Why They're Agog over Google

An IPO may loom for the search engine everyone loves

In the aftermath of the terrorist attacks on New York and Washington on Sept. 11, popular news Web sites such as CNN.com and ABCNEWS.com were overwhelmed with a deluge of people grasping for the latest information. For many, the sites were inaccessible. Into the breach stepped Google Inc., the search engine company. It had made copies of the news pages before the crush and offered them up on its site.

Those events were obviously exceptional, but they illustrate the role that Google has come to play. For many Web surfers, it's the vital intermediary between what they want to know and the answers that are out there somewhere on the vast Net.

Google's rise has been remarkable. In just three years, despite spending nothing on marketing, its search engine has become the 15th-most-visited Web site in the U.S., according to Jupiter Media Metrix Inc. With the company handling 120 million Web searches every day, Google's traffic has leaped 73% so far this year, making it the top pure search site on the Web.

More impressive, Google has found a way to make those eyeballs pay off. Analysts estimate the upstart's revenues this year will be a not-too-shabby $50 million. Its business is split evenly between advertising on the Web site--a business that has been growing at more than 10% per quarter--and selling its search technology to other sites. Google claims that, after two quarters of being cash-flow positive, it will turn a profit when the third quarter closes at month's end. "Google could feasibly be a billion-dollar business [someday]," says Safa Rashtchy, a senior analyst at U.S. Bancorp Piper Jaffray. "It's a matter of continuously advancing its technology edge and finding ways to make that pay."

HOISTING. Google is in the process of transforming itself into a tightly managed company that could attempt an initial public offering in the coming year. In August, the board brought in Chief Executive Eric E. Schmidt, the former CEO of Novell Inc., to try to hoist Google to the next level. His mission: to capitalize on Google's search technology by entering new markets.

The next stage of growth won't be as easy as the early days. Google is trying to expand into markets that are established and hotly contested, such as selling its search technology to corporations for use on their in-house networks. And Schmidt, while lauded for his technical expertise, has been criticized for ineffectual leadership at Novell. That company's share of the market for network operating systems fell from 15% to 11% during his four-year tenure, which ended when he resigned in July. "There was no one at the helm," says one former Novell exec. Schmidt admits his performance was "mixed," but he says Novell's fortunes sagged when he couldn't diversify fast enough.

It looks as if Schmidt has picked a winner this time. Google has a strong chance to thrive, thanks to its core strengths. His easiest task is widening Google's technology lead--the startup's bread and butter. In late 1995, Google co-founders Sergey Brin and Larry Page began working on its technology when they were PhD candidates in computer science at Stanford University. The two dropped out and founded Google in August, 1998. Not only does Google's technology look for keywords inside of Web pages, but it also gauges the importance of a search result based on the number and popularity of other sites that link to the page. This summer, a survey by market researcher NPD Group ranked Google the most effective search engine, with 97% of users saying they located what they were looking for "every time" or "most of the time."

How can Google get better? It's planning to cast a wider net to capture more of the Web's ever-expanding ocean of content. The company's software, for instance, now searches more than 1.6 billion Web pages, up 60% from a year ago. That, however, is only about one-third of the estimated 5 billion searchable Web pages, according to Internet search company Cyveillance. To extend its reach, Google has expanded the number of languages it can deal with. With the addition of Arabic and Hebrew, Google now spits out results in 66 languages. By comparison, rival AltaVista Co. performs searches in only 25. Google also is working on technology to search a wider variety of documents, including images, which will be rolled out in the next couple of months.

With all this in hand, Google is starting to pound on the doors of corporate customers. Marthastewart.com, for instance, pays Google to "crawl" its Web site, organize and store the data, and then return search results when a user searches for, say, wedding gifts. So far, Google has announced only seven corporate customers, including Cisco Systems Inc. and Procter & Gamble Co. That's a paltry list compared to rival Inktomi, with 2,500 customers, and AltaVista with 1,000. "It's going to be a load on [Google] to move in this direction," says David C. Peterschmidt, CEO of Inktomi Corp.

WIDE WORLD. Google also aims to expand on its successful start in Net advertising. Unlike portals such as Yahoo! Inc. and CNET, Google has seen online ad sales rise in recent quarters. The reason? The ads on Google's site are delivered as a text listing above the search results--making them appear more a part of the page's content. "It works so well since users seem to be under the impression that all ads are graphical in nature and written-word ad placements are still editorial," says ad buyer Jonathan Adams, senior partner at Ogilvy Interactive.

Now, Google is attempting to duplicate this success overseas. More than half of Google's traffic comes from outside the U.S., yet it hasn't scratched its potential with international advertisers. Schmidt's answer: Build a network of foreign offices that can forge relationships with local advertisers. In recent weeks, Google has opened offices in Britain and Japan. Germany is next.

Google is growing up. A successful IPO would be the surest sign yet it has gone from an Internet sensation to a real business.

By Ben Elgin and Jim Kerstetter in Mountain View, Calif., with Linda Himelstein in San Mateo, Calif.

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