Search engine extraordinaire Google sure is growing up fast. On Aug. 6, the company's two twentysomething founders, Larry Page and Sergey Brinn, brought aboard a high-profile CEO -- former Novell chief Eric Schmidt. He announced the company was profitable, ahead of schedule, with revenues split evenly between advertising and running search functions for corporations. So, with one of the most recognizable brand names in cyberspace and, by some estimates, 40% of all search queries on the public Internet, Google has been marked as the next great initial public offering coming out of legendary incubator John Doerr's stable.
Yet a handful of pretenders have cropped up, all selling Google-esque services on the cheap, while the technology gap between Google and its old competitors has noticeably shrunk. In the corporate market, Google lags Inktomi, Verity, and others in sales of search tools for use on internal networks. What's more, the company is playing in an increasingly crowded space that has a market size of well under $1 billion right now. It's biggest challenges now lie ahead.
Not that Google hasn't done a lot of things right. A dynamite search engine coupled with a stripped-down interface devoid of big ads and pop-ups has won it a following of millions of Netizens. Google also spends virtually nothing on marketing, unlike other search companies that have poured millions into ad campaigns to minimal effect. "We have a marketing person or two," says Page, adding: "But it's a very, very small amount of money."
People close to the company estimate Google is probably spending $40 million to $50 million each year on operations, including staffing, office space, hardware, Web-hosting, and bandwidth costs. The company's tech-heavy staff -- more than 20% hold PhDs in hard sciences -- strives to perfect a search engine that has indexed more than 1.6 billion individual Web pages using custom software and 10,000 cheap PCs networked together. Each day, that system handles 130 million queries, split between the company's main search portal and search functions that the company runs for 130 companies, including the The Washington Post and Cisco Systems.
Outsourcing to Google has appealed to companies hoping to save on IT costs and improve search performance for visitors to their sites. Brinn says Google has healthy, double-digit profit margins, and sources close to the company have put exact revenue estimates at $50 million. Says Page: "We have had very healthy growth, and we have been right on [target for] our forecast."
How much money these strategies will yield, however, remains a very open and crucial question. Google claims it is getting good revenue from selling click-throughs for simple text ads linked to key words used in queries. For example, a query for "tennis shoes" would draw a small, clearly marked text ad at the top of the page touting Nike.
Sounds good, but that ad market might prove limited for Google. The company serves many esoteric queries that don't trip a key word. In fact, some industry insiders estimate that only 20% to 30% of Google searches elicit key-word advertisements. And Google could find its ad market constrained by the limited number of placements it can serve without marring its interface. The company puts no more than a handful of text ads on most pages, significantly limiting its potential profits.
Further, these text-only ads won't serve for the branding campaigns that make up a significant chunk of advertising spending -- campaigns that also require graphics. True, rival search company GoTo grossed over $100 million last year by selling ads in a somewhat similar manner. But GoTo places these ads on a wide variety of portals and search engines, including AOL and TerraLycos. Thus far, Google only puts these ads on pages served at its home search portal, www.google.com.
And Google's high profile as a stand-alone destination could actually be an obstacle, since that puts it in competition with potential customers such as big portals or media sites. Although Google signed a deal with Yahoo! to perform a portion of searches for the portal last June, other search firms have maintained their hold on some of the biggest Web properties. Both MSN and AOL recently renewed agreements with Inktomi.
In the big-money enterprise market of providing Web and site search capabilities to big companies, Google is apparently struggling. By some estimates, for every single document on the Internet, corporations have two more floating around in their internal networks. While Google has a handful of marquee customers, including Sony and Cisco, the roster pales in comparison with search veterans Verity and Inktomi, which have 1,800 and 2,500 corporate customers, respectively.
Google's current managed-search offering might prove a tough sell to big companies. Why? Google hosts the index and search software on its own network. That could be construed as a security risk by many companies that hate the idea of a full index of sensitive internal documents stored on someone else's servers. If companies don't sign on, Google would be limited to searches only of publicly accessible documents, a major market constraint. By contrast, Inktomi and Verity both offer licensed software search products that companies can host and manage themselves.
And the existence of licensed software places a natural revenue ceiling on what bigger companies would pay Google. For instance, say a Big Three auto maker contracts Google to handle search functions on its Web site and the bill for a year comes out significantly higher than the cost of licensing software from Inktomi and paying IT staff to run it. Naturally, the carmaker would demand a price break, or else switch to a licensed software product.
The going rate for most licensed search products runs at only $100,000 to $200,000 for initial costs, plus 20% to 40% each year for license renewal -- rather small by IT standards. Google maintains that customer saving on IT staff should allow it to charge more for its outsourced service. "No matter how much Google will charge, it's not going to be able to break through to the multimillion dollar range," says one search-engine expert.
SCOUTING NEW REVENUE STREAMS.
Even if Google manages to surmount these hurdles, the market potential for the search sector is tentative. Collectively, the largest search players have only $2 billion in valuation. Worse, many search companies have seen sales decline, as consolidation in the Web space has put significant downward pressure on pricing and the tech slump has reduced IT spending.
While that trend has affected the entire search sector, the hosted search business that Google plays in has been hardest hit. According to JP Morgan H&Q analyst Jack Ripsteen, Inktomi has seen declining revenues in the hosted-search business where it most closely competes with Google. "I can't imagine the pricing [for hosted service] is anything but under pressure. This is a shrinking market," says Ripsteen.
It's possible that Google could well emerge as a big and successful company. Brinn and Page claim the convenience and savings of having someone else manage search functions far outweighs the negatives. For example, installing a Verity package not only costs hundreds of thousands upfront but also requires several months of systems integration performed by expensive Verity consultants. And Google also is looking at ways to create extra revenue streams, possibly by creating premium search packages or more personalized services.
That sounds promising. But competitors are hardly standing still. Inktomi signed up Dell Computer in June, 2001, as a reseller for its search software. Another rival, FAST, signed a deal in September, 2001, with eBay to provide a specialized search service for the site, something it already does for tech powerhouse IBM. While Google has some nice notches in its belt, it remains far from dominant. And even if it thrives, the company that Larry and Sergey built might find itself the king of a mid-sized hill rather than a mountain.
By Alex Salkever in New York
Edited by Beth Belton