Than anyone else out there. on the market. So once the business model kicks in This is why Google search has like a eighty seven percent gross margin on it. Yep. There's this incredible story of

1:08:00 Google's first Data center. was a co location data center facility, a kind of a shared uh physical space in Santa Clara called Exodus. and the data center cage, the space that Google had allocated.

1:08:14 was right next to The cage for inktomy. Which was a competing Search engine out there that we'll talk about in a minute. And

1:08:22 Google folks talk about the Inktomie Cage had all these gleaming sun machines and lots of space and lots of airflow and All this incredible cable management. And then you had this like Frankenstein Google thing next to it. And to your point, Ben. They were only paying by square footage. They weren't paying for Power. So they were sucking up.

1:08:44 All the power of the data center. And I heard a story that they actually at one point May or may not have stolen a power circuit from the uh Inktomy cage uh next door. Borrowed. Borrowed. Borrowed. Borrowed, yes. So one fun illustration of what does it mean to be on commodity hardware versus enterprise grade hardware. Jeff Dean shared a fun story with us that on enterprise grade hardware, you would have something in RAM, which is called a parity bit. And in consumer grade hardware you don't. And what is a parity bit?

1:09:12 A parity bit. Adds one extra bit. to memory. That Is

1:09:18 Basically for error checking. It looks at the rest of the data in the byte and if it's even. it'll set the parity bit to one and if it's odd it'll set the parity bit to zero. The con of this is now you need an extra bit. So that makes the overall machine more expensive because you're losing one eighth of the RAM to this parity checking.

1:09:37 But the benefit is you know that nothing ever got corrupted because the likelihood that one of your bits got flipped. And it also flipped your parity bit is very low because you can kinda Check and see wait.

1:09:50 It's supposed to be an odd number according to the parity bit, but it's an even number, so you know, likely something went wrong. And when I say something went wrong This is from like random radiation that is just flying around the universe at any given goes wrong all the time. Well, because Google is using this commodity hardware, they ha then have to

1:10:08 do these crazy things in software and build all these layers themselves. to say we're running on crap hardware, we don't know for sure that the value in memory is correct. Can we have a second way of verifying that it's correct? So it's that sort of I don't know, cool software engineering, but also another layer of systems that you have to build when you're on commodity hardware.

1:10:30 So the net of these constraints. And the incredible technical team Google has. Is that they design. Everything from The ground up.

1:10:38 the computing systems, the file systems, the data centers, the racks, the hardware, everything. And They built stuff like GFS, the Google file system. Map reduce. Yahoo would eventually feel like they needed to copy

1:10:51 MapReduce to be competitive and they would open source that as Hadoop. So if people Apache Hadoop, that is a Yahoo copy of Google's MapReduce. Yep. Of course, shepherded and stewarded mostly by people outside of Yahoo eventually, but that's where it came from. Yeah. And then ultimately because Google is building their own Hardware

1:11:08 Racks. Data centers. And they can do it cheaply. They put data centers all over the world. And then that means they can deliver Search results.

1:11:17 And add results. instantly to users All over the globe. Yeah, so this speed really starts to become a bragging point for Google, where whenever you Do a query.

1:11:28 It'll show you how long the query took. It's usually like a quarter second. And they used to brag about the index size. Now they say, I'm returning a gajillion results to you. But this was a really big flex for a long time as We searched a huge index, billions of pages. We found

1:11:44 A huge number of results, and we did it really fast. And we're going to show all those numbers to you because A, we're engineers who are awesome, but B, we know. It's the best stats that anyone out there could report to you. Yep. It's a snake in the ground. So

1:11:58 All this grows out of the constraints of like They don't have any money. First at Stanford and then with this little angel around they raised. They don't have a way to generate any money. And yeah. They don't have any way to generate any money. So We cannot overstate how important Google's infrastructure innovations were. All this comes out of these constraints.

1:12:18 That Google the company has. But none of this would have mattered. If they didn't figure out the business model. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta.

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1:14:01 So you can get$1,000 off Vanta at vanta.com slash acquired. That's V-A-N-T-A.com slash acquired for a thousand dollars off. And just tell them. That Ben and David sent you. All right, David. So going from having no business to the greatest business model.

1:14:18 humankind has ever discovered. Not exactly a straight line, huh? Uh no. Not at all. So How does it all start?

1:14:27 So early nineteen ninety nine. Even despite The incredible infrastructure work and being able to scale cheaply. Google's still Running out of money from the angel round.

1:14:38 And They hire a recent Stanford undergrad named Salar Kamengar. Who joins Google as employee number nine. And like Many

1:14:50 Stamford. students at the time. He started using the search product while he was An undergrad was blown away and he's like I gotta go work for this company. He basically bang down Google's door, tries to get hired, finally they're like, Okay, okay, come on in.

1:15:04 And so the first thing that Larry and Sergey Give to him to do. It's kinda, you might argue, the most important thing at the company. They're like, Well, we're running out of money. So we need to go raise venture capital.

1:15:15 We don't wanna write the business plan in the pitch deck. You write the business plan in the pitch deck. So Sally goes off and Yeah. Writes the pitch deck for the Google Series A. Yeah, a collaboration with Larry and Circuit and they come up with

1:15:29 A three pronged business model that they're gonna present. To VCs. Three ways that they're gonna make revenue. And it's hand wavy as hell. Yes. All right. So number one. The biggest revenue driver

1:15:42 projected going forward, you're the main Google business, innovative new business model that they're gonna pursue here. They are gonna sell Google search technology. Enterprises. So that Companies.

1:15:58 can use the same amazing Consumer Google search technology. To search their own documents. And intranets.

1:16:08 This is the business plan for Google for the series A. You know what this kind of feels like to me? It feels like they're saying Google.com is so precious and amazing and special. We don't want to risk it. By having to make money on it. So can we make money doing something else with our technology?

1:16:25 Yes. what we really want to do, which is Google dot com. Now. It's pretty funny to talk about this now in retrospect. They did have a couple reasons why they thought this might work.

1:16:38 Number one. was all the way back at Stanford. Back rub and then Google had actually been used for this use case. You could use Google to search internal Stanford Intranet. Stuff and people did. It was like a great experience for Stanford students.

1:16:54 Also Before the series A Somehow Larry and Sergey. had managed to actually sell one of these deals. To the company Red Hat. That's right. That was their first revenue, right? Was Red Hat. Yeah, the open source Linux company. They sold

1:17:08 This enterprise search deal to Red Hat. For twenty thousand dollars. They're like, Oh great, there's a market here. So that was gonna be The main

1:17:17 Business driver. And then there were gonna be two other business lines too in the company. One was gonna be Well, sure, okay, VCs, you know. You make us we'll sell ads, CPM banner ads, the same way everybody else does. We're not gonna like it, but we'll put it in the business plan. And it seems like they didn't think through it any more than that,'cause I couldn't find anything about

1:17:38 Is that gonna appear on the search results page? Is that gonna appear on Google.com next to the search box? It seems like It was never real enough to actually Have a plan for it. And Indeed.

1:17:50 the series A pitch deck and business plan, like was intentionally vague. I think part of the reason Larry and Sergey were like, Okay, Salar, new guy, you go do this is like They didn't actually want to tell VCs that much. Yeah. So that was number two. And then number three was that they were gonna license

1:18:05 Google organic search results to portals and Directories as essentially OEM search. to backfill results like we were talking about with Yahoo. Other search engines were doing this. Inktomy had gotten started at this point in time. Inctomy was the next door neighbor at the data center.

1:18:22 Exodus in Santa Clara. And they built a sizable business. selling white labeled organic search results to other portals. Exactly. This was Inc. is They just sold organic search results white label to other portals.

1:18:35 five big customers and fifty total customers out there for this business. Yeah. So this is the business plan, this is the pitch deck. They go out. Remember, we're in spring nineteen ninety nine here.

1:18:46 So Even though this is a little harebrained, it's still the dot com bubble. Money is still flowing. There's a Great Michael Moritz quote in Stephen Levy's book. Talk about this particular moment in time, he says. Nobody's feet were on the ground. Deliciously Michael quote, yes.

1:19:04 And Google's got all this usage and engagement and growth numbers. Uh hey, internet companies trade on eyeballs. So of course this is gonna be a hot deal. Famously. Kleiner and Sequoia end up Splitting the deal. And Michael Moritz and John Doer, the two most legendary VCs in the world, they team up, they join forces.

1:19:23 They split the deal and they both join. The board of Google at the series A. Which is Unheard of. The fact that Larry and Sergey were able to

1:19:32 Say it. you both only get twelve and a half percent of this company and you have to do it together. They both must have really, really, really wanted to do the deal. That is true, and I love that Even today, even you

1:19:45 Have that opinion. We heard from folks in the research that This really was like A Google PR master stroke. to see this narrative.

1:19:54 Oh Well they held a press conference in person with both Sir Michael and John Door there. It's the first Google press conference. Larry and Sarge are there in Google branded shirts. Yes. They made a big deal about this. The reality is Sequoia and Kleiner split tons of deals. This was not the first one. It may have been the first one that

1:20:15 Michael and John. Split together. But like they have been on boards together before. Maybe they've done one round or the other and Sequoia and Kleiner split deals all the time. But hey. It was the dot com era and everybody needed a PR strategy and that one worked well. Fascinating.

1:20:30 But the point is this was a hot deal. There's all sorts of stories out there about other investors coming into the round or trying to get in or trying to get in later. Yeah, I think in the middle of negotiations, they got another term sheet at a hundred and fifty million dollar valuation instead of a hundred. But I think they were sort of already pot committed. to Sequoia and Kleiner Perkins. And I actually don't know

1:20:51 who the hundred and fifty came from, but I do know it was someone who Ram Sri Ram set up the meeting with. Mm interesting. And remember, Larry's older brother Which Moritz had funded at this point. So like They knew they wanted to go with.

1:21:06 Sequoia incliner. That was the goal all along. Yep. Regardless. The round gets done. twenty five million dollar total raise at a one Hundred.

1:21:17 million dollar. Post money. Valuation. A hundred million dollar evaluation was genuinely wild for the time. Yeah.

1:21:26 Even in the heyday of the dot com craziness for a series A and a hundred post. That was newsworthy. So funny thinking about this today. I know. Today is so clean. It's so clean. The comp in today's world is imagine reading a headline that a series A after a company just had a few angel investors got done at a multi billion dollar valuation. That's kinda the

1:21:49 way it would have felt in tech at the time. Yes, totally. But Despite that and despite all the hype around the series A There's still kind of an

1:21:58 Urgent imperative to make revenue. Yes. There's twenty five million in the bank now, but you've got And the playbook back in the Dot com days was

1:22:07 Invest in the company. Get quick revenue. Go public. Yeah. So there's a fire lit under Google too.

1:22:14 Figure out the business model. Right around the same time as the series A happens. Larry and Sergey. Me. A guy from Netscape named Omid Cordistani.

1:22:24 And the first time they meet I think Omid is thinking about it in the context of Oh. I'm wearing my Netscape hat. I'll evaluate is there some partnership here?

1:22:34 And I think he quickly Maybe. But Netscape just got bought by AOL. It's getting a lot less fun here.

1:22:43 And Omid was the VP of sales and biz dev at Netscape. Yes. So he's very familiar with building an internet based business. And What these Google guys are doing is very interesting. Yeah. And of course Larry and Sergey.

1:22:55 As the great recruiters that they are. Like, hey, why don't you come work here? So Omid joins Google. Essentially as chief revenue officer. And he's tasked with Okay, take this business plan, take these three areas and make them a reality.

1:23:09 And we should say too, Omid is an awesome guy. We talk to him in research. Yep. So He goes out and of course the first the innovative business model that they pitch the VCs, you know, number one, the enterprise search business model. He goes out and Starts trying to sell it. But as you might imagine, especially at the time.

1:23:25 There wasn't a lot of uh customer pull. Shall we say for this. Yes. So for the first Six

1:23:32 plus months of the company, kinda the rest of nineteen ninety nine. After The venture funding. Things are not looking good on The revenue front.

1:23:42 David, do you remember this is way back in acquired history. What Doug Leone told us. In February of twenty twenty, when we were recording our episode with him. Yes, yes, I know exactly what you're gonna say, and I've got some more flavor on You give the quote. Okay. So the quote is from Sir Michael Moritz.

1:24:01 He comes to Doug. And they're running Sequoia Capital together at the time. He says, Doug. We've never paid so much. For so little.

1:24:10 And uh That's the lore. I got a little more behind the scenes flavor on the quote. Mm.

1:24:18 Apparently it was not Sir Michael who said it first. He might have just been repeating it back. Apparently Was it John Dore? It was Vinaude. Oh in the Kleiner partnership. That's what I heard. Oh This is like the hot potato of quotes. Nobody wants to actually take credit for this. Either way, though, the sentiment is right. You can understand why Kleiner and Sequoia would feel this way. They kinda have egg on their faces. They just

1:24:42 Paid a hundred million dollar post. For A series A company with no revenue. The revenue is not materializing. We're now into the year two thousand. The bubble is starting to burst.

1:24:54 And Google still basically has no business. Yeah. No business. But

1:25:00 Growing market share. fervent loving fandom among the people using it. providing real value to people, there's gotta be something here. Yes. Exactly. So the revenue imperative is becoming

1:25:14 Well imperative. More of an imperative, shall we say. And Omid's a smart guy. He's like I'm not Gonna just keep banging my head against enterprises here. Like We're gonna pursue the other two business lines that are Obvious, you know, who knows how big they'll be, but at least we'll make some money. So set up just Regular ads, same way as everybody else does it.

1:25:31 So Omid goes and hires Tim Armstrong in New York. To set up an ad sales force. And Google does start selling ads. At the top of search result pages. And what do these ads look like, David?

1:25:43 So importantly Larry and Sergey insisted that Okay, if we have to have ads on here. They need to be text only. We can't serve

1:25:53 Images and banner ads like everybody else does because that'll slow down the page. Yes. It's like they always talk about it for taste, which is true. But yes, it's a performance thing. Yes. It's a page performance thing. So there're these great stories about Tim in New York and O'Mid and the ad sales force that they're

1:26:10 building up at Google. They're going to ad agencies, they're going to advertisers directly, they're trying to sell these ads and like um No images. Just text. Trust us, it's gonna work. Not very exciting.

1:26:21 To these Madison Avenue guys. How are they paying for them right now? Still CPM. So

1:26:30 You By a keyword. And then your promise that you're gonna be an ad that appears on the page. Whenever that

1:26:39 keyword is searched and you're gonna pay per thousand impressions of that. Keyword. Is that right? Yes. Okay.

1:26:48 Not self serve. No web tools for this. This is like negotiated over the phone. And then they manually hand enter it. into Google.

1:26:57 That when this keyword is searched. you need to display a text ad for this person. and track how many times you display it because we then need to invoice them. For How many times the page loads.

1:27:09 Yes. Not even on the phone, that would be really uh technologically advanced for Madison Avenue at the time. All ad insertions were done by fax at this time. So Google had to install fax machines at its headquarters to take these insertion orders for These ads that they were selling. Awesome.

1:27:28 Now. What was the pitch though to Madison Avenue about why this would work? Intent, baby. Exactly. So the very first project that Jeff Dean did when he came over from deck.

1:27:40 All right, the V Cs say we gotta sell ads. Go figure out. The tech to serve. Adds.

1:27:49 On. Google.com. But don't do anything to degrade search or user experience. And so Jeff works with Marissa Mayer, who just joined from Stanford Undergrad. And they're like, Okay, like Fine. This is gonna have to just be text.

1:28:01 What can we do as a test? to see if we can engineer something that'll work. With text ads. We could scale, run it against a bunch of queries. Well, what about Amazon affiliate links? We know a guy at Amazon. We know a guy at Amazon who happens to own a good chunk of this company.

1:28:20 So Google goes And signs up as an Amazon affiliate. Which how crazy is this? The Google business model. was validated, like doing customer development, you know, uh startup idea validation. using Amazon affiliates as the mechanism.

1:28:36 Yes. Jeff Dean. Codes it up. So that dynamically. As users are searching.

1:28:42 If there's a query that is related at all to Any book in the Amazon library catalog. Google will dynamically generate A text ad. Say, go buy this book at Amazon.

1:28:55 Insert an Amazon affiliate link. And Drive traffic over to Amazon. And the amazing thing is Of course it actually works.

1:29:03 Now. Whatever the Amazon affiliate commission you know, maybe it's four percent or five percent of the revenue of a ten dollar book. Obviously it's not gonna change Google's fortune in the amount of money that they'll generate from this. But it's a test. It's a test and it's

1:29:18 Proof that they can then take to advertisers. We Can capture intent. And we can send highly monetizing traffic to you based on the keywords that you are buying.

1:29:29 And so if you think about the funnel steps, there's the impression of an ad. Hey, they saw the ad. Then two, there's the click. They click through the page. Then three, there's the on page conversion. It would be one thing to just test click through rate. Which would have

1:29:43 shown a great result here. 'Cause click through rates on search ads are higher. than ads that are just randomly around the internet. Because Someone is intending

1:29:53 To buy something, they have high intent. That's a great place to show. An ad. The click through rate's gonna be higher. They also know because it was an Amazon affiliate links, is they know the down funnel number two. They know conversion is actually higher from this traffic.

1:30:08 Because we got to know how many books on Amazon were sold from the number of impressions that we served. So they can say This intent based ad system has high click through rate and high conversion. Yeah, they're just text ads, but

1:30:24 you're gonna like the numbers. This is ultimately a math problem. Yeah. It was an absolutely Brilliant. Test and bootstrap.

1:30:33 of the first step of the Google ad model. Yep. So That's sort of Gen One. of the Google Ads business. And they get it set up, it's going, it's making some money.

1:30:44 They're winning some clients on Madison Avenue, like Good. Right. The more interesting piece for the next year, year and a half

1:30:53 Is the OEM search. And There's some big deals to come. Netscape. Yahoo.

1:31:01 A O L This is white labeling. Google search. to be the search powering. other places search activity that has tons of traffic. Which oh by the way, is also gonna train huge portions of the internet.

1:31:15 To use. Google search. Yes, it is. And specifically, what were the portal deals at this period of time? before Google had a real functioning

1:31:26 Paid search business. What a portal deal represented was just Letting a portal use Google search to power their organic search and in exchange just getting Paid a fee for that. Yep. It was the Ink to me business model. It was exactly that. We're selling our search results.

1:31:43 For you to use on a third party page. And it's effectively like a B2B supplier. They're a vendor. To a portal, more or less. Yes. It turns out though that we're still in the era of the Internet where

1:31:54 Portals are Pretty big. Ton of traffic. And They're not just any old vendor. They're a vendor that at the bottom of every page says powered by Google.

1:32:04 Yes. So Pretty quickly after that. Omid joins from Netscape back in nineteen ninety nine. He goes

1:32:11 back to his old colleagues at Netscape slash AOL. And gets essentially like a proof of concept deal. Done with them. And that's for Google to backfill Organic search results.

1:32:23 on Netscape's own directory service that they just launched to compete with Yahoo. So it's interesting. I we always think about Netscape the browser, but this was presumably like the Netscape homepage whenever you opened up You know, it would go to Netscape.com or something and there'd be all these Netscape services there available, one of which was search. Yep. And I presume having been acquired by AOL, this was now more of a strategic priority for Netscape because this is AOL's like whole business model at this point, besides the you know, monthly dial up fees. Right. Worth remembering AOL way, way bigger.

1:32:56 At this point Tens of millions of people using AOL. Way fewer. going through Netscape.com to deliver traffic to this Google search. This is sort of the small part of the organization they're working with right now. Yeah.

1:33:09 Exactly. But Relative to How small. Google.

1:33:14 Actually it is at this point in time. It's huge. Still big enough that when they flip the switch And Google on Netscape goes live with Google powering Yeah, organic search results. There's so much traffic.

1:33:27 That it Blows out Google's infrastructure. Well It comes close. Basically they're watching the analytics like a hawk. Ohmeed gets an urgent call from Sergey saying the traffic is about to tip over.

1:33:39 And this is potentially company killing'cause this is their big strategic priority. If they prove that they are untrustworthy to Netscape and can't deliver then how are they going to keep Netscape's business, let alone get any other portal deals. Or be able to go sell to enterprises that they're thinking they're going to do at this point in time. Right. So they cannot tip over.

1:33:58 And so they have this Pretty Tough decision to make. But actually it's not even a decision at all. This is obvious. We are shutting off Google dot com.

1:34:07 For today. And we are going to prioritize all traffic from Netscape. for our servers until we can stand up more machines. Yeah. Just think about this for a minute.

1:34:17 Think about everything that Google is today. Never goes down. universally available basically everywhere in the world on every device. It's frickin Google. In nineteen ninety nine.

1:34:28 They shut Google down so that they could serve Netscape's users. Yes. I mean Look, the revenue is very material coming from this and the reputational impact is very material. Like I said, it sounds like a hard decision. It's actually not a decision at all. It also ends up being the right

1:34:45 Strategic decision. Because of what you mentioned a minute ago of the powered by Google logo at the bottom. Sure, you shut off Google.com for a day and Your own Google users, of course, don't like that. But you're training millions of new Google users who are gonna see powered by Google at the bottom. And they got trained. I mean, so the Netscape deal brought in three million total searchers per day.

1:35:07 And at first Google sitting there begging these early portals, hey, please put powered by Google on and really trying to get that inserted in the deal. Later on, Google got so well known that for having quality fast search results on a big index. That It was a value proposition to show your users, oh, our search is powered by Google.

1:35:25 It becomes the Intel inside of search. Yes. It's the ingredient brand. That's exactly right. So now they've got some distribution, millions of users, but still very little revenue in June two thousand and nine. Yeah. So over the next year or so Obviously they're working on the other business models too, but

1:35:42 Omid keeps signing up, you know, some smaller portals, some international portals on the success of the Netscape deal. getting more of these OEM portal deals. For Google. And then They start working on the big kahuna.

1:35:57 Yahoo. Yes. All right listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is uh no longer the hard part.

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1:37:52 In June of two thousand. They sign a deal with Yahoo. right as the whole world is falling apart, the dot com bubble is bursting. The peak of the Nasdaq was March two thousand. In June of two thousand Google signs the deal with Yahoo.

1:38:08 That they are gonna take over All organic search result backfills on yahoo.com. With The powered by Google branding. And

1:38:18 Yahoo is going to invest ten million dollars in Google as part of this deal. Phew. What a deal. This totally saves Google. Between the revenue

1:38:28 That they got. From Yahoo for this. And the ten million dollar investment. It keeps the company going through the next couple of years of the dot com winter until they figure out the AdWords business model.

1:38:40 Yep. So traffic doubled to fourteen million searchers per day on day one of this deal. June of two thousand, we're now a year later than the Netscape deal. So Started to get a material

1:38:53 portion of web traffic here with 14 million searchers per day. Yeah. And the next year in two thousand one, the first full year of this Yahoo Portal search deal. Yahoo pays

1:39:05 Google seven point two million dollars. For organic search results. So it's material. And again to underscore. between the ten million dollar investment, this revenue

1:39:16 The other portal deals, Netscape, others, and then others that they're able to get on the back of Yahoo. This revenue really bridges the company through the dot com winter. That's such a good point and something that's often pretty overlooked that there was no potential for Google to raise more money here.

1:39:33 The venture capital gravy train was over. And so We're sitting here saying, Oh, they really need to make money and when are they gonna turn the revenue switch on and we're sort of like hand ringing over here. We're only two years into the company's life.

1:39:47 Think about startups today. You don't have expectations of profitability. Yeah. Exactly, within a couple of years of founding. But Google's got a very expensive business to run between the people and the infrastructure.

1:40:00 And there's no more ability to finance it. So revenue really was the only option. So in the midst of All of this as Yahoo's coming online.

1:40:12 The board is also pushing Larry and Sergey. To hire a CEO. Yes. So as part of the series A process. John Door had very begrudgingly extracted.

1:40:24 A promise from Larry and Sergey. to hire a quote unquote professional CEO. Larry was CEO For The series A and and CEO for the next couple of years after the series. I

1:40:37 They really didn't want to do it. They were dragging their feet. It took sixteen months to find a CEO. I don't think that was Entirely because It was hard to find someone.

1:40:49 Uh, let's see how long we can get away without one. Yes. My Favorite story from the whole. Google CEO hiring

1:40:57 process was Sort of the standard playbook here that John and Mike and Sequoia and Kleiner would run with founders when Convincing them to hire a CO is Take them around the valley, take them on the tour, have them meet

1:41:10 The CEOs of the great Companies in the valley at the public companies that say, look, see what a great CEO can do for your business. So they do this with Larry and Sergey. Go around, they meet everybody in the valley, they're unimpressed. They don't like any of'em. And finally after months of this, they come back And they tell you.

1:41:29 Clear in Sequoia. All right. There's one person that we met in this whole process. Who We think meets our bar who we would be willing

1:41:39 As our CEO here at Google. Oh God, who is it? Steve Jobs. Really? Yes, yes, yes. Cause wasn't he like an idol of theirs? Yeah, well and he had just come back to Apple from next.

1:41:54 Whether they really meant it or not, I'm sure if Steve had been willing to come be CEO, they probably would have said yes. Of course. But I think it was more like a Hey, a little thumbing their nose at the VCs are like we're keeping our buyer high. It's Steve Jobs or nothing. Wow. So great. Also deeply ironic given

1:42:14 What was to come. Between. Apple and Google. Ten years later. Yeah. But that is for the next episode, so

1:42:21 Anyway, it was a pretty contentious process. Through all of it, you know, sixteen, seventeen, eighteen months in. Finally Eric Schmidt emerges as probably the only viable candidate out there. And I think Eric was Acceptable to both sides, both because he was an actual engineer

1:42:38 And had been at Sun, he was CEO of Novelle. He was a business person too. He'd been a CEO, been a CEO of public company. And you know, famously. He hit the Venn diagram of everything. He also went to Burning Man, as did Larry and Sergey.

1:42:52 Right. And so Eric joins in March of two thousand one. And Again, I think Larry and Sergey were still kind of resentful of the process. I think it did.

1:43:02 come to work pretty well and They and Larry especially realized hey, there's parts of being a CEO, especially as we're getting bigger, that like I don't really like. And Eric can do those things.

1:43:16 I don't really want to run a finance org. I can have Eric do those things and It ended up working. really well at a critical moment for the company where they needed revenue, they needed to build a business, and they needed to scale. Yeah, and the three of them kinda ran the company together. I think they had a daily standing meeting. So it wasn't like

1:43:34 There was a CEO that took over and put the founders out to pasture. It was CEO and then Larry was president of products and Sergey was president of technology, but really it was like There are three people running this company together. Yeah.

1:43:49 And a trusted relationship between three people It's just more manpower than Two people. Yeah. And the organization at this point was so we haven't talked about Googliness yet. Yes. Let's talk about Googlyness. Uniquely Googly.

1:44:04 that there would have been organ rejection if Eric tried to take a heavier hand. I mean, he really Kinda came in. with a lens toward learning and understanding. There was somebody who decided

1:44:17 very early in his tenure, maybe even on his first day. To move into his office with him because there wasn't enough space anywhere else. And so he was like camped out like an engineer at Google. Had an office mate for many months with an engineer. And you know, it's sort of this googliness. It was a little bit of like a an acid test for him. Yeah, right. But this giant worldview. Let's solve big problems together. Can we think bigger?

1:44:42 Uh, no matter how crazy the solution, if it sounds like a good idea, it's worth running down. Googleness is Kind of utopian. In a way that makes all other companies look almost like an an evil empire.

1:44:55 It feels like a university in a lot of ways. Yeah. That was the culture there. And they wanted the mentality of a campus too, where they want inexperienced people who don't know what they don't know. So they try novel approaches to problems. They collaborate more than they otherwise would have. Yep. But who are really high horsepower. Everyone there was ludicrously high IQ from the very beginning.

1:45:16 But I think that sort of collaborative utopian thing went along with the IQ. The phrase that I heard a lot in the research from talking to folks who are early Google was a healthy disregard for the impossible. Was like the modus operandi there.

1:45:31 And it's this culture that comes up with a mission statement. to organize the world's information and make it universally accessible and useful. I mean, this was In nineteen ninety nine, in their very first press release after the financing, that has been the mission statement. It's also amazing. How much that mission statement scaled. Yes, I was gonna save this for way later in an analysis.

1:45:54 But Organize the world's information. Not too broad. Not too narrow. in many ways altruistic.

1:46:02 to attract the right type of talent that you want. But Also one that lends itself to tremendous monetization. If you're going to organize the world's information and you have a bunch of smart people, you are going to be able to create a money printing machine based on organizing the world's information. They actually have a great quote in their IPO perspectus.

1:46:20 We believe that the most effective and ultimately the most profitable way to accomplish our mission is is to put the needs of our users first. So there's this almost like Trifecta. Of

1:46:32 wonderfully altruistic sounding mission, A, that B lends itself to this incredible monetization model. C as long as we're putting the needs of our users first. Yeah. And I think Eric really

1:46:45 It was a risk. Even though he joined Google in Two thousand one and a lot of these portal deals were already underway, the Yahoo portal Deal had already happened. It wasn't

1:46:57 Clear that Google was gonna be like a smash hit home run. I think it was clear that it was gonna survive. And they had enough revenue and they could be profitable. But we're talking about Somebody who's the CEO of a public company.

1:47:10 Novelle. And Taking a risk to come back to a private company. That yes had a lot of usage. But hey, startups are out of favor now.

1:47:19 And I think it was really Him making a bet too of like, No, this is what I want, now I'm gonna buy into this. Yep, totally agree. Alright, so what was Eric? Walking into here with Google and call it Spring.

1:47:32 Two thousand one. We're now through getting the Yahoo portal deal done. Basically stabilized the ship. Save the company. Google's gonna survive the dot com crash between the ten million dollar investment from Yahoo. Plus the revenue from that portal deal.

1:47:48 Eric hasn't started yet. But Larry and Sergey Now turn their attention back. Yeah. And they're really not happy. Like the current state of play with ads, even though it's

1:47:59 Working to a certain extent and advertisers are happy. There are a bunch of problems with it. One It's all still hand sold on Madison Avenue, so like the market of the pool of potential advertisers

1:48:12 is nowhere near as big as the pool of potential searchers and intent that's happening on Google. Right. They can't really scale this business. And so it would require getting an enormous amount of spend from each of the small number of customers they already have. Yep. And then scale to another reason it's not gonna scale well. Is that it's all sold by hand. So as you scale the business and you scale the number of advertisers, you're gonna need to scale the number of people you need to sell by hand. Like That sucks. Then you end up looking just like Yahoo.

1:48:39 Yeah. So that's on the scaling side. Then On the experience side, the user experience side. There's no notion of add quality here.

1:48:51 Google as a value proposition to its users is We give you the highest quality, most efficient. Best search results possible. We help your needs the best.

1:49:03 And the ads aren't really lining up with that. There's no way to ensure that they're good. Yes. Exactly. So that's a problem. And then four. Google's just flat out leaving money on the table. They're giving advertisers this

1:49:17 Great. product of hey, we have intent of people searching for these keywords. But Google's just getting paid on a straight CPM basis for what they're selling. They're not participating in the economic value. And they're pricing a little bit kind of finger in the air on what the price at any given keyword should be.

1:49:34 Exactly. So now fall of two thousand. Like okay. Let's address this. Yes.

1:49:41 So all four of those issues are things that Google's gonna address in this next evolution of AdWords. But there's a whole part of the world That Heavily inspired. Mm-hmm. Adverts V two.

1:49:54 Yeah, AdWords V to uh you might say is Google's Instagram stories moment. Yes. There was an innovator in the space called Overture. or its original name, go to dot com. We should tell you that story now.

1:50:08 So Go to. Bill Gross started the company out of his startup incubator, Idea Lab, and he did it with quite a bit of flair. coming to the world from the TED Conference in February of nineteen ninety eight. So same time as Google's about to launch. Right.

1:50:24 And at the time, existing search engines, as you'll remember, had a problem. This is the same exact problem that Larry and Sergey recognized. Quality was going down. In the old world keyword matching algorithms We're fine. There was no one gaming.

1:50:38 There wasn't a lot of real commercial activity yet. And search engines weren't well understood yet, and so the old, hey, go search for dogs and the Most relevant website is probably the one that says dogs the most.

1:50:52 That still kinda worked. Yeah. So now you're starting to get in nineteen ninety-eight all this stuff like keyword stuffing, white text on a white background. People getting porn sites to appear in search results no matter what you're searching for. Hijacking traffic, all that sort of stuff.

1:51:07 So Bill had this very radical idea. The best search results should be determined by the free market. With dollars. Whoever is willing to pay the most is probably the very best search result for your given query. And spammers who aren't relevant to your search can't afford to pay because there's not gonna be super high conversion, but super legitimate businesses that would actually solve the pain point that you're searching for could, just like how yellow pages in the phone book had paid inclusion as a philosophy.

1:51:35 that would lead to only the most relevant listings for any given category. Right. And at the time this was like A completely crazy idea. But when you think about it, it actually does make sense. If I have a product or service.

1:51:49 that can solve the need you're expressing for through your your intent in the search, I should be willing to pay more than anybody else to Meet your needs. Absolutely. It's just a different way of solving ranking and relevance than Larry did. Larry and Sergey sort of figured it out on the er organic side and Bill sort of figured it out on the paid side. So Bill went so far as to uh

1:52:11 Go to didn't actually develop any organic search technology on their own. They relied It was all paid. Yes. Only on paid listings. And if you kept scrolling, they actually did show organic results, but they would license them from Inc2B and others, David, like you were saying, as a backfill. Alright, so the net of all this on the Ted stage.

1:52:28 Bill gets wildly criticized for this. Some people even booed the idea when he was on stage at Ted. But crazily, Bill's idea was Basically right. And it had a ton of ideas that would become a part of Google that we'll talk about here in a minute. So here's how it worked. When you searched, go to would show you a list of the paid results exactly in order of who paid the most.

1:52:49 With no fanciness at all beyond that. And they would show you the price. that someone was willing to pay for your click. So Right there on the page you could see twenty one cents, twenty three cents, twenty four cents.

1:53:02 Yeah. It was fully. Yes. So insight number one, paid ads on keywords, auctioned off to the highest bidder, showing up first. Insight number two, and again, this is way back in ninety eight. was that this whole cost per thousand impressions thing

1:53:17 Was wrong. And that eventually he thought the whole world was gonna move. beyond this to a cost per click or pay per click pricing. And so he thought, why not just do it today? And so go to advertisers only had to pay when a user actually clicked. And the origin of this is since Bill had a bunch of companies at Idea Lab, he could uniquely feel this pain point. He sort of hated the fact that he was getting billed for all these impressions at his companies when he just wanted to pay for the actual clicks.

1:53:43 I mean this is How advertising works. throughout all of human history to this point. There's that famous John wanna make a quote of half the money I spend on advertising is w wasted. I the problem is I just don't know which half.

1:53:55 This new model of performance based advertising wasn't Possible until the Internet when you could Track. clicks and conversions. But now all of a sudden As an advertiser.

1:54:05 You don't have to worry anymore about what's wasted. Right. You know it's all Performing. And the nuance is CPM actually works fine in brand building situations, but on conversion, you actually care about the click. So basically with cost per click, you're getting free exposure. every time your ad shows up, but nobody clicks on it. But in a high intent environment, you're not trying to get exposure. You're trying to actually capture the click. So it's kind of reasonable the way that it shook out that a lot of brand based advertising is still CPM based

1:54:36 But On search engines, it totally should be. C P C. So how did it go? Well, it worked insanely well out of the gate.

1:54:44 Go to did a hundred million in revenue in one year. Way more than Google. Yes. This is a good business model they have found.

1:54:55 By the way This is also self serve. There is a website where you as an advertiser can log in and place a bid. There is an auction. That happens.

1:55:07 You know, it a real time auction where the person with the highest bid again plays through the website. is on the very top. Does this sound familiar to anyone who's used Google's advertising tools? So the hundred million happened in year one. By mid nineteen ninety nine, they had eight thousand advertisers. Compare that against what AdWords had when they launched in October of 2000, which was three hundred and fifty advertisers in the beta program, to your comment about scale, David, this can just scale to so many more advertisers. Go to goes public within a year.

1:55:38 Yeah. this crazy. Uh you're probably sitting there thinking, like, how are they not the dominant player? So one thing that did not happen was patents. They did not patent the idea of the auction or of pay per click.

1:55:52 And I got the chance to talk to Bill when we were prepping for this episode. He's very direct about all this, very reflective, also a brilliant guy. He just thought they were obvious. He just thought this is the way it should be done. Of course it should be build per click. Of course there should be an auction and the highest bidder uh is the one that that wins. So

1:56:11 The nuts and the bolts of it are that Right before going public, the lawyers flagged, hey, you really should patent some of this. But they were just outside the window. Of what was patentable because he shared them more than a year ago. On stage at TED. So the ideas were no longer eligible. The TED conference.

1:56:29 That's amazing. There's some really interesting background to all this too. You would think Of course Bill was right. This stuff is obvious. Why had Nobody tried this until nineteen ninety eight.

1:56:41 Somebody actually had tried this earlier. There was a search engine called OpenText. That did try. Paid search results. In nineteen ninety six.

1:56:52 But the internet was still enough of sort of a utopian uh community, like small enough and sort of an outgrowth of academia that I mean people booed Bill Gross and go to on stage at Ted in nineteen ninety eight. In nineteen ninety six When OpenText tried to do this.

1:57:08 It was like They got kneecapped right away. Heresy, yeah. Yeah, it was heresy. And Because that happened, everybody else had a hangover from it of like, oh, that's like a third rail. You can't touch that. Internet users will never tolerate. Paid search.

1:57:23 Right. So it's funny, maybe they wouldn't have gotten the patents anyway, since Open Text was doing it before, but that was the ethos of that early web is how dare you litter our organic results. with your paid inclusion. putting these ads front and center. Look, originally Larry and Sergei were thinking this too, right? Yeah. The great irony is all this criticism, we're gonna flash forward for a second. When Google does launch AdWords v2.

1:57:47 There's a sidebar with a separate color. It looks super different. The word sponsored is. Very clear. you are very aware that you're looking at like a whole separate pane over there. That's the paid icky world. relative to my beautiful clean Google search organic results. Anyone who's used Google in the last few years knows.

1:58:08 The world basically ended up exactly the way Bill Gross envisioned. It's one column of results, the first few are sponsored. In Google's case they label them even less than Bill was labeling them at go to, and then it's followed by the organic results after that. So what was once criticized as absolutely heretical has come to become basically the dominant model of search and search monetization today. Yeah.

1:58:31 But the interesting thing is the timing was not right in the mid nineties for this. Yes. By the time the bubble was sort of fulflated. The Internet had become commercial enough. That Hey, it was okay for Bill to try this.

1:58:46 And then He and go to an overture. set the example of like oh oh this is how you're gonna monetize Search. This is really how you're gonna monetize the internet. And then Google can look and see.

1:58:58 Oh. Maybe we should do that too. Yes. So a couple of quick things. Overture did file some smaller patents on the self serve tools. Google did eventually end up owing them three hundred and sixty million dollars for infringing, but these big ideas, CPC, auction, those are now out there given to the world for free. So within the next two years, they realize that they can take this paid search model they have and bring it to portals too. So just like Google started doing organic portal deals.

1:59:27 Go to starts doing paid portal deals. This goes so well, they become a B2B company. They rebrand. This is when they switch from go to to overture. They start powering the ads for dogpile, Meta search. Then they get to the big boys with AOL and MSN, and eventually they get Yahoo. Yahoo alone was a hundred million dollar deal. You know, Google's playing over here in like fun pennies on the ground land where they're Please, sir, give me some money for the organic results. And meanwhile.

1:59:55 Overture has it figured out. These paid results, we are doing massive, massive white label of share deals. Once they get to Yahoo. Some huge percentage of Yahoo's overall company revenue. Becomes. Paid search ads powered by overture, right?

2:00:11 Yes, I think it's like seventy five percent. So Let's just flash all the way forward to this. Yahoo ends up buying Overture for 1.6 billion. There's a little bit of a bidding war back and forth with Microsoft, but that's the final price. Yahoo basically says we have to own this thing. I mean, it is our revenue. And Yahoo market cap had gotten decimated when the bubble popped. So this was a large portion of Yahoo's market cap that they spent for overture. Yep. But what choice did they have? They were over a barrel. It was the majority of their revenue was coming from this vendor who was Rev sharing with them.

2:00:43 Yep. Okay. So David to end the overture story before we go over to what did Google learn from all this and start implementing? Some fun trivia. Did you know that Go To tried to acquire Google?

2:00:56 Mm I did not know that. So here's how it went down. I asked Bill about this. Bill thought it was a match made in heaven. So Google's got the best way to bring relevant organic search.

2:01:07 with page rank. really amazing for informational non-commercial searches. And GoTo has this amazing paid system for the commercial searches. You should totally have one system that marries informational queries and commercial queries together. It's got the two best ways to surface

2:01:24 relevant things to you, one paid, one organic. And Larry and Sergey Before they raised the Sequoia and Kleiner round. came to Bill and said, what about two hundred million? Wow.

2:01:37 Bill thinks. Actually seems fine. This seems fair, you guys are really on to something. They were had a chance of getting acquired for two X the valuation of that Extreme fundraise, right? Wow.

2:01:50 Was overture already public at this point? Yes. So then Bill goes to the rest of the overture board. And Overture at the time is worth two billion dollars. And the board their conclusion is basically How could we give up 10%?

2:02:05 Of our very important valuable revenue generating company to this little company with zero revenue. It'd be a delutive transaction. And so no deal. Well, There's almost zero chance that

2:02:20 Google becomes Google if that deal had happened. So yeah. Exactly. That's the thing with these, like what would have happened otherwise acquisitions. Yeah. That's amazing. Well, okay so back to fall of two thousand when Larry and Sergey and Google can now finally

2:02:35 Focus on improving their ads product. Yeah, I think we heard this from folks in the research. Once they saw How well the go to and overture model was working.

2:02:46 I think Larry and Sergey were kicking themselves of like Wow, we should have just done this. From the beginning. Like why did we waste time? doing this the other way. And like, yeah, it's gonna take a lot of technology to build this out. And like, yeah, we're gonna have to focus on it, but

2:03:00 It's obviously the better business. Obviously Larry and Sergey. geniuses from their childhood through their under grad research projects. the way that they conceptualize the original page rank algorithm, everything Truly geniuses.

2:03:15 But the second superpower on top of that is it doesn't always need to be their idea. They're very good at Hearing the best idea. whether it's from outside of Google or someone else inside Google and adopt that and making that

2:03:29 the thing that they run with. So October two thousand They put Seller on The project to improve AdWords. The first obvious thing that they need to do is they need to build a self-serve system. As long as Google's still taking manual orders for ads.

2:03:46 They're not gonna be able to implement any of the technology to build people per click or anything like that. Or let in smaller advertisers and expand the pool. Exactly. Which clearly overture had shown there was a market for this if they had eight thousand advertisers against Google's, you know, couple hundred that they were selling by hand. Famously, by the way, Tim Draper. was looking to invest in overture and eventually did lead their round.

2:04:10 And to test it out, he actually opened up his computer and he bid on the keyword VC when they were pitching him. That's amazing. That's the like historical proof that I have that Overture had self-serve. And then he got outbid. It was like one penny, two penny, and then he he started a bidding war over the term V C Oh that's such a great story. I love it. Okay. So obviously they need self serve. That's the first thing to work on. But

2:04:37 Salar and Larry behind the scenes too are clearly thinking like, okay, how do we do this? In a Googly way. Yes, we're gonna borrow a lot from Overture, but I think they had a

2:04:49 Spidey sense already. Google E to or so pure over here. Wasn't quite right. That Overture had gotten like Three quarters of the way there on cracking the business model. Yeah.

2:05:02 And so the thing that Salar And the team Really start. Noodling on is We've got this beautiful algorithm in PageRank.

2:05:12 That Can deliver highly relevant organic results. Is there a way that we could Incorporate something like that into our ad system as well.

2:05:23 And insure Add quality. Like yes, the Paid. system in it in and of itself. goes a long way towards ensuring ad quality, Ben, as you were talking about earlier, but there's

2:05:34 There's still potential for abuse here. Yep. What can we do to really make sure that these things are good? Well Okay, if we're an online self serve system, we're measuring Clicks.

2:05:47 We're gonna ultimately switch to pay per click. We could track those click through rates. And what if we made that A signal to the ranking of how we show

2:05:58 The ads. I mean it's not just like fully where if you pay the most, you get placed at the top. But actually we incorporate as part of our ad ranking. System. How effective your ads are at click the rate. That might solve the problem.

2:06:13 Such is the birth of ad rank. You've got page rank that uses all the clever things we talked about earlier with number of people linking to you and how authoritative those sources are for the organic results to make sure that the most relevant results are being surfaced to you. Now we have a way over in the paid side of the house with Ad Rank. To take all the great stuff that we just talked about with Overture, the self-serve model, the auction. The cost per click based

2:06:39 System. And we add in click through rate and we feed it back into the algorithm, creating add rank, which is really the main two things going into where is your ad gonna be positioned. in the ranking.

2:06:54 It's both how much you're willing to bid. And it's how often are users actually clicking through so they know that it's The right add to be showing at that right moment. Click through rates are a proxy relevance.

2:07:08 Yes. And By the way. As a really Nice.

2:07:14 Side benefit. Of that. If your formula For placing ads. Is a combination

2:07:21 Of the price that an advertiser is willing to pay per click. And The click through rate. Of the ad. Well, that's actually the mathematically optimal formula for

2:07:34 Maximizing your own revenue as Google. Oh, that's interesting. Highest price. Paying per click and then the Highest

2:07:45 Likelihood to click. That is the ad that you should show to maximize your own revenue. Oh, it's basically an expected value calculation. Exactly. Oh, that's funny. But it's also perfect for advertisers, because it means that if you're a better advertiser for that keyword, then you actually get to pay a lower price.

2:08:03 If people are more natural to click through to your service and transact on your product you get the privilege of bidding lower prices and still winning the auction. Uh Incentives are a line.

2:08:15 For the user. Oh, and for the user, because then it means that the user Is Only ever seeing Products that are the most relevant.

2:08:24 Yep. So it's funny how all of this gets rolled out. It's fall of two thousand and they start working on this. The first version they launched. Includes

2:08:33 Self serve? And includes Add quality. But it doesn't yet include C P C

2:08:42 Or the auction. Which is funny. It's sort of like they did the hardest technical stuff. First. First Rev in the fall of two thousand attracts a ton of advertisers. You've now opened the floodgates to the long tail of advertisers. And you've introduced this

2:08:59 click through rate element, this add quality element, you know Add rank. to how ads are gonna get served. Advertisers pretty quickly out. They're still paying on a CPM.

2:09:11 basis, not on a per click basis. They figure out that they can game the system by clicking on their own ads. So because that'll boost the click through rate and then their ads will get shown. That's so funny. And they're not paying per click. So they're not costing themselves money when they're clicking on the ads. It's actually an efficient use of impressions. to use them internally to boost click through rate. Exactly. So it becomes like Fruit. A set of months, the greatest arbitrage in the history of the internet was to click on your own ads. That's so funny. On Google. But it proves that like

2:09:44 Okay, this is gonna work. So then they fully borrow after that. We're now into two thousand one. They borrow the rest of the model. From overture with the cost per click.

2:09:53 Payment basis. And the auction model. Now. Interestingly, they do one up overture on The auction model.

2:10:02 They go to the second price. Auction. This is such a genius mechanic. There's like eight genius mechanics we've talked about so far in the episode, but this one really sings. If you're the winner of an auction. They make it so you never have to pay anything more than one penny.

2:10:19 above second place. So let's say I bid twenty cents, you bid thirty cents. And then some other guy bids fifty cents. Well that other guy is gonna win, but he's only gonna have to pay thirty one cents.

2:10:33 And you might say. Well that's silly for Google. Like they're leaving money on the table. But what Google is thinking is with a much longer lens And say well we'd rather have our advertisers A trust us and feel like we're not gouging.

2:10:45 And B. not feel like they have to constantly like check and fiddle and look to see who the other bidders are and if they want to adjust their price. It's actually a long term value maximizing thing to do, even though in the short run, of course you're leaving pennies on the table each click. It's a version of um Uh Ben, you have this theory that you and I have been talking about that every Greek company

2:11:09 has like a stored potential energy of value maximization that it doesn't fulmize. Like Costco is the the the the extreme example of this. But Google has this too. That's a great point. Yeah, the second price auction is storing potential energy in a way. So there's a fun story around this.

2:11:27 As you Can imagine. This is a little hard to explain to advertisers when they roll it out, like how this works. Why it's gonna be good for them, et cetera. They used to just write One check. And send a fax. And that check bought them a big batch of impressions. And now you have this confusing morass.

2:11:45 Right. So there's a fun little story about How to educate advertisers around how this model works. all of this, the sort of full version of AdWords that we know today had launched at the very beginning of two thousand two. And Cheryl Sandberg had joined the company right around that same time too and she was working on ads. Part of her job is to sort of

2:12:04 pitch to advertisers what this new model is and explain it to them. She's banging her head against the wall. It's so hard to do it. So she calls up her mentor. Larry Summers, who had previously been the US Treasury Secretary and Cheryl had been his chief of staff there. She's like, Larry I'm Having a hard time.

2:12:19 Explaining this to advertisers, you know, how this model works, the second price auction. It's weird and Larry's like oh This is what's called a vicory second bid auction. There's a lot of economic literature about this. This is the optimal way to do auctions. And this is actually how the Federal Reserve sells its treasury bonds. You should just tell advertisers that. So she does it, you know. I I don't think it sings in right away, but eventually.

2:12:43 Advertisers get the message. Mm. Funny. I do know. This was very painful for Google to do to transition all their advertisers over to this new model. They actually called it Project Sunset.

2:12:56 Where they had to sunset them off the old model. bring them on to the new pricing, even though it's better for everyone, is miserable along the way. I have a funny coda for you. to the whole overture thing. Great, go for it.

2:13:08 So I think it is correct that Google and particularly Salar led the charge on the insight that click through rate is really important and factoring it back in. is relevant. Ovature did also figure it out. earlier.

2:13:24 The problem was That after the team implemented it. Advertisers, as you would imagine, no longer knew how much to bid. And Overture's whole thing was we have this transparent

2:13:37 thing on the page where we show the prices. And whenever you load up a page, now the prices were out of order. And you're like, Well, what am I supposed to get? To bid to get the top spot. And also like

2:13:48 It makes it plain and clear. You guys were supposed to be transparent. Now you're this like confusing black box. Overture did not Take the pain. Of transitioning. over to this new model and they just abandoned it and said, uh, we're not gonna mess with this click through rate thing, which ended up being crucially important to the model.

2:14:05 This also highlights something that we would be remiss not to say as well. The technical infrastructure Two Dynamically execute. Second bid auctions.

2:14:16 Every single time a user is making a search query. Was Incredible, especially at Google scale. In two thousand and one with the technology available then, yes. Yeah. I totally believe that

2:14:29 Overture. Did try to implement it, had the same idea. And also that Overture had really good technology too. Like I I think that is true. But again, back to Google's infrastructure and the commodity hardware and the scaling out data centers and the distributed file system and distributed computing. To really scale this. You needed special infrastructure that only they had.

2:14:48 So okay, we're talking about the pain of transitioning. The Google ad model and ultimately the whole business. Yeah, over to this new beautiful AdWords model and and how hard that was to put some numbers on it. So in two thousand one, the year that

2:15:02 The Yahoo deal. Save the company. Google for the year ultimately did eighty six million dollars in revenue that year and ten million dollars in profit. So Turned profitable in two thousand one. Like

2:15:14 Great numbers by Any metric for a startup and especially in the middle of The dot com winter. But Almost all of that revenue was the combination of these portal deals.

2:15:26 And The old ad system. That was in place. So Project Sunset and transitioning over to the new ad system.

2:15:34 Put a large portion of that revenue. At risk. Oh yeah. It was not necessarily An easy decision. I mean, it was an easy decision because like the performance was so clearly better. Right. And like

2:15:46 Eventually economic incentives would kick in. But It was still a little Tenuous there in Google Land for a while. The other thing that's happening at this exact same time is Eric Schmidt arrives and discovers that fifty percent of Google's searches are outside the US. But they have no international ad sales.

2:16:05 There's no international business. So he almost jokingly tells Omeed. Just go get on a plane. go to the airport Monday morning and I'll call you and tell you what market to where to buy a ticket to and we'll just kinda go from there.

2:16:18 Or just pick a country and we'll, you know, figure it out. They kind of build basically these little startup teams in a bunch of different geographies that kinda act as their own company selling Google ads on the new system, but it basically works. Year one, because Omid spent the whole year on the plane, 18% of revenue is now international. 2002, it grew to 22%. 2003, it grew to 29%. Today it's half of Google's business. And they even had a business in China for a long time until famously they got into a fight with China that started in When was that? Two thousand and two and three, oh four, something like that? Yeah, eventually Google finally just withdrew and rather than censoring results.

2:16:56 in twenty ten. But Basically everywhere that is not China, starting in two thousand and one, with Schmidt being like, We need an international business, they grew themselves a just fine international business. Yep. Yep. Yep.

2:17:09 So two thousand two is this. year of transition to AdWords for the company. So Spoiler alert. It worked. In two thousand two.

2:17:19 The company did four hundred and forty million dollars. of revenue. So up like you know, whatever that is Five, six X from the eighty six they did the year before. While transitioning. All of that revenue to the new model.

2:17:33 And when I say all of that revenue, I really do mean all of it because A lot of that eighty six million, remember, was the the the portal partnership deals. By midway through two thousand two Google's realizing that Paid search and AdWords is working so well.

2:17:48 We should stop having Portals pay us. For organic search. We should start paying them to do paid search. On

2:17:58 There. Sites and share. Yeah revenue. And that leads to The landmark.

2:18:04 Summer two thousand two. Deal. With AOL. Oh yes. All right listeners.

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2:19:14 And one context setting thing just to see how fast Google's world changed in two thousand and two. With The new AdWord system, it going phenomenally well.

2:19:25 As recently as late two thousand and one Just months before. There's a dinner with Terry Semmel. Who's the CEO of of Yahoo. big media executive guy comes in, takes over is the

2:19:39 Big media CEO. And he sits down with the founders and he says So guys I think we're your biggest customer. Right.

2:19:47 Us paying you for those organic results in the portal deal. And they say, Yep. And he says, That's like less than ten million dollars that we're paying you. So you don't have a business, do you?

2:19:59 the business can't be that big if we're your biggest customer at less than ten million dollars. And everyone's all excited about you. And they're like, uh We're excited about some of the things they have in the works and they're clearly Thinking about

2:20:11 this new AdWord system that they're gonna launch. On the spot. He offers to buy Google for a billion. Wow. Even knowing You aren't doing much revenue. And this is at a time Google was so secretive pre-IPO. I mean, no one knew other people in the business. Terry Semble sits down, he didn't have a real sense of their revenue. He just knew that he was the biggest customer.

2:20:32 So I think this kinda illustrates just what a insane twelve months it was to go from being in that position to the numbers that you just shared. On what is it, five X revenue in a year? Yep, they more than five X revenue from two thousand one to two thousand two from the Eighty six million to four hundred and forty million in revenue.

2:20:53 All right. So they're feeling real good about this. And so They decide to go to AOL.

2:21:00 the big source of traffic. I mean AOL has thirty-four million users at this point. It's funny imagining This recently, AOL was still a big and important company, but If they could figure out how to be the search results provider and more importantly, the ad provider for AOL. That is a potentially company making event.

2:21:22 I mean hell. Two thousand two. I was probably just transitioning from using AOL as my way to access the internet as a senior in high school.

2:21:34 I think we had maybe just gotten broadband like that year, maybe the year before. Funny how sometimes things feel like a lifetime ago and sometimes they feel like just yesterday. Right, right. So yeah, okay. Summer two thousand two.

2:21:48 The transition to the new AdWords model is blowing the doors off. Google goes to AOL. Which by the way, Yahoo sees this. And they come back and say, How about three billion? I had heard about that three billion number. Google comes back and says, How about five billion? And of course, no deal gets done, and this would be the last time that they seriously try to acquire the company.

2:22:08 Yeah, but then yeah, who would buy overture? But as I pointed out a minute ago, when Yahoo bought Overture for one point six billion dollars. That was a huge portion of Guy's market cap.

2:22:20 If they had actually done The five billion dollar Price that the Google founders floated at them. It would have been reverse takeover. It would have been Google taking over Yahoo. Oh, that's a good point.

2:22:31 In fact Google. throwing out five million is almost a farce. It's like how about we buy you? It's a counter offer. Yeah, we'll we'll buy you. That's so funny. So this AOL deal. The current state of things is that the thirty four million AOL users, their search experience

2:22:47 is powered by Inktomie. on the organic side since nineteen ninety nine, so the last three years, and overture for the last two years. it's sort of a bake off of do we want those two or do we want just one to take over all of it, since Google seems to have kind of the whole package now. Google wins the deal. Here's the shape of the deal. And then we can kinda talk about the philosophy behind it, but it's worth knowing the bullet points.

2:23:13 Advertisers will all sign up with Google. Mm. Clean. They use Google's UI. So Google can sign'em up. Or AOL can say

2:23:23 Hey advertiser, I know we have a longstanding relationship. You can buy ads on our properties other than search, but for search Here's the URL you go to to place your order with Google. Mm. Okay, go through the rest of the deal points, but this is huge. That is huge.

2:23:40 Google will then share back. eighty five cents on the dollar. To AOL. for all of that revenue. AL wants two things in exchange for turning over their entire business.

2:23:52 in the search advertising world to Google. One is We want warrant coverage. So what they end up getting granted is The option to buy seven point four million shares.

2:24:05 of Google at three dollars per share. So a total of a twenty two million dollar investment. They get that as part of the deal. Two is A one hundred million dollar revenue guarantee.

2:24:19 Yeah. We wanna make sure that Hey, even if this whole thing falls apart, you're gonna pay us at least a hundred million dollars. And hopefully more. If these ads perform well.

2:24:30 And we're getting eighty five percent. So here's the crazy thing. Google doesn't have a hundred million dollars. When they're negotiating this deal In May of two thousand and two. It's like just starting to work.

2:24:42 Yeah. So Sergey Brent has a quote. He says We could have gone bankrupt. This is quite literally Google betting the company. And the way to kind of think about it is financial leverage.

2:24:54 They took on a fixed dollar denominated obligation. with that revenue guaranteed AOL. So if there's upside to Google, it would have been a huge, huge win. But if there's downside in their business of serving Yeah, if they couldn't make it work on AOM. Right. They obviously have very high confidence that it would, but if something happens and they're like, Oh shoot, we actually can't sell these things at the rates that we thought.

2:25:16 It would have gone from like oh shuck's bummer to now that we've signed this deal, we're bankrupt. Yeah, this was a really, really contentious decision. And I think it ultimately came down to Larry and Sergey pushing for this. You are absolutely right. There's a great quote in Ken Aletta's book about this.

2:25:33 Where Omid says, you're betting the company if you do that. And Larry Page responds. We should be able to monetize the pages. If not, we deserve to go out of business.

2:25:46 Well that's great. So yeah, those are the deal terms, but that first one of advertisers are gonna use Google's system. This is why it's worth betting the company. This is when Google discovered What we talked about on our meta episode.

2:25:59 When Boz, Andrew Bosworth, the CTO. had the insight that more ads equals better ads, and then argued to Zach and Cheryl like, don't we need to show more ads and feeds and then they'll get better. The more ad inventory you have in your system.

2:26:14 If you're serving them dynamically based on a ranking and Targeting them. You want to have as much inventory as possible to give you as many candidates To choose the best ad to serve. And so onboarding all of AOL's search ad inventory into Google's system.

2:26:30 was hugely strategically valuable. Yeah, it's a market liquidity thing. Yes, exactly. Basically the more volume you have in your market, the more deeply traded the market, the more likely you are to have an ad that has perfect product market fit with the query. Yes. If you have a

2:26:47 thin pool of advertisers and several folks I talked to at Google made this point to me that If Google had come out of the gates With The AdWords business model In all of its glory that it ultimately became

2:27:02 It would have been very hard. To bootstrap. From a cold start. because you would have had this inventory problem. You wouldn't have been able to deliver the magical high quality

2:27:14 add experience because you would have had a very thin inventory of advertisers. You almost had to bootstrap it up. How they did. And then onboard this other supply into the marketplace to get deep liquidity. It's funny. Yeah. I just want to pause for one second. When you say magical

2:27:29 There's nothing magical about search ads, but I think you're right that they're like the least offensive. They're the most likely to be what I'm looking for without giving me any delight whatsoever. Sorry. I meant magical from an economic stand. Yes. It is the most Magical economic transaction. I think ever known to man. Right.

2:27:49 I mean for an advertiser. you are reaching the exact right person at the exact right time when they have the most intent possible. to find your service. It is actually a pretty magical economic lever. Well,

2:28:01 To your point at the beginning of the episode that Google with this business model. Makes more profits. Ten. Any other company ergo. Tautologically, it's the most magical business model ever discovered.

2:28:14 Right. So the ink to me comment. on this. They commented to the Wall Street Journal on AOL's decision. They'll learn over time that Google takes your users. It doesn't help you build your property.

2:28:28 Which Wasn't wrong. I mean, how many people use any portal today versus how many people use Google directly today? So how did this actually go? They made this huge bet, they put$100 million on the line. You better be really, really sure that you can come through when you're betting your company.

2:28:45 Uh It worked. It worked. AOL made thirty five million dollars in two thousand and two, the first half year of the deal alone, and then in two thousand and three made two hundred million dollars. Wow.

2:28:58 Yeah. Yeah. Blow through the guarantee. Absolutely. This made Google a major player in the paid listings market. almost overnight, and they weren't at all before. Overture dominated this market before. So this is a Absolutely bet the company move that Couldn't have gone better. And they were taking all that inventory effectively from Overture, who was AOL's partner before this. That's exactly right. This is also where Cheryl Sandberg really makes her mark. She joined David, as you mentioned, sometime in the last year, right around when Eric Schmidt joined or right after that.

2:29:28 And she was looking for the right job to do. She's sort of poking around the company. I think she's a business unit manager or something like that, but Google didn't really have business units. And so Omead sits down with her and says You're looking for a big job, right? And she says yes. And he said we have this huge AOL deal that we just signed. We have a ton of new advertisers in a bunch of categories that we have no idea how to service.

2:29:51 We need like an army of people to handle these thousands of new advertisers and they have to be smart and they have to be adaptable because we have no systems built for this yet. And then over time, they're gonna have to figure out how to scale themselves so that we're not constantly hiring more people. They need to feed ideas into our technology organizations to make it so that we get more leverage. off of the people that we hire. And she basically hired all these great people, built out the entire AdWord sales function to service this monster AOL deal.

2:30:20 That was what she did at Google before going and becoming COO of Facebook. Mm-hmm. We'll talk about that on the next Google episode here. Yes. This also I think

2:30:31 As Google's digesting this deal and realizing the huge strategic value of it. This really I think gives them license to then go play offense on traffic acquisition everywhere. Like basically the light bulb now goes off of

2:30:47 If we can have Google search Paid and organic. B part of the user experience.

2:30:56 Anywhere on the internet we should do Everything possible to do that because it will build our liquidity pool and our business and we will just monetize the internet. Oh boy. Will it ever? David, you wanna do distribution? Do you want to go there right now? Oh yeah. Let's go there. I've been chomping at the bit.

2:31:13 So we're gonna talk about all the crazy stuff they did for distribution. But Before that, it's worth a discussion of the business model of search. And we've been talking about it all episode, but there's a very particular unique characteristic. That once you realize it It completely changes

2:31:29 how you should think about distribution. So search is a winner take all market. And not just because It's large and consumer facing and it's horizontal across industries. There's something more to it than that, a second layer. So they've got all the traditional economies of scale that you would expect.

2:31:45 it if you make a thousand of a widget, you get cheaper pricing than if you make ten of that widget. So just like everyone else, they amortize the fixed costs of their infrastructure and their employees. And they have a better infrastructure model as we were talking about earlier, et cetera, et cetera. Exactly. But there's this crazy thing that happens with Google where at scale Not only do their costs decrease On a unit basis.

2:32:06 Their revenue actually increases. Per unit. So here's what I mean by that. When you have more bidders on every keyword. You have better price discovery in that little market.

2:32:18 And the winning bid is a higher price than it would be if they had Less bitters. Ah. This is another reason why you want A deeper market liquidity pool. Yes.

2:32:29 The second thing too is you have bitters on keywords that are less common. So let's say you've just got the hundred biggest advertisers in the world. you only get to monetize some of your searches. But if you've got a big long tail of advertisers or just a lot of advertisers, then you get to advertise more of your searches. So it's more likely that any given search results in

2:32:51 Revenue. So Having marketplace liquidity means you always generate the most revenue per search. versus other smaller search engines. So it's not just that unit costs go down. It's that as they scale their revenue per search actually goes up.

2:33:07 Due to the auction system. Hm, yeah. There's a third statement that you need to add to you. Bases. Insight from the Facebook days of

2:33:17 More ads equals better ads. It's more ads. Equals better ads. Equals Better business.

2:33:25 Absolutely. I mean it is crazy that there's this You make more money per search the bigger you scale. Yeah. in this auction based marketplace system.

2:33:36 It's increasing returns to scale. Exactly. So then keep following the logic tree. So because each search is worth more. Well, each user is worth more over their lifetime. Which means you can Pay more than other search engines can to acquire a new user.

2:33:53 And once you realize this and you get a little bit ahead, which this is where Google is right now in history in that two thousand and two era, a little bit ahead. You can start pressing your advantage. And once you start doing that, it's really hard for anyone to catch up. So the cycle is Get distribution. And we haven't yet talked about how, but somehow. We've talked about it a little bit in the portal deals.

2:34:13 Which drives volume of searches. More searches, drives, keyword bids. Keyword bids drive up price in auctions. The price creates more revenue for Google. More revenue for Google means they can pay more for distribution. The virtuous cycle obviously goes on.

2:34:28 So the obvious lesson. Do not just sit back and let organic growth do its thing. Even though they've got great organic growth and the best brand in the world and here in two thousand one, two thousand two. You want to be aggressive and gobble up this market as fast as you can. Because someone else is gonna have this insight too.

2:34:47 Mm-hmm. So then the tactics, what do you do? One. Pay massive revenue share to your distribution partners. In some cases up to a hundred percent.

2:34:58 of the revenues generated. And we'll talk about who the distribution partners are in a second. But even earlier, we heard with that uh AOL deal, they were willing to give AOL eighty five percent That's a huge Split. Yep. Yes. So with some partners, they were incredibly like we're we're gonna give you all the revenue for a while. Just to get you on. Yes, exactly. If Google monetizes each search the most.

2:35:19 Then their Rev share to distributors. are gonna be better than anyone else. Let's say they give away the same percentage as other people. Oh, we're only giving away 70%. Well, that's more than someone else's seventy percent. So you know, press that advantage, go a hundred percent. I even heard s one example where they gave more than a hundred percent, where they they can realize like The payback on this is just so This property is so valuable they get

2:35:42 This distribution. Yes. Eventually, it just doesn't make economic sense for a competitor to match your pricing. They literally will run out of money to try to spend the way that you can spend. because your monetization per user is so high. So realizing this is kind of a secret weapon. This is also where being private was nice. Some of the other search engines were public by this point.

2:36:03 And so they were reporting very consistent metrics that they wanted to continue reporting. Google could irrationally do things like, eh, we're gonna overpay for distribution in this case. And they could potentially risk having a worse quarter. Ultimately. Google discovered this. property and they had a belief that no one else had, which is search is going to be really, really big.

2:36:25 Not like A billion dollars big or ten billion dollars big Search is currently half a trillion dollar annual revenue market. This is a market worth betting everything on. And they had the stomach to invest very, very, very heavily, where others kinda thought like, Jeez is the final

2:36:42 payoff can actually be worth investing into this market. And Google thought it's literally worth any amount of money that we could invest in this, especially in being first and being biggest. So We've been talking so far.

2:36:55 About distribution deals in terms of these, you know, search deals with portals. Tell us about some of the other Crazy stuff they end up doing. 'Cause once you realize this, the game just becomes Yeah. Users and advertisers.

2:37:09 At all costs. That's exactly right. So Currently people need to know how to type in Google.com. That sucks.

2:37:18 It would be really nice if you could get users Without having to like hear that from a friend and load up a web page to start searching and like hopefully you bookmark it. You don't own a browser. So how do you get a Google search box to actually appear in the browser?

2:37:33 Instead of on Google.com. Which by the way. Microsoft owns the browser right now. And if there's anybody you need to be afraid about figuring out this secret. It's Microsoft. And Microsoft definitely did figure out this secret. And just to be a little more specific on that.

2:37:50 Google was already going and starting to pull away from the rest of the market. So it would have taken Primo. Boatload of money. To try and compete with Google even a year or two into this. Which almost no one except Microsoft has. And then spoiler alert for part two.

2:38:05 Who would a few years later? Try to spend a boatload of money with Google. Microsoft. Yes. Okay, so Microsoft's got Internet Explorer. Google doesn't have a browser? What do you do? It's December of two thousand. We are not talking

2:38:20 Chrome territory here. Google Toolbar, baby! Google Toolbar. Man, when this came up in the research It was like the biggest blast from the past of both.

2:38:32 Man, I love that thing. Man, I had not thought about that in about 15 years and holy crap. Everybody thought this was just this gift that Google the benevolent Google gods bestowed upon the internet ecosystem. No way. It was a hugely strategic Business model. Piece for them. So here's how it worked. They shipped it super early in December of 2000. This is like two and a half years after the company was founded.

2:38:59 Before they've figured out AdWords V2. They had just launched AdWords V one. So it's both the sort of offense we're talking about here of go be aggressive get users, but also defense. Google's paranoid about Microsoft entering and using Internet Explorer as a weapon. If Microsoft owns the browser, they can direct the traffic wherever they want. So once toolbar is installed by a user. And maybe we should for younger people explain what toolbars are. Google toolbar is, yeah, what toolbars are. It was a plugin, the equivalent of a a a browser extension that would basically create a bar.

2:39:33 underneath your bookmarks bar. Or I don't know if bookmarks bars were even a thing yet. Kind of where the booksmark bar is. Yeah, at the top of the window. Yes. And it had a little Google search box in it, among with some other functionality. You could just search right from the toolbar without having to go to the website. Now it's Every modern browser you just

2:39:50 Search. From the bar at the top of the browser. There used to be two different things. There was a URL bar, and first that's all there was, and then eventually they put in a search field inspired by the Google toolbar. So Here's the economics on how it all works.

2:40:05 Once Google Toolbar was installed, a user averaged seven times the number of searches. Obviously. Which makes them seven times more valuable. Which means you could pay a lot of money. to get someone to install it.

2:40:22 Yes. So how did they pay money to get users to install the Google Toolbar? Because they weren't paying users The average annual revenue generated by a Google user was two dollars. But with toolbar It was ten plus dollars. even if you're being conservative. So that difference that somewhere of you know eight bucks a user call it

2:40:42 is your budget to play with. And estimates are that Google ended up spending on average way less than this for a Google toolbar install, but you can understand the amount of lift that they get from a Google toolbar when you understand wow, it's worth eight dollars more per user. in this year. And by the way. Average revenue per user, ARPU, is skyrocketing. It's growing very quickly. So this eight dollars.

2:41:09 Twenty dollars, fifty dollars, a hundred dollars, yeah. So Google just paid everyone that they possibly could. to bundle Google Toolbar with their installer of an application. This includes

2:41:21 Adobe? You downloading an Adobe app? Hey, congratulations, you have Google Toolbar. You don't know it, but Google just paid Adobe a bunch of money. Real networks.

2:41:30 Same thing. Winzip? Same thing. They were hyper aggressive. And just to be really clear about what's happening here. When users are downloading

2:41:40 Programs. what apps used to be called to run on their computers. Google is paying the maker of that program to include a Trojan horse payload of the Google toolbar, which will then become a Trojan horse. That lives

2:41:57 In your Internet browser in Internet Explorer. And Google will make a lot more money from you. So the most horrible way to describe this is that it's adware, it's spyware. It's a Trojan. But users loved it. I love the Google Toolbar. Totally. But the technique itself. Are you gonna get into pop up blocking? No, lay it on me.

2:42:15 Oh, well, so as they were building the toolbar and thinking about like, okay, A users are gonna love this because users love Google and being able to access search or you know that's value prop in and of itself for this thing. But Pop up ads were a problem on the internet at this point in time. And

2:42:33 One of the most popular plugins For web browsers were pop up blockers. And so Google decided well Hell, why don't we make the Google Toolbar? Also a pop up blocker. Just one more incentive to install it and become a sticky Google user. Yes.

2:42:48 Genius. They even did a deal with Dell directly to make sure that when new PCs shipped with Windows, They shipped with Google Toolbar pre-installed on Internet Explorer. Amazing. They famously did a deal to become the default search engine in Firefox, just as it was becoming popular, which served as Mozilla's main revenue source for.

2:43:10 Decades. And this is a great one that'll be real close to home, David. You remember the uh Google Earth acquisition? Oh yes I do. Classic acquired episode.

2:43:20 So Google's an ad based business. They buy Earth. There's conversation in Google. How do we put ads inside Google Earth? Well, Instead of doing that, they realize that Google Earth is going viral. People are downloading this thing like crazy because it's really cool to just play with a globe on the internet. And the original Google Earth was a program that ran on your computer. It wasn't like baked into Google Maps the web app, yep.

2:43:40 And Google Maps was like very lame compared to Google Earth. They did very different functions. Maps was clearly for driving directions. Earth was Oh my God, I can zoom in on my house and I can it's all three D, it's super cool. They just bundled Google Toolbar with the installs of Google Earth, and then it more than paid for itself. We don't need to do ads. Way more than paid for itself. Yeah. It's crazy. No need to put ads in Google Earth. It's so crazy. In the mid two thousands, ARPU would eventually grow ten dollars, twenty dollars, thirty dollars, and always a Google toolbar user was stickier than a non toolbar user. And so they just had more and more and more budget to play with.

2:44:18 in acquiring users. And not to spoil too much, but obviously this still Plays out all the way to the much debated Apple Safari deal today and the tens of billions of dollars that Google still pays to Apple. in traffic acquisition costs. Yeah.

2:44:34 So The takeaway here is Yes, they had the best product. And yes, it was fast. And yes, it was the best technically competent. Yes, they had this amazing culture. But everyone kind of forgets about the fact that they were so aggressive in distribution deals.

2:44:48 They didn't just let people magically find their way to Google. Yeah. And it was all so strategic. As I've been talking to people over the last month About.

2:44:58 making this episode, talking to friends, thinking about how to position it. I've been like This first Google episode feels like When we made the Costco episode. It's the same.

2:45:10 Where every Peace. of the Google business model. works together and reinforces the other pieces and in concert it creates The best business model of all time.

2:45:21 Yep. And it's funny, toolbar happened to be the one that worked. But it wasn't the only thing they tried. They tried so many desktop applications. They even had one called Google Desktop that would search your desktop. And then incorporate those results privately into your web search application. The original Google Enterprise Search application. Yes. Reincarnated as Google Desktop. But that's basically the strategy for all these applications and clients is how do we make you a more sticky Google user.

2:45:48 So do you know the final chapter of this story of in two thousand and four? A new PM. is hired by Google. They come in And they take over This applications

2:46:00 client team that includes Google Toolbar. That PM is Sundar Pachai. Right. And that is all we will talk about for Sundar on this episode, but obviously he will come into play much more in the future. Well it really highlights. How important.

2:46:15 Google Toolbar was secret of the company was about this really being like the strategic clinchpin of what they were doing. Yeah. Or a strategic lynchpin. So there's one more. business building story to tell here before we get to the IPO and the end of this episode. And it's another version of this sort of extension of the Google business model.

2:46:34 And that is Add sense. Which is Google's kind of second big business line after add words on search pages. Yeah.

2:46:43 And it's another. Brilliant insight of how to extend The strategic Google business model. Before Adsense Google was limited to making money.

2:46:55 When a search happened. That was the Atomic unit. of the Google business model was a search query. Which actually doesn't happen that often.

2:47:05 It's a really valuable thing when it happens'cause it's high intent. But most of the time someone loads up a page. It's a website that is not google dot com. Right. You're consuming content on the internet much more often.

2:47:17 Or for a higher share of time. Than you are. running queries and searches. And queries and searches have high intent, so they're really, really valuable. But there's all this other time and content on the internet that that Google

2:47:29 Can't monetize. But Because of everything that they built. For PageRank and Organic Search. And understanding

2:47:38 What's on a page and then serving. the page of search results and then Also for the ad system for Add targeting and add quality and predicting click through, right? They realized that

2:47:49 Well actually we don't really need a query to happen to serve effective Adds against what a user is consuming. What if

2:47:58 We essentially run uh a version of the same algorithms on static pages on publishers. Web pages. And then reverse serve the keywords that we would have served. For a search query. That would have landed on that page. It's absolutely brilliant.

2:48:16 It's a little bit different because they're matching the ads to content instead of to intent. It's sort of trying to fit in with the content around it. But You know, if you're consuming content

2:48:28 You likely have some future intent around that content. Or maybe even loose intent right now. Yep. And we've got this existing pool.

2:48:38 Of advertisers. In our system. And their ads. And their ads in the system. We could literally just run the same ads. We can run the same ads. On web pages. So in February of two thousand three

2:48:52 They have this idea. And Google is still massively inventory constrained for serving ads. There's way more demand from advertisers to be serving their ads against queries than there are Query supply in the system, so to speak. Which is why the auction works. If you had way more searches than everybody would just be bidding, you know, one and two cents on everything all the time and winning. Right, right, right.

2:49:13 You always want to be supply constrained as a business. So Legendary Google Engineer Jeff Dean. Builds AdSense in six weeks.

2:49:24 The whole system. Course he does. The great stories, you know, they launch it first on Google Groups. And then they want to test it on true third party websites to see how this works. And as they're testing it, what they decide to do is, oh, we'll just buy display ad space on these other publishers.

2:49:43 And rather than running display ads. We'll serve it however they need to serve it, but we'll effectively serve a display ad That is just a window into the text ads of AdWords ads that were serving onto that page. I remember seeing these for the longest time when you publisher enabled Google AdSense, you'd get like What looked like search results.

2:50:01 Just like three across in a banner. Exactly. That's what AdSense was in the beginning. And they're Favorite website for testing this was the website howstuffworks.com. Because

2:50:13 All of the Pages on how stuff works, it turned out We're like High intent, highly commercializable AdWords pages for AdWords. Queries. Like if you reverse engineered the add search queries that would have

2:50:27 Run Advoids against them. They were great pages. So Susan Woodski came in as the product manager for this into the process, and it becomes another Big business. For Google. much lower margin than their own first party AdWords business, but adds hundreds of millions of dollars of revenue to Google.

2:50:44 Off the bat. Yeah, I've seen different estimates from different points in time. Sometimes that they share sixty seven percent of revenue. Sometimes that they share eighty percent of revenue, but the right way to think about it is most of the revenue On a click.

2:50:58 in Google Ads sense actually goes to the website publisher and Google takes the smaller part as their spiff. Yes, that's right. Whereas if you actually own the search results page and you are running first party ads. You get a hundred percent. Yeah.

2:51:12 But it's very similar to the portal ad deals that they were doing with AOL and others of sharing revenue with the publisher. It's the same model. Right. Yeah, it's a great point. It's someone else's traffic. The net result of this, by the way, of the AdSense launch, Google has had

2:51:26 Uh Trouble dance. Over the years back and forth with publishers. Are they good for publishers? Are they bad for publishers? What does it mean for the news industry? Blah blah blah. Right in this moment.

2:51:38 When they launch AdSense. Publishers and especially small ones. Love them. I'm making content on the internet and all I have to do is drop in some HTML and Google just starts depositing money in my bank account. This is amazing.

2:51:52 Think about this too. This is the precursor. to the YouTube business model. For creators. Oh wait, you mean I get to just create content? And

2:52:01 Put it on YouTube. And Google deposits money in my account? This is the first version of that. An ad network running on a thing that you make is a beautiful thing for a small business owner. Totally. And with all the liquidity of advertisers of

2:52:14 Google. So they launched this thing, you know, Jeff codes it up at the beginning of two thousand three kinda Calling. End of Q one in two thousand three, they launch AdSense. By the end of the year, so just a few months later.

2:52:25 It's doing over a million dollars a day in revenue. That's Crazy. It's just crazy how fast this grew. And we're zoomed in on AdSense right now, but You know, we're still pre IPO here. The rest of the business

2:52:37 It's still Very much developing. It's worth sort of bouncing around to a few different parts of Google to share some updates that kind of didn't fit. into the story arc along the way. One is

2:52:49 Twenty time. Is happening. People are launching all sorts of fun side projects. And there's Google Labs, which is this really great way that they're starting to surface this stuff to users. Google News comes out of this. It is legitimately someone's actual twenty percent time

2:53:05 their own personal motivations. Actually, particularly after September eleventh, there's this super strong hunger for people to have a a way to get rapidly updating news on a topic. Yes. Yeah, you couldn't get that before. You had to go to CNN.com. Right. So Google News is starting to really get some traction and Speaking of disputes with publishers, that is starting to heat up as well. The second thing is

2:53:28 Their organic search ranking is really developing. What started as just page rank plus then using the anchor text. They're starting to use all sorts of things. later by two thousand seven, they were using two hundred different pieces of information. to determine.

2:53:46 the ranking on a query. And early on I know some of these early signals Included. data that they were actually feeding back from observing traffic.

2:53:56 There's this data network effect that's starting to happen where more people use Google and that makes Google better A on the whole. So they can understand, oh, if someone keeps bouncing off that page every time this query is searched. Then clearly That thing doesn't

2:54:12 We're doing a bad job on this query, yeah. Yeah. Or B. personalization. What can we learn about you? from a whole bunch of things that you've done in the past. Now

2:54:22 without spoiling too much of the future, there's not a strong reason to be logged into Google yet. So personalization only works so well. But once Google accounts become a thing, then that'll really take off. So It's worth knowing. And I really didn't know this.

2:54:36 Page rank really is the thing that got Google going. But That part of the algorithm.

2:54:43 isn't really the thing that's the main differentiable asset today. It was just the start. And I think this is also a major difference in mindset of Larry and Sergey and Google. Versus the other search providers. Everybody else just said, Oh, we've got our insight like okay, great, we're done.

2:54:59 You know. Yes. We solve search. Google has never said we solved search. And they just keep investing and investing and investing. I think A, they believe search is going to be bigger than anyone could have realized, but B they sort of had the insight of the exponential curve of content on the internet is growing faster. than Google will ever be able to sort of index it all or come up with clever strategies to sort it all. And it's so dynamically changing that we'll actually never catch up. And so we need to constantly be investing

2:55:27 to approximate good results because we'll actually never have optimal results. Yep. Surely. And then the third big sort of thing that kept developing is their infrastructure. They put so much over these years into

2:55:40 Building out all the hardware that we were talking about, a ton of software stuff. Yep. And that hardware stuff shifted from Ooh, we're being really uh, you know, entrepreneurial, shall we say, and how we use commodity hardware cheaply to Oh, we're designing our own data centers.

2:55:57 Yeah. Absolutely. And we're designing our own file systems with GFS, or you know, I think we'll talk about a lot of it in the next episode, but Very real system level software.

2:56:09 That is pioneering. Yep, big table, map reduce, et cetera, et cetera. Yep. That's on top of the clever search software that they're writing for things like synonyms. People don't pay that much attention to this, but

2:56:22 Synonym matching is actually a crucial part of getting search right. If you're searching for cat. And there's a whole incredibly relevant page about kittens. And

2:56:32 you don't have a good way to understand synonyms then you're never gonna surface it, even though it might be incredibly relevant. And Google had all these little tricks like Realizing oh wait, when users are searching for cool cat pictures. And then they change cat to kitten. And that happens a lot, we can infer

2:56:51 That That is actually a synonym. And then we can develop our own constantly updating synonym dictionary in real time, which will make our search results better. And they have a thousand of these things. And so they're just pushing and pushing and pushing.

2:57:06 So we're finishing out two thousand and three here. They're effectively never capital constrained from this point on. They can always fund every idea that they have. the business has flipped from one. That

2:57:18 kind of pre June of two thousand two ish. They had to make trade offs. And after call at the end of two thousand and two, there's no more trade offs ever. They always have the cash for every single thing they want to do.

2:57:32 Yes, we talked about two thousand two and the four hundred and forty million of revenue and the hundred and eighty five million of profits. Two thousand three, that explodes to one and a half billion in revenue and almost three hundred and fifty million Yeah. Operating income. What was operating income the year before?

2:57:48 Hundred and eighty five million. Someone from one eighty five to three fifty. In one year. Yeah. In one year.

2:57:55 Wow. So some of you might be listening and be like Well Wait a minute. Sounds like their margins got a lot worse. And yeah, depending on your accounting, it did.

2:58:03 You get to keep all the money from Ad words and you only get to keep twenty percent of the money from AdSense. Yeah. Adsense is the answer there. Adsense added like

2:58:13 half a billion dollars in two thousand three at much lower margin, but was awesome. Yeah. And as best we can understand it, Google AdWords stayed an eighty five percent gross margin business. Yeah. Incredible.

2:58:27 Okay, so that takes us. In two thousand four. Which is the I think today thought of as

2:58:36 Famous. Google IPO. And today thought of as successful. And today thought of as yes, successful IPO. At the time infamous. And horribly. Unsuccessful. Google IPO of two thousand four.

2:58:50 So I don't think other than Microsoft there had ever Been another. Company like this. Where There was no good reason

2:59:02 For Google. To go public. It was wildly profitable. Generating Plenty of cash.

2:59:09 did not need the investment money. I assume they've never spent their IPO proceeds. No, of course not. They've never not been wildly, wildly, wildly profitable. And actually even more so than Microsoft, Google had a really, really good reason not to go public, which was Microsoft. As we alluded to

2:59:27 There was desperate paranoia in the company of We can't let Microsoft They are the actual front door to the internet for All of our users through Internet Explorer.

2:59:41 And they have no idea what a good business this is. Yes, we can't let them know how good this is. Fortunately, I guess for the investing public and unfortunately for Google. been passed yet. And so the

2:59:55 five hundred shareholder rule. We're still In effect. for companies in the US, which was that If you crossed

3:00:03 The threshold of having five hundred distinct Shareholders for your company. You had to report your financials publicly as if you were a public company. You know, David, I read all this too. They had venture capital backers. They had to go public.

3:00:16 Sequoia and Kleiner Perkins are not gonna be just sitting there on their hands like we love being private shareholders for everyone. We like dividends, yeah. No. In two thousand and three, in these funds that just went through the dot com crash, so most of their other companies got wiped out. And it's not like they're the venture capital funds of today that come up with all these clever strategies to look like more permanent vehicles and offer liquidity. These were closed and freaking funds that need to get their money out.

3:00:44 Well, I think the question is did Larry and Sergey care about that? Whether they did or didn't, the five hundred shareholder rule was a forcing function, but obviously the VCs But to your point, I guess the VCs didn't control the board. Larry and Sergey controlled the company. Yeah. Exactly. Just like Bill and Paul and Microsoft. It was extremely rare that because Google never needed to raise V C money after the series A

3:01:07 Larry and Sergei. Together with the employees in the option pool, you control the majority of the votes in the company. Google, Microsoft, there's something correlated between founder control And incredibly good capital efficiency in a business. Yeah.

3:01:24 Regardless, this is all academic because truly the five hundred shareholder rule would have required them to disclose their financials anyway. So like Might as well go public and make the VCs happy, I guess. And employees too. There was clearly pent up employee demand and There wasn't the same kind of liquidity markets that there is today. David.

3:01:42 Put Four underlines under that. This IPO made Half Of the two thousand people who worked at Google.

3:01:50 Millionaires. Yes. Yes. So as we get to end of two thousand three, beginning of two thousand four, they know they're gonna cross

3:02:01 the threshold during two thousand four. They're gonna have to go public. They start interviewing Investment banks. And Larry and Sergey, you know, they really don't want to do this. They don't like anything about the process. Shocking. They don't like the IPO pops. They don't like how much money the banks make, et cetera, et cetera, et cetera. So they're interviewing banks. We should say this IPO pop thing. It sounds good, right? It's like a phrase.

3:02:24 That's the investment banking community invented to make it sound like a good thing. A pop is a bad thing. for existing shareholders. It means that in the IPO you Incorrectly priced it too low.

3:02:36 And then within one day Upside that should have Or really like is yours because it happened. in all the intrinsic value was built all over these years goes to the people who had access to buy your IPO shares, the investment bank's clients.

3:02:51 And then they get this nice little pop on day one. and you were mispriced. That is the problem that a lot of people try to solve for in different ways. Yes. So during the IPO process.

3:03:04 They learn from Bill Hamricht of WR Hamricht, Boutique Investment Bank in San Francisco, who really doesn't have the same incentives that the Big banks in New York have with their clients. That actually there is an alternative way. To price your IPO.

3:03:19 Something called a Dutch auction IPO process, which is this arcane thing that been done before. How do you do good price discovery? Well The optimal way to do this is a reverse auction where you start the bidding high And you come down

3:03:35 in price incrementally. Until you reach a clearing. price where the entire offering size is spoken for with bids at that price. And you can imagine just how much this appeals. To Larry and Sergey and Google.

3:03:50 Oh my God. It sounds perfect. They're like, This is like the whole business. This is what we do anyway. This is delightful. There's this legend that Eric Schmidt talks about of They also they got a letter from a little old lady. That uh hearing that Google is about to go public and really hoping she could get in and that the small retail investor would have access to and that pulled it their hard strings and

3:04:10 I'm sure that's true too. But You can see why this appeals. In a vacuum, this sounds perfect and like everyone should do it. Yes. And theoretically, this is also like kind of what the investment banker what algorithm are they actually running? It should be something like this, right? They're meeting with clients, they're picking up the phone are you in at this price? Are you in how much would you want at that price? Like you kind of should be running this algorithm in a loose human way anyway.

3:04:32 Yes. Now So they're worried about pricing and they're worried about the IPO mechanism. They're also really worried about losing control. Because once they go public, even though they have control of the company now as a private company, the employee shares are sort of captive. People are gonna start selling. Now all of a sudden the public markets are gonna control a lot more of the company.

3:04:51 There's risk that Lari and Sarge. might collectively lose control of the company here. So they do a thing that no one else in the technology industry does. And Google has been swearing up and down that they're not a media company.

3:05:05 And then they look to the media companies and they go, Wait a minute, when the media companies need to separate editorial control. And have sort of Family stewardship of editorial control, but they want to let the shareholders come in and they don't want the business to be able to affect editorial too much, they've got this great

3:05:24 dual class structure. For a tech company. Yes. Where the families of the New York Times company or Dow Jones back then, or basically all the major

3:05:38 the original family owners had super voting shares that ensured that collectively the family would retain majority voting control over the company even if they lost economic control. So Larry and Sergey decide. Oh great. We're gonna do a dual class chair structure. For Google too. Which today is super common.

3:05:57 Yes. But Google started it. Google was the first tech company to do this. I mean, today it's it's everybody. It's Facebook slash meta, Alibaba, Shopify, Spotify. Coinbase, Airbnb, Zoom, Datadog, uh every major IPO.

3:06:12 Since Google. I mean, every major tech IPO. has had this famously Snapchat even pushed the envelope so far. When they IPO'd The public shares have no votes. So it's not even just super voting. It's like, oh, you public market, you, you get no votes whatsoever. It's like being at Green Bay Packers. Shareholder.

3:06:29 Yeah, exactly. Google pioneered all of this, which I think is why in retrospect. This IPO is viewed as a famous success. Okay, so they do the Dutch auction. In practice, it does not go well. But why? That this is the so here uh the numbers on this are pretty crazy.

3:06:47 They are initially floating in the Dutch auction using the software. And by the way. Google software engineers wrote the software. I know, amazing. Isn't this crazy? And I don't think it's like Google owned. I think they were collaborating with the investment bank. So the saw it's like this weird joint partnership that they're doing, where it's Google engineers, but it's this investment bank running the process.

3:07:06 And they're trying to figure out We're in the range between a hundred and eight dollars a share and a hundred and thirty five dollars a share. Should we price? Will it be fully subscribed? Well The actual price where they end up filling the order is at eighty five dollars a share.

3:07:21 Yep. Wait, Scoobs, Google, a twenty three billion dollar market cap. IPO. They raise 1.7 billion dollars, you know, this is like great, right? It's a 1.7 billion dollar raise 23 billion dollar market cap. that looks like an astronomically high multiple that the company's been given. So

3:07:39 You should walk away and say they really maximized value there. And they probably were just wrong in that initial range that they were looking for.$108 a share at$135 and it only priced at eighty five. Well, trust the mechanism. I guess it's only actually worth eighty five dollars a share. Nope. Pops to a hundred bucks.

3:07:55 On closing of trading. The very same day. Eighteen percent pop. Day one Then by the end of the very next year. sixteen months later is almost a five X.

3:08:06 Yeah. This thing was not at all priced correctly. So There's a reason why when you look at the legacy of the Google IPO Dual class share structure. Great idea. Everybody does it.

3:08:19 Dutch auction IPO. Not a great idea. Nobody has done it since. It doubled within the first few months. Yeah. I mean it's great PR, right? The stock's doing well. People think high of your company that's good for all sorts of reasons. But This did absolutely zero for making sure that the company doesn't leave money on the table.

3:08:38 Yeah. So Funny. It's all kind of a footnote of history anyway because No, what's a few percentage points between friends when the company would go to Over two trillion dollars today as we are.

3:08:50 recording this or roughly a hundred X. The market cap. When it IPO'd. And David, you're not counting dividends. Not counting dividends, right, of course. If you reinvested dividends, you'd make significantly more than uh a hundred X since IPO. Well after our Steve Bomber interview, never gonna not count dividends again. But

3:09:09 The rest of The series. Google's uh Two point one. call it trillion dollar market cap company today, roughly a hundred X since the IPO.

3:09:20 Amazingly, do I'm gonna ask do you know, I know, you know. What? Google slash alphabets. Price to earnings ratio is right now. Ooh, baby, I do know'cause I was just looking this up. It is.

3:09:31 Kind of an all time low. Twenty twenty price earnings. Six X. revenue. So compare that to it's peer companies. Amazon's PE is thirty five.

3:09:44 Microsoft is thirty seven. Nvidia is forty six. Apple is thirty and meta is twenty seven and Google alphabet is down at twenty. And it's not like

3:09:55 Alphabets Not growing revenue. They're growing revenue. Just as fast, if not faster, than all of those companies except NVIDIA. Something is going on here. This price sure seems to reflect that even though revenue is growing nicely and margins are quite high

3:10:10 Somebody And that somebody is Mr. Market thinks the future is a lot bleaker. than they do for those other companies. Never mind they. Google.

3:10:19 Invented AI and published the transformer paper. We will get to it. No spoilers. But Okay. That's where we're gonna leave Google for part one. But one more little little Start of a story.

3:10:34 to tease you with for part two next time. So The same month. In April.

3:10:42 Files its S one for its IPO. Google does a Unexpected product launch on April Fool's Day. Which really was not a good idea because Google had a history of Fake April Fool's joke announcements. But if you have one that kind of sounds ridiculous, don't launch it on April Fool's Day because people will think it's a joke.

3:10:59 Because the product they launch actually sounds way too good to be true. Web based Email. From Google. With one gigabyte of free storage.

3:11:13 for every single user. Now to put that in context. Yahoo and Hotmail. Yeah, who male and hot mail at the time. had like two megabytes of free storage per user. I think it was twenty X the next best is the stat that I read on Gmail.

3:11:28 Yeah. And it comes with Google search. Baked in across. All of your emails. And it's entirely web based, runs in your browser anytime.

3:11:37 Anywhere. It's like the greatest April Fool's gift to, you know, internet users everywhere. Thank Google. could provide here. So the question though is why did they do this, knowing what we now know?

3:11:50 About Google. David, wouldn't it be great if there was a reason, like a really compelling reason. for someone to be logged into Google. Mm. And wouldn't it be great if we could just attach

3:12:04 More things. to a user's life. They could be entry points. Google search. And the greatest business of all time.

3:12:12 Search ads. What if then? But if. Okay, David, we're gonna tell the whole Gmail story. As part of chapter two.

3:12:20 But I do have to give you one thing that is specific to this episode. Go for it. The engineer who started Gmail. Paul be okay.

3:12:29 Now, of course, a partner at Y Combinator and actually with Brett Taylor started Friend Feed. That's right. Paul Bukite is awesome and recently launched a new venture fund. And actually the original coiner of the term don't be evil. At Google.

3:12:45 That's right. So He's working on Gmail. It's very early. It's like 2001. He's been working on this thing for two and a half, three years before it launches. So we're at the very beginning of it. In his twenty percent time, right? This is a twenty percent project.

3:12:59 And it starts as I'm gonna look in your Unix directory at your mail. And I'm just gonna treat that Like The web, just the same way that we treat

3:13:09 web pages. And so I'm just gonna take a search box and I'm gonna point it at your male. Folder. And I'm gonna let you search. That's it.

3:13:18 That's like the only functionality of what would become Gmail. So the search bar is actually the first feature. of Gmail and everything else came later. And as he's playing around with this He has this idea.

3:13:31 Well If our core business is Indexing organic results and showing some ads. Maybe in addition to indexing and searching this organic results out of your mail folder.

3:13:43 I should Just Go grab ads from our Add database. And just kinda display'em around and see

3:13:49 How well the content matches. He's showing this off internally. Larry and Sergey see it. And they go. Wait.

3:13:58 Does this work on websites too? And so The thing that led to Adsense. Ah, this was the beginning of the idea for AdSense. Was actually part of the prototyping process. of Gmail.

3:14:12 Ah, amazing. I love it. I love it. And I love how you saved this to the end'cause you knew we were gonna do the little uh T zir on Gmail. Well, you texted me, you said, Oh, I think we should do a little Gmail foreshadow in the Ah great. Yes. Great, great, great. So thank you to uh Paul Bukite for sharing the story with us. Amazing. All right. Bringing it home. Of

3:14:36 Google search business. Let's bring this one home. Yeah, so David, this chapter, this episode definitely feels like the Building of the castle. Yeah.

3:14:45 And maybe next episode is gonna be the uh The building of the city around it, the state around it. The nation state around it. Yeah. And it depending on your metaphor, is it a You know, an entire

3:14:56 Property, a platform that they're building around it, a city? Is it a moat? Is it a but it's definitely uh This one is building the castle. We'll have to see. All right. Let's go into playbook for part one. Ben, what do you got?

3:15:10 The way that I framed playbook for this one is I tried to Just itemize the bullet points of why did Google work? And as I think through them, if I had to sort of lay'em out to someone. starts with the best original algorithm insight.

3:15:23 They had the best organic relevance out there, which created the best results in order fast, delightful, clean, simple UX. And they were truly dedicated to organic search. I mean the aversion to paid inclusion for as long as they were served them very well. So there's Amazing

3:15:40 original algorithm for organic search is one. Two Best execution of the search advertising model. I mean, once you get all those puzzle pieces in place, the auction. The switch to cost per click.

3:15:55 factoring in relevance, you know, with click through rate. It really is this truly beautiful system. Advertisers are incentivized to make their ads more relevant and only bid on the most relevant keywords because it means they don't have to pay as much. It's the best ads to the right users at the right time. And to your point, David, it maximizes it is literally the algorithm to maximize Google's expected value. It is like a Harmonious.

3:16:19 system that they developed. Three. clever infrastructure advantages. They just invented stuff and they thought about problems differently and they reasoned from first principles.

3:16:30 Four, they hired the best people. Truly. only world class people for a very long time. And because When the dot com crash happened.

3:16:38 they could basically get anybody that they wanted there in the second half of this episode. Paul Bukite had a great quote when I was talking with him. I don't even think I realized it at the time. That it was truly just the best people in the industry working around him.

3:16:53 So That's four Five. Culture A culture of thinking insanely big.

3:16:59 Mostly by Ineperienced, untainted people. that helps you with creativity, that helps you come up with new ideas. It was like the naivete of kids on a college campus who are dreaming matched with the brain power of the very best PhDs. And this hardcore belief that whatever our big ideas are

3:17:17 We always have to think with scale. Every little implementation detail Has to be As this scales, will this work, or do we need to re-architect the system? It's very impressive. So Culture

3:17:29 Which includes power law dynamics, by the way, being willing to make big bold bets because they could be these multi billion dollar payoffs. That's five. Six, the self-reinforcing data network effects once it takes off. I think that is underappreciated about Google. lot of people say, Oh, the algorithm, but like the algorithm is so dependent. on all the data that is generated.

3:17:51 And then lastly. A mission that has stood the test of time. Organize the world's information. It's not too broad. It's not too narrow. It feels altruistic. But of course.

3:18:01 the business behind it is actually the best business of all time. Yep. I would add on to the second to last one you had there, the data network effects. It also is the flywheel effect of liquidity in the marketplace of

3:18:14 Users and queries and Advertisers. Yeah. Everything that we just talked about. Like once Google had that realization of Oh. Our business gets better the more

3:18:27 Users and advertisers we have. And thus we should be willing to spend basically anything to increase those two pools. This is my quintessence. Oh, okay. I'm stealing your quintessence. I love it. I feel like this is the most unique insight of this episode is woe. These are economies of scale that don't just reduce your cost as you get bigger, but it increases your revenue as you get bigger. Yeah.

3:18:50 Okay, great. Well, I didn't mean to steal your thunder with quintessence. Sorry about that. We did our quintessence early this episode. Okay, good, good, good. All right. Give me your playbook.

3:18:58 Great. I've got two other sort of meta points that jumped out to me from this episode in addition to What you just said about the incredible encapsulation of why Google worked. Great.

3:19:09 When You and I were talking about Doing this. And starting the Google series. The reason

3:19:16 We decided now was the right time was Because of everything going on in AI and it feels like understanding Google has never been more relevant. And like if we're gonna do Google Unacquired, we gotta start at the beginning and understand. how Google was built.

3:19:29 Because that's what we do. This Episode. We'll set the stage to Then get to today.

3:19:37 Telling the story though and doing the research, I was like Today is exactly the same. The parallels I had the exact same thought. Between What happened Between nineteen ninety six and

3:19:48 Two thousand two. Feels like Everything that we are living through right now. Twenty twenty one to Today. Right. Or even let's start with you know the chat GPT moment.

3:19:58 Put sharper. I thought this was gonna be Well, we're gonna have to eat a lot of vegetables to understand Google so that we can understand where the transformer came from. to get to the real great meat and what we can learn about AI by studying the present. But I think by studying the way that search played out

3:20:16 How did monetization work? How did the value chains work? How did distribution work? How did monetization work that uniquely enabled distribution? Where did all the competitive dynamics come from? This is a History doesn't repeat but it rhymes and God does this rhyme.

3:20:32 Totally. Transferable. Lessons and dynamics. Yep. When You were telling

3:20:39 The story of Go to and overture and the launch at Ted and Yeah, how upset people were, but how brilliant I was thinking like Well What would the analogy be today? Like what if somebody made

3:20:50 A chatbot, you know, and a an L M a model. And what it told you was just what people paid it to tell you. Like people would go crazy, you know, if that happened. But like Yes. Is that worth trying? Should somebody try that? Like let's see, you know. Product design here on Acquired by David Rosendell. Yeah, right, right.

3:21:07 Probably a bad idea. But it it s feels like such a similar Yeah. Moment that we're in. That's just what struck me. over the head doing all of this. So like wow. History doesn't repeat itself, but it does rhyme. Yep.

3:21:20 And then the other big playbook theme I had was God, did Google really come of age at exactly the right time? We talked about this earlier, but If Larry and Sergei had met and started working on this. A few years earlier it would have been Yahoo because the web was just so much smaller. Like you didn't need a technology based

3:21:39 Search engine. Two. Understand it. Right. And then if they'd started a few years later, it would have been too late. It would've already been too big. You would have needed Too much technology and power to make it work.

3:21:50 It was the perfect window. There was a very narrow window to start the Google. of that era. And again, maybe this is a sub point of my first playbook theme of just

3:22:00 The parallels to today. Yeah. All right, powers. What? Of the seven powers.

3:22:08 Does Google have? And for new listeners to the show, this is based on a book called Seven Powers by Hamilton Helmer. And it is the seven factors that enable a business to achieve persistent differential returns. Or basically how to be way more profitable than your closest competitor sustainably.

3:22:25 And the seven are counter positioning, scale economies, switching costs. network economies. Process power. Branding. And cornered resource.

3:22:35 Let's see. To start, I guess let's just go down the list. I actually don't think there was tremendous counter positioning here. You could argue versus Yahoo. Well it's interesting. Because it was a new industry. They were counter positioned against

3:22:48 the other search engines that existed at the time in that Okay. As we talked about with Excite when they were trying to sell backgrub to Excite. The other search engines wanted you to stay on the page. Yeah and Google didn't. But I don't think that really counts because it was a new industry and those were bit players. There was no incumbent already there. Right. And Google was just better.

3:23:07 Being better is not Counter positioning. The best argument for counter positioning is versus the portals. Yeah, versus Yahoo. It may have become clear.

3:23:17 At some point. that search actually is important. But the portals couldn't really pivot to it'cause they couldn't give up all of their portal ad revenues. Yeah, I think that's also right. And also take Yahoo.

3:23:28 Yahoo had constructed itself as a media company, even though it was started by two electrical engineering PhDs from Stanford. Right. And Just Couldn't

3:23:37 pivot. I mean famously tried to, right? It bought overture, then it bought ink to me. And then they spent years trying to put overture and Inc to me together to create a packaged competitor to Google. This was The ill fated Project Panama. Yahoo. Which

3:23:52 By the way. acquired Easter egg, that is where Jan Coom and Brian Acton met. And then they would get so frustrated and leave and start WhatsApp. But yeah, I think there's counter positioning against Yahoo there. Okay, scale economies. For sure.

3:24:07 There's more powers here too, but the whole thing is scale economies. And it's More than than just the traditional one. I mean think about Hamilton's traditional definition here. Is that

3:24:17 Netflix has scale economies because it can amortize the cost of buying a given piece of content across more users. This is more than that. I mean this is For a given piece of infrastructure or software or hardware investment that Google wants to make.

3:24:34 Or a a user acquisition cost. Right. They can amortize that. Across More

3:24:41 Users. But also as they scale, they make more revenue per user. Right. I don't know what that is. Is that a new power? Superscale economies. Yeah. Where does this come from?

3:24:54 Auction based businesses whenever you have Auctions to determine pricing. the more liquidity you have. the higher price is.

3:25:05 And so are there other businesses that we can kinda look at? That are similar. Do scale economies ever explain why scale gets you more revenue? What is the thing where with an increase in scale their prices go up? Mm.

3:25:20 They maximized their available take. on any given micro auction. This is weird. I'm trying to think in another auction based world.

3:25:30 Like Christie's would kind of have this, or Sotheby's as you get more and more people into the auction house audience any given Sale is likely to go at a higher value. a real estate brokerage, if people were actually like loyal clients of a real estate brokerage. Oh, is this just network economies?

3:25:50 That the more Quarries you have the more advertisers you'll have, the more advertisers you'll have, the more but typically network economies are when people join the network, it creates value for other people in the network. That is true from a advertiser to a searcher and a searcher to an advertiser. So we should say this definitely has network economies. It's almost like there's negative network economies from advertiser to advertiser. You don't want your competitors to be on the platform, but Google does.

3:26:16 Yeah, maybe you're right. Maybe there's something unique to auction models here. Because the price is dynamic. Hamilton. If you're listening, we need to talk. Yeah.

3:26:26 Great. Okay. Let's keep going. Yep. Switching costs. Not yet. Not yet. Talk about that in the next episode. When you're not logged in and there's no personalization. No real switching costs yet.

3:26:37 Yeah. And everything else you'd switch to is worse, honestly. Branding. Yeah. To a certain extent. Absolutely. They built a brand of

3:26:46 Trust and speed and and fun. I had a Google shirt. I used to read Google blogs. I mean I'm trying to think, let me date the year. Two thousand Two to six. I was

3:26:58 as big a Google fan of things that were Googly as I was an Apple fan for that period of my time. And I think a lot of people were. I think For those of us who weren't in Silicon Valley That's what it meant. to be successful at Silicon Valley was to become Google.

3:27:14 Yeah, I would agree with that too. I think it's weak branding power though because That's not a branding power like Armes has branding power. It's gone away over time. Now it's just a and for the literal definition, are people willing to pay more for the brand? Like are advertisers willing to spend more on Google than elsewhere? No, if they're rational actors. They had an employment brand, though, to your point. They absolutely had an employment brand. Smart people would be willing to do anything to work at Google.

3:27:38 Yep. And lastly, cornered resource. Not really at this point in time. Not really. And process power, I also don't think there's much there.

3:27:47 Yeah, I don't think so. Okay. Quintessence. We already talked about yours. Do you want to say another word on it? No, the increasing returns to scale at the revenue side is unbelievable. And the fact that they can Have that insight.

3:28:00 and then realize they need to go be super aggressive on spending It makes total sense if you have a long view and think our RPUs are only gonna grow up, people are gonna be sticky forever. it is worth investing heavily to win this race. It's amazing.

3:28:15 Yes. I love your quintessence. It's totally right. I will. Second and underline it. One not quite as good, but alternative quintessence I wanna put out there.

3:28:26 About Google. Is a quote. From a page in Stephen Levy's book in the Plex. On June eighth. Two thousand seven.

3:28:34 Justin Rosenstein. who until recently had been a Google product manager, sent an email to his colleagues. I am ready to spread good news. The missive said. Facebook really is that company.

3:28:49 Which company? That one. The company that shows up once in a very long while The Google of yesterday. The Microsoft of long ago, that company that's on the cusp of changing the world that's still small enough where each employee has a huge impact on the organization.

3:29:06 where you know you'll kick yourself in three years if you don't jump on the bandwagon now. Even after someone had told you it was rolling towards the The promised land. That was Google. Google was that company. Microsoft was the first

3:29:19 That company. Google was that company. And then Facebook was that company. That's exactly right. And

3:29:27 They are exceedingly Exceedingly rare. Yes, they are. So That about captures it.

3:29:34 That's my quintessence. Google was that company. All right, carve outs. Carve outs. I have a three way tie of three excellent T V shows that I watched in the last

3:29:45 I guess two months'cause we didn't do uh Carvats with Steve Ballmer. Right. The first And I think the most landmark of mine

3:29:53 is the rehearsal. Nathan Fielner. Season two Oh my God. I don't want to spoil anything for anyone. So

3:30:03 If you're a person who believes that anything is spoilers, stop. I'll tell you things that you'll learn in the first ten minutes of the first episode. Nathan, just to give you some quick background, a decade ago did a show called Nathan for You, where he went and helped small business owners. figure out how to make their businesses better, improve on a key area. But

3:30:24 It's all kind of satirical. The way that he helps them accomplish their goals is Very bad. for their business in in most other respects. He's an incredible comedian, really dry sense of humor. And

3:30:37 the thing that that he did in Nathan for You was like a pretty good commitment to the bit. the lengths that he would go to, for example, to get a coffee shop owner to get more traffic in their store, they rebranded the store to Dumb Starbucks. And he spent hundreds of thousands of dollars of the studio's money or maybe millions of dollars to commit to this rebrand.

3:30:56 Obviously a a bad idea. But great TV. In the rehearsal. He commits to the bit. So unbelievably hard, it takes years of his life.

3:31:06 And He has a A goal. To reduce the number of plane crashes by doing a deep study of the thing that causes plane crashes, which he believes to be pilot communication. And

3:31:20 In this season of the rehearsal. He builds elaborate, elaborate sets. And hires a bunch of actors to simulate

3:31:30 different experiences. to help these pilots feel more comfortable communicating with each other so that fewer planes will crash. And I am telling you, David, this is the tip of the iceberg. It gets Crazy. Sound. Commitment to the bit at an all time great. Are we committed to the bit? We are nowhere near as committed to the bit as Nathan is. Okay. So that's one.

3:31:56 Two is a much more casual, very enjoyable show called Your Friends and Neighbors on Apple TV. It's John Ham. It's beautifully shot. It's a little bit like the you know, following rich people around like succession is these sort of fictional characters.

3:32:12 But with an unexpected twist. love your friends and neighbors on Apple TV. And then Andor season two. on Disney was excellent. Starts a little slow, first three, four episodes are not as good as season one, in my opinion.

3:32:25 But the last eight episodes are like some of the best Star Wars canon that exists. I love it. Ben, you were my In addition to being my best friend, you are also my smart friend who has like great T V recommendations. So I love that you get to be that smart, you know, T V recommender friend for the internet too.

3:32:42 I'm here for you. And I will continue dumping this on you even though I know you don't watch TV. You'll never get to the city. I would like to This is for listeners. This isn't for you. Two little kids. Tough, tough. My car out. Two well, I've got one standard carve out. Gamecraft season three. Gamecraft podcast. We'd uh

3:33:02 crossover with Mitten Blake years ago. They have really committed to the bit. Season three is excellent. I'm so glad they've kept up the podcast. It's really great. If you like Gaming the gaming industry. Mitten Bleaker.

3:33:14 Do the best in the business. My next carve out related to that. is actually sort of a real time dilemma, Carval. And this is good because it can be a multi part series here on Google. I'll report back in the next episode. Which direction I went with this carve out.

3:33:30 So As I said before. I think I did a preemptive carve out. I was so excited for switch two. Switch two finally launched. I haven't gotten one yet. I have a reservation

3:33:41 For a shopping appointment. At the Nintendo store in San Francisco, the new Nintendo store here in San Francisco. Super excited. I Can't wait for it. I can't wait to play it with my daughters someday as they're approaching that age. All right, what's the decision? As I was watching reviews on YouTube

3:33:56 I started getting into Steam Deck. Oh And now I'm desperately conflicted. Do I want to get the switch two like I'd been planning? Or do I wanna go in a totally different direction and get a Steam Deck?

3:34:13 Well Acquire listeners, tune in if you weren't interested in Google Part two on its own merits. Now you're gonna be on pins and needles for day to come about. I would ask our listener base for help with this decision. And I would love all of your thoughts. But because of our editing process, the reality is I will have made my decision already by the time this episode goes live. So Tweet a picture. All right. That's what I got.

3:34:39 Awesome. Well We've got some thank yous. We talk to a zillion people, as seems to be the new precedent when we do these large tech companies. One off the top, Arvan Navarotnam for Worldly Partners did an awesome write up. on uh the company as usual, which he will make available by clicking the link in the show notes.

3:34:59 And then David You've been maintaining the list. Yes, I've been maintaining the list of some of the folks we should think for helping us with this episode. In addition to the many other folks we talked to Who we can't mention, but

3:35:12 Thank you, you know who you are. But specifically. Thank you to Craig Silverstein. Google's first employee, to Anna Patterson, to Omid Cordistani. Alan Eustace, Claybore.

3:35:23 Brett Taylor, Jeff Dean. Jen Fitzpatrick. Danny Sullivan. Nick Fox. And to Paul Bukite.

3:35:30 to Bill Gross. To Wesley Chan. And to Isar Lipkovitz. Thank you so much for the conversations. David, I feel like we got a dream team of people if we want to go start a tech company. Got an all star lineup.

3:35:43 I started joking by the end of the research process. I was like, I think we are sapping billions of dollars of market cap out of the economy by taking people's time to have these conversations. So we greatly appreciate it. Yeah. Alright, listeners, we'll see you next time. We'll see you next time.

3:36:00 Who got the truth? Is it you, is it you, is it you who got the truth now

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