Google

Summary

Acquired Podcast Episode Summary: Google (Released June 30, 2025)

Hosted by Ben Gilbert and David Rosenthal

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Introduction

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal embark on a comprehensive exploration of Google’s journey from its inception to becoming the titanic force in the tech industry. Titled “Google,” the episode delves into the company’s foundational technologies, strategic business decisions, competitive landscape, and the pivotal moments that shaped its trajectory.

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Founding of Google: Larry Page and Sergey Brin’s Beginnings

The story begins in March 1973 in Lansing, Michigan, where Larry Page is born to two computer science professors at Michigan State University. His upbringing, immersed in academia and computing, set the stage for his future endeavors. Meanwhile, Sergey Brin is born a few months later in Moscow, Soviet Union, to a mathematician father and a NASA researcher mother. After emigrating to the U.S., Sergey excels academically, graduating from the University of Maryland at 19 before joining Stanford for his PhD.

Ben Gilbert introduces the founders' backgrounds:

"[...] Larry Page grew up with two computer science academics as parents in the 70s, which would have meant that his parents would have needed to start in the 50s. Very, very few households." [06:34]

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Meeting at Stanford and the Birth of BackRub

In the fall of 1995, Larry arrives at Stanford University, where he meets Sergey Brin. Their collaboration sparks the creation of a research project initially aimed at building a decentralized annotation system for the web, inspired by the limitations of existing search engines and directories like Yahoo. Faced with the challenge of ranking vast quantities of user-generated annotations, Larry conceives the idea of PageRank—a revolutionary algorithm designed to determine the importance of web pages based on their backlinks.

David Rosenthal explains the evolution of their project:

"It wasn't that we intended to build a search engine. We built a ranking system to deal with annotations... Hence PageRank." [19:16]

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Early Funding and Angel Investment

Despite the promising technology, Larry and Sergey struggle to monetize their project. In May 2000, during the dot-com boom, they secure an angel investment from Andy Bechtolsheim, co-founder of Sun Microsystems, who hands them a $100,000 check on the spot. This injection of capital forces the founders to formalize their venture, leading to the establishment of Google Inc.

"Google Inc. does not exist yet. This is actually true. [...] He just throws it at them, hops in his car and takes off." [44:02]

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Development of Infrastructure and Scaling

To support their burgeoning search engine, Google pioneers innovative infrastructure solutions. Engineers like Urs Hölzle and Jeff Dean join the team, bringing expertise in distributed computing and system design. They develop the Google File System (GFS) and implement a distributed architecture using commodity hardware, enabling Google to scale efficiently and handle massive amounts of web traffic.

Ben Gilbert highlights Google’s technical prowess:

"Google was forced to do distributed computing because their index file was too large to store on any one machine." [64:23]

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Strategic Distribution: Google Toolbar and AdWords

Understanding the critical importance of user acquisition, Google adopts aggressive distribution strategies. One of the most significant moves is the launch of Google Toolbar in December 2000—a browser extension that integrates Google’s search functionality directly into users’ browsers, dramatically increasing search usage and brand visibility.

David Rosenthal discusses the Toolbar’s impact:

"Google Toolbar was a hugely strategic business model piece for them." [163:56]

Simultaneously, Google evolves its advertising model. Initially relying on manual, banner-based ads, the company transitions to a self-serve, pay-per-click (PPC) system with AdWords. This shift not only aligns advertiser incentives with user intent but also creates a scalable revenue stream that fuels further growth.

"They build AdWords by incorporating click-through rates to ensure ad quality and relevance." [128:28]

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Competition with Overture and the Evolution of AdSense

As Google refines its AdWords platform, it faces competition from Overture (formerly Goto.com), which pioneered a similar PPC model. Despite Overture’s early success and rapid revenue growth, Google’s superior infrastructure and innovative Ad Rank algorithm—combining bid price with ad relevance—eventually outpace Overture. This competition culminates in Yahoo’s acquisition of Overture for $1.6 billion, reinforcing Google’s dominance in the search advertising market.

Furthermore, Google introduces AdSense in 2003, allowing website publishers to monetize their content by displaying targeted ads. AdSense’s seamless integration and revenue-sharing model democratize advertising, expanding Google’s reach and solidifying its position as the cornerstone of online advertising.

"AdSense was the precursor to YouTube’s monetization model, enabling creators to earn from their content effortlessly." [169:03]

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IPO and Dual-Class Share Structure

In 2004, amidst the bursting of the dot-com bubble, Google proceeds with its initial public offering (IPO). Opting for a dual-class share structure, the founders retain majority voting control, ensuring strategic autonomy against market pressures. Despite a rocky start—where the IPO was initially underpriced at $85 per share, leading to an 18% initial rise—the structure safeguards Google's long-term vision and operational integrity.

"Google pioneered the dual-class share structure, allowing founders to maintain control post-IPO." [186:35]

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Key Insights and Business Strategies

The episode distills several critical factors behind Google's success:

1. Superior Technology and PageRank: Google's innovative ranking algorithm provided the most relevant and efficient search results, outclassing existing search engines.

2. Scalable Infrastructure: By leveraging distributed computing and commodity hardware, Google built a robust infrastructure capable of handling exponential web growth.

3. Aggressive Distribution: Strategic initiatives like Google Toolbar and AdWords ensured rapid user acquisition and advertiser engagement.

4. Innovative Business Models: Transitioning to PPC advertising and introducing AdSense created sustainable and scalable revenue streams.

5. Strategic Leadership and Culture: The collaboration between founders and the recruitment of top-tier engineers cultivated a culture of innovation and resilience.

6. Economic Model with Increasing Returns to Scale: Google's revenue per search increased as user and advertiser bases expanded, creating a self-reinforcing growth loop.

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Conclusion

Google’s ascent from a Stanford research project to the most profitable company in the US is a testament to visionary technology, strategic business maneuvers, and relentless pursuit of excellence. By intertwining superior search capabilities with scalable infrastructure and innovative advertising models, Google not only transformed how the world accesses information but also set the benchmark for sustainable business success in the tech industry.

Notable Quote:

"Google did not happen by accident... They built the best business of all time." — Ben Gilbert [02:53]

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Notable Quotes with Timestamps

• Ben Gilbert: "Larry Page would say later, this is a quote from him probably when I was 12, I knew I was going to start a company eventually. I wanted to make the world better." [09:00]

• David Rosenthal: "We are building the front door to the Internet, which was just growing 700% year over year." [09:36]

• Ben Gilbert: "Google Toolbar was the most strategic business model piece for them." [163:56]

• David Rosenthal: "The AdWords model maximizes Google's expected revenue through a perfectly aligned auction system." [128:28]

• Ben Gilbert: "The mission statement: organize the world's information and make it universally accessible and useful." [107:11]

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This summary was crafted to encapsulate the key discussions, insights, and strategic milestones presented in the episode, providing a comprehensive overview for listeners and newcomers alike.

Transcript

[Ben Gilbert]

All right, David, last episode we are doing in our studios before Radio City.

[David Rosenthal]

Ooh, that's right.

[Ben Gilbert]

How do you feel?

[David Rosenthal]

We're about to go from like the stage of one very, very small audience of one to the very, very big.

[Ben Gilbert]

Stage where if we make a mistake, no one will notice and we just re record it and it's like it never happened.

[David Rosenthal]

We should try that at Radio City. Just be like, ah, strike that. All right, let's take that again.

[Ben Gilbert]

Yeah. Hey, this is authentically acquired, you guys. This is how we do it. You're getting a look at the inside. Probably not though. All right, let's do it.

[David Rosenthal]

Let's do it. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you?

[Ben Gilbert]

Is it you?

[David Rosenthal]

Is it you?

[Ben Gilbert]

Sit me down.

[David Rosenthal]

Say it straight. Another story on the way.

[Ben Gilbert]

Who got the truth? Welcome to the summer 2025 season of acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

[David Rosenthal]

I'm David Rosenthal.

[Ben Gilbert]

And we are your hosts. 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 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 25 years now. A quarter century. But it wasn't always this way.

[David Rosenthal]

No, it was not.

[Ben Gilbert]

Back in 1998 when Google was founded, there were a dozen other search engines that already existed and there were a variety of different business models, most of which were not very interesting.

[David Rosenthal]

Yeah, none of which were very interesting.

[Ben Gilbert]

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? I'm not being facetious, listeners. Google, and I should say Alphabet today generates more net income or profit than any other US company. More than Apple, Microsoft, ExxonMobil, JPMorgan Chase, Berkshire Hathaway. This is a cash gusher. It is a super high gross margin, B, in a giant market, and C, according to the US Government, as of today, they are a monopoly in that market with 90% market share. That is three enormous numbers multiplied together to create that most profitable company in the US Stat that I threw out earlier.

[David Rosenthal]

Well, I'm glad we don't need to get to the government and all that until much, much later in our series. But yeah, this is the creation of the most beautiful business of all time.

[Ben Gilbert]

And Google's market position has been seemingly unassailable, at least until really this year, until the AI wars really heated up. 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, it was the last.

[David Rosenthal]

Well, you know, Microsoft may take a little issue with that with Bing, but only a little issue.

[Ben Gilbert]

Few percentage points of issue.

[David Rosenthal]

Few percentage points of issue. Yeah.

[Ben Gilbert]

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 Email after this episode, join the Slack to talk about this with us and the whole acquired community. Acquired FM Slack. And if you want more acquired between each episode, check out ACQ2, our interview show where we talk with founders and CEOs building businesses in 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.

[David Rosenthal]

It was bananas. It was awesome.

[Ben Gilbert]

Yes. Well, before we dive in, we want to briefly thank our presenting partner, J.P. morgan Payments.

[David Rosenthal]

Yes, and as you all know, J.P. morgan is our partner for our big Radio City show coming up on July 15th. We've been hard at work preparing. It's going to be an amazing night. The show is basically sold out. I think there are like less than 100 tickets remaining right now out of the 6,000 total. So if you haven't grabbed yours yet, go do it like right now or they will all be gone. J.P. morgan will be showing off all their latest and greatest payments tech there. We'll have exclusive merch, a fan meetup before the show, an after party, and an encore event the next day at the New York Stock Exchange. So details on all of that are in the acquired slack. We're so pumped.

[Ben Gilbert]

Yes, we cannot wait to see you there. So with that, this show is not investment advice. David and I may have investments in the companies we discuss and this show is for informational and entertainment purposes only. David Rosenthal when is the first time any Human being searched for anything ever?

[David Rosenthal]

I have no idea. That's a great question.

[Ben Gilbert]

Not that far back. Where do we start?

[David Rosenthal]

Yeah, well, you know what? We should ask Google. But to do that, we need to tell the story of Google. And that story starts In March of 1973 in Lansing, Michigan, where Larry Page 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 Sr. Is a professor of computer science in nearby East Lansing at Michigan State University. Now, before my dad, who went to MSU and is an MSU alum, 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.

[Ben Gilbert]

And would send his son there as well.

[David Rosenthal]

Yeah, yeah. Both of his sons and unfortunately Larry's mom also went to Michigan, also got a CS degree there and also teaches programming as a programming instructor at msu.

[Ben Gilbert]

Yeah, pretty Michigan heavy.

[David Rosenthal]

Pretty Michigan heavy. But pretty amazing childhood in, you know, the early mid-70s 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 both of their parents steeped in computers as computer science professors, but really pretty unique.

[Ben Gilbert]

Incredibly unique. Are you kidding me? Larry Page grew up with two computer science academics as parents in the 70s, which would have meant that his parents would have needed to start in the 50s. Very, very few households.

[David Rosenthal]

Like right at the same time as the PC era is coming online and Microsoft to just have that big be your heir, your daily existence growing up as a kid, like, how incredible is that?

[Ben Gilbert]

Amazing.

[David Rosenthal]

So even more so for future Google to come for the 1979-1980 academic year when Larry is 6 and 7 years old, 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 on, on young Larry. And then he continues to kind of be influenced by this because I mentioned his older brother, Carl Jr. Who's nine years older than him. Carl goes to Michigan, majors in CS just like Larry would. 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 mentor graphics down in Oregon. Carl Jr. Would ultimately also come down to Silicon Valley and play a little role in this story, as we will see in a little bit. But back to Larry here. Part of the reason I say all this, and I want to include Sergey 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 absolutely freaking not. We want to dispel that notion right right now. 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 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 world changing company at the same level as him.

[Ben Gilbert]

Yes, to your point, Google did not happen by accident or another reasonable comparison. The generation before Bill Gates, I think they publicly, Larry and Sergey don't get the same sort of ethos that those two get, but the same fire was there.

[David Rosenthal]

Larry would say later, this is a quote from him probably when I was 12, I knew I was going to start a company eventually. I wanted to make the world better. And in order to do that, you need to do more than just invent things. And, 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.

[Ben Gilbert]

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 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.

[David Rosenthal]

Yes. And Larry, you got this all along. And Sergey did too. Okay, so as we all know, Larry goes to Michigan undergrad, he graduates in 1995 and then he goes off to Stanford to get his PhD in Computer Science where has a fateful meeting with his business partner, friend soulmate Sergey Brin.

[Ben Gilbert]

And isn't the way this all went down that Larry was visiting and Sergei was already in the program? I think Sergei 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 Sergei at every little 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.

[David Rosenthal]

Yeah. 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's 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, I think, before been told publicly.

[Ben Gilbert]

Who?

[David Rosenthal]

Well, it turns out Anna was a postdoc at Stanford at this time, and she's the one who organized this new students 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. This sort of 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 famous local Stanford alum picks up the tab for the group. Ooh, can you guess who that person was?

[Ben Gilbert]

I don't know. Lay it on me.

[David Rosenthal]

Charles Schwab.

[Ben Gilbert]

No way.

[David Rosenthal]

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 got you guys.

[Ben Gilbert]

That's awesome. So Charles Schwab funded the first date of Larry and Sergey.

[David Rosenthal]

Yeah. Amazing. And Charles Schwab accounts would go on to hold 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 an instant, electric friendship partnership between the two of them, 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 like, reminds me a little bit of you and me.

[Ben Gilbert]

On a very different scale.

[David Rosenthal]

On a very different scale.

[Ben Gilbert]

But that's interesting. Equal co founders. I'm racking my br. Maybe Bill Gates and Paul Allen. But even then, it became very clear very quickly, Bill Gates is the guy that was reflected in their equity ownership.

[David Rosenthal]

Exactly. I'm sure we've covered other companies where there were equal equity ownership amongst founders, but where it was a real, true partnership. One plus one equaled, like 100.

[Ben Gilbert]

It's fascinating. Yeah, Maybe Jensen, Curtis and Chris at Nvidia, but over time, you know, it kind of became Jensen. Yeah, you're right. This is sort of unique for us to be covering true founder partners that made it decades together.

[David Rosenthal]

I mean, even Warren and Charlie. Charlie was never full time at Berkshire Hathaway.

[Ben Gilbert]

Right. And certainly owned way less.

[David Rosenthal]

The closest I can think of is maybe Capital Cities with Tom Murphy and Dan Burke.

[Ben Gilbert]

Hmm. It's really interesting.

[David Rosenthal]

Okay, so Sergey, what's his story? Sergei was also born in 1973. A few months later in August, in some place even colder than Michigan, 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 probably to really be anything there. His family lived in a three room apartment in Moscow in what I assume was state allocated housing. They shared it with his paternal grandmother, but his dad was an extremely talented mathematician. And so when Sergey's 4 years old, his dad attends an international mathematics conference. This is like 1977, 1978. 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 emigrate out of the Soviet Union, but they eventually come to the U.S. his dad becomes a math professor at the University of Maryland. His mom becomes a researcher at NASA's Goddard Space Flight Center.

[Ben Gilbert]

Okay, so Larry's parents are both computer science professors. Sergei'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 80s.

[David Rosenthal]

Yes. As you would imagine, Sergey is very precocious. He graduates high school at age 16, goes to the University of Maryland, gets his undergrad degree in both math and computer science in three years, graduates at age 19, and then of course gets into Stanford for his PhD. Do you know what he did in the summer before coming to Stanford?

[Ben Gilbert]

Ooh, I have no idea.

[David Rosenthal]

He interned at Wolfram Research.

[Ben Gilbert]

No way.

[David Rosenthal]

Really?

[Ben Gilbert]

Yeah.

[David Rosenthal]

Stephen Wolfram.

[Ben Gilbert]

Oh, shout out to friend of the show, Stephen.

[David Rosenthal]

I know, I know. Developers of Mathematica, then Wolfram Alpha, I guess, eventually another search engine. So, yes, Sergey every bit Larry's intellectual equal, every bit his sparring partner. Maybe a little more zany too. More of a love for rollerblading than Larry, let's put it that way.

[Ben Gilbert]

Yes. And frankly, it kind of pencils now that you're starting to get the picture of these two over time, you know, in the far future, closer to today, Sergei is the one doing stuff like Google Glass and skydiving videos. The zany parts of Google are sort of Sergei's DNA. And, and the really honed products 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.

[David Rosenthal]

Yeah. Okay, so fall of 1995, Larry arrives at Stanford. Sergey's already there. Terry Winograd is his PhD advisor, and Larry and Sergey are already building this great friendship. Larry, that academic year presents a dissertation topic to Terry to his advisor in collaboration with Sergey. And the idea they have is this World Wide web thing seems to be becoming a thing. You know, here we're 1995, we're what, a year after Netscape was started, a couple years after Mosaic.

[Ben Gilbert]

I have a stat for you on this era and the Internet.

[David Rosenthal]

Ooh, yeah, lay it on me.

[Ben Gilbert]

This is from John Battelle's book the Search, which is excellent. From 1993 to 1996, the web grew from 130 sites from to more than 600,000. And if you compute that rate of growth over that four year period, it is 723% growth year over year for four years. That is exponential.

[David Rosenthal]

Yeah, this is the version of the Jeff Bezos realization where he's like, I gotta leave de Sean, I gotta build Amazon. Like nothing like this has ever happened before.

[Ben Gilbert]

Right. The Internet is a phenomenon like no other. And if it keeps going, I mean it's amazing for something to grow 700% year over year at all, but it happens. But for that to keep happening year over year over year for half a decade, that is worth quitting your job, dropping everything, changing your whole life.

[David Rosenthal]

Yep. And 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, Larry proposes that they're going to 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 is going to be a decentralized annotation system where anybody can say what's interesting about a website.

[Ben Gilbert]

Oh, that's funny, I thought I knew the whole history of Google. I somehow missed this.

[David Rosenthal]

So Terry, Larry's advisor is like, okay, you know, I like the 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 so Larry goes off, and of course, he's collaborating with Sergey on this. And as they think about it, they realize that actually there's sort of a fundamental flaw in what they were planning for this annotation system, which is that for a big site like, say, the New York Times or something, it's just going to get overrun with hundreds, thousands, millions of users commenting. 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. 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. 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. Hence PageRank.

[Ben Gilbert]

Ah, yes, we should say Page. It is ironic that the things that were being ranked were web pages, because the actual page and PageRank is named for Larry Page, not for the pages they would rank.

[David Rosenthal]

Right, exactly. So Larry goes back to Terry and he's like, okay, this ranking idea, this seems like a really interesting computer science problem. The annotation thing seems messy. Why don't you just focus on rankings? So Larry goes back and ultimately has the breakthrough leap. Oh, we should apply rankings to web pages themselves. Larry says, 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, at least the germ of the idea for PageRank as we all know it today is born.

[Ben Gilbert]

So essentially, just the mechanics of what the idea is, is try to rank websites 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.

[David Rosenthal]

Of course, yes.

[Ben Gilbert]

How important is a research paper? Well, that depends how many other people cited the research paper.

[David Rosenthal]

And in particular, not just how many raw number of other papers cite a research paper.

[Ben Gilbert]

How many important papers cite your research paper?

[David Rosenthal]

If you're in an important journal, what do those papers cite? And this becomes the inspiration for how they're going to do the ranking of.

[Ben Gilbert]

Webpages 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.

[David Rosenthal]

Oh, interesting. I didn't know that, actually. I mean, it makes sense.

[Ben Gilbert]

It's kind of like how Hollywood loves making movies about Hollywood. Academia loves doing papers about papers.

[David Rosenthal]

Yeah.

[Ben Gilbert]

So there are some examples to look at of how might one use references or citations to weight importance.

[David Rosenthal]

Right. So we're almost all the way there to the huge leap that would become PageRank and then BackRub and ultimately Google. But there's still one missing piece. They've got the theory of how to do this. But what's a citation on the web? Well, they realize it's a link. A hyperlink is the exact same model as an academic citation. And not only 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. Anytime you click a link, you know, anybody who's creating a link can make anchor text for it or feel like, 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 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.

[Ben Gilbert]

Yes. 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, what words did they use to describe your website? So this whole thing is a genius idea, and we're going to talk about all the work that they had to do to implement it. 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. 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 and all the crap all the way at the bottom.

[David Rosenthal]

Yep. So Terry's like, yeah, do this for your dissertation. Like, great, let's do this project reputation on the web.

[Ben Gilbert]

That's going to be valuable.

[David Rosenthal]

So there's one more thing to making this brilliant PageRank idea work. Which is a little problem, which is that the way the web is architected, any given webpage 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?

[Ben Gilbert]

Right. It's kind of 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?

[David Rosenthal]

Exactly. And so the only way you could figure that out is, is if you somehow went and got a copy of everybody's phone book and then could backtrace all the links. Well, that's what they do. Google could not have been built at any other time in history.

[Ben Gilbert]

Yes. Because the web was actually small enough that you could go suck it all up then.

[David Rosenthal]

Exactly. It was small enough that as a research project, it was not totally insane.

[Ben Gilbert]

Pretty insane.

[David Rosenthal]

It's just a little bit insane. It's still pretty insane to say, oh, I'm going to go crawl the entire Internet, make a copy of every webpage out there, store it in something, which we'll get to, and then trace back.

[Ben Gilbert]

All the links and then reverse compute all the links. To answer that one seemingly simple question of what web pages link to me.

[David Rosenthal]

If you had tried to undertake this as a brand new project, 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 index copy like this, like.

[Ben Gilbert]

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.

[David Rosenthal]

Yep. Prohibitively expensive.

[Ben Gilbert]

So we're in, what, 96, 97 here?

[David Rosenthal]

Yep, we're in 96. Kind of the back half of that first academic year of Larry at Stanford.

[Ben Gilbert]

Great.

[David Rosenthal]

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 the project Backrub, since it uses backlinks for ranking web pages. So they spin up Backrub, Stanford Eduardo, and Larry writes the first implementation of PageRank, and the crawler to go do this, he writes it in Java and it's like super buggy and basically doesn't work. So they ask one of their friends there at Stanford, a guy named Scott Hassan, to help them. Scott's a better coder than Larry and Sergey is, so he codes it up in Python and it actually sort of Works Now, 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.

[Ben Gilbert]

Right. And they hadn't even come up with the name Google. I mean, nothing about this. It's not a search engine.

[David Rosenthal]

Exactly. So if you go to that project homepage and you can find cached versions of this on the Internet or images, I think there's even a recreation of it out there.

[Ben Gilbert]

Yes. With the really weird black and white picture of a backrub with the red text over it.

[David Rosenthal]

Yeah, I think that picture actually was on Backrub Stanford Edu. It looks like somebody's back.

[Ben Gilbert]

They certainly didn't search Google images. I know that.

[David Rosenthal]

Yeah, exactly, exactly. So the text on the page says backrub is a quote unquote web crawler, which is designed to traverse the web. Currently, we are developing techniques to improve web search engines. So, yeah, Ben, they're not thinking of Backrub as a search engine yet. They're thinking of Backrub as just a implementation of a crawler and the page rank algorithm.

[Ben Gilbert]

Oh, that's interesting. But they have the insight that this method of ranking, if it turns out to be better, could contribute to better search engines.

[David Rosenthal]

Yep. Because again, even though Larry really wants to start a company, he's thinking he's going to get his PhD and then go forth here.

[Ben Gilbert]

Kind of like Mark Zuckerberg got years into Facebook before realizing, oh, this is my company.

[David Rosenthal]

So Larry and Sergey are building Backrub here, and I mentioned Scott Hasan, their friend who helps code it up in Python, doesn't end up joining Google. Well, what happened to Scott? Scott leaves while all this is going on and starts a company. Because it's 1996, 1997, you're here in Silicon Valley, the bubble is inflating. Like, what do you do? You go start a company, it's your.

[Ben Gilbert]

Obligation to go take it. Smash this pinata.

[David Rosenthal]

So Scott leaves, starts a company called E Groups. That company a couple years later ends up getting acquired by Yahoo, becomes Yahoo groups for about $400 million. Do you know who co founded Egroups with Scott?

[Ben Gilbert]

Ugh, man, you're stumping me today.

[David Rosenthal]

No, Larry's older brother, Carl Page.

[Ben Gilbert]

Oh, that's this company.

[David Rosenthal]

Yes.

[Ben Gilbert]

Wow.

[David Rosenthal]

So here we are, we've got Larry and Sergey doing this research project to improve search engines. Meanwhile, their buddy who helped code that, and Larry's older brother, they just went and they started a company and then they raised money. Sequoia and Mike Moritz would end up funding eGroups and then they sell it.

[Ben Gilbert]

For $400 million to the leading web company at the time. That seems like a good idea.

[David Rosenthal]

Yeah. Larry and Sergey start thinking, ooh, wait, maybe we should do something commercial around this. This seems like it would have value. So that leads them in the spring of 1997, before school is out, to start shopping this backrub technology around to the other existing search engines. At the time, they're not yet thinking that this could be a company and they're thinking, we're going to sell this technology to another search engine. They're going to 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.

[Ben Gilbert]

Because they effectively have it working at this point, even though it's not, 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.

[David Rosenthal]

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.

[Ben Gilbert]

Right.

[David Rosenthal]

So they're shopping it around that spring, that summer, they get a bunch of meetings. They meet with Infoseek, Lycos, all the existing search engines and we should say.

[Ben Gilbert]

There was a large list of other search engines, portals, Internet properties, search engine like things. Yes. That existed and had traffic. I mean, Archie Gopher, AltaVista, Hotbot, Inktomy, Lycos, Yahoo, Excite, Infoseek, the list goes.

[David Rosenthal]

On and on and on. Yes. So the closest they get that spring and summer is with Excite. This story is amazing. 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 Khosla, a legendary founder of Sun Microsystems. By this point in time, he's one of the top VCs in the valley. He's at Kleiner Perkins alongside John Doerr. The two of them are running the firm and Vinod is on the board of, of Excite. And so somehow Larry and Sergey and I think they bring Scott along, get a meeting with Vinod and they hammer out a deal that Excite is going to license this back rub search technology from the two of them for about a million dollars. Part of that's in cash, part of that's in Excite. Stock and Larry and Sergey are going to come work at Excite that summer, implement Backrub for their search. You know, basically make Excite into Google. And then they're going to leave and they're going to go back to Stanford in the fall. And they get so far that they run a test, a side by side test of Excite's search results, the original algorithm and then the Backrub algorithm. And the legend goes that they're demoing this test to Excite's CEO as like a final step to finalizing this deal. And the results are so relevant. With Backrub, you get exactly what you search for, exactly what you want. It's right there. You click, you go to it. And the usual Excite search is bad. You have to click around, you go forward, you come back, you spend a lot of time on the site. And the CEO is like, 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.

[Ben Gilbert]

It is amazing that as early as 1996, 7 this time period, this very important conflict of interests is teased out. This is 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 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 finding what they really wanted?

[David Rosenthal]

Now, all this is 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 per thousand views. You wanted page views and impressions on your site. And here what Backrub is doing is they're going to kneecap your page views, right?

[Ben Gilbert]

They're going to dramatically reduce the number of page views and allocate them to other properties on the web so they can leave your property.

[David Rosenthal]

This deal was never going to happen with Excite or anybody else because it broke the business model, right?

[Ben Gilbert]

It was not strategic for them. It was a conflict of interest to implement this type of better ranking, better search, faster technology. So back to the lab, right? No deal.

[David Rosenthal]

Yeah, Exactly. That fall 1997, Larry and Sergey go back to school. All these get rich quick deals have fallen apart. Nobody wants Backrub And Larry's just like, well, eff it. All right, this is how I believe search should work. We're going to build this thing ourselves here at Stanford. Quote from him, we couldn't get anyone interested in buying Backrub. We did get offers, but they weren't for much money. So we said, whatever. We went back to Stanford to work on it some more. These companies weren't going to 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.

[Ben Gilbert]

Yeah. And I mean, when he says, we talk to others. They tried to sell PageRank to Yahoo for $1 million and were rejected. And there's going to 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 Infoseek. Also didn't happen. Infoseek was bought by Disney and later shut down. They showed the tech to Lycos. They were shopping it all around town.

[David Rosenthal]

So they get back to campus and they're like, all right, we're going to build a real search engine ourselves. First order of business, the name Backrub, you're probably not going to fly.

[Ben Gilbert]

Yeah. Describes the technical underpinnings, but doesn't really describe the searching.

[David Rosenthal]

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. And the story is that Larry's dorm mate suggests the term Google.

[Ben Gilbert]

Oh, wait. Do you know the name before this?

[David Rosenthal]

Oh, no.

[Ben Gilbert]

Do I know something you don't? Oh, this is great.

[David Rosenthal]

Ooh, go for it.

[Ben Gilbert]

The name is Whatbox.

[David Rosenthal]

Whatbox?

[Ben Gilbert]

Whatbox. It rolls right off the tongue. You know, it's a box that you type stuff into.

[David Rosenthal]

Sort of a question.

[Ben Gilbert]

But they decided that it sounded too close to a porn site, so they decided not to go with it.

[David Rosenthal]

Well, hey, I guess if Facebook can be a product name and a company. Yeah. Maybe we could all be whatboxing things.

[Ben Gilbert]

I mean, we are all whatsapping. So to be fair.

[David Rosenthal]

Yeah, it wasn't that crazy.

[Ben Gilbert]

It wasn't that crazy. But yes. Whatbox. Out.

[David Rosenthal]

Next.

[Ben Gilbert]

Name. How did Google come about?

[David Rosenthal]

Larry's dorm mate suggests that they might want to use the term Google. G O O G O L, which is the mathematical term for one followed.

[Ben Gilbert]

By a hundred zeros, ten to the 100th power.

[David Rosenthal]

Yes. And the legend is that Larry loves the name. Sergey likes it. They go to register the domain Name and Larry misspells it and thought that Google was spelled G O O G L E misspells.

[Ben Gilbert]

Really? I thought G-O O-G-O L.com was taken.

[David Rosenthal]

Oh, maybe that's it. Maybe that's it. Like anything here, you know, there's a lot of legends floating around.

[Ben Gilbert]

Yes. But the misspelling is actually great because you kind of should spell it the way that other people are most likely to spell it.

[David Rosenthal]

Right, Exactly. This is before you've got the Google. Did you mean in the search box here? Yes, spelling was important. So Sergey designs the homepage and makes the first logo using the open source drawing program gimp. You ever used GIMP back in the day.

[Ben Gilbert]

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 know about that one. That was real colorful before the drop shadow thing. 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.

[David Rosenthal]

Yes, it was. We'll link to it in the show notes and on social media. It's fun to look at.

[Ben Gilbert]

Yep.

[David Rosenthal]

But basically that homepage design of a colorful logo in a search box, that was it then, that's it today.

[Ben Gilbert]

97 onward.

[David Rosenthal]

So that 97, 98 academic year is when they're building back rub into Google. By spring quarter of that year, Google google.com is doing 10,000 queries a day. 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 starts 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.

[Ben Gilbert]

So at one point they actually did bring down the Stanford network. This is how fast it all happened. It's all during this academic calendar where they're taking backrub, they're working in a search box. So there's now a keyword that we're ranking things for, not just arbitrarily ranking them. That keyword relies heavily on the anchor text description. So there's sort of these two early key innovations. There's waiting 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 dock stuff, David?

[David Rosenthal]

Oh, yeah, yeah, yeah.

[Ben Gilbert]

There's these famous stories of other researchers that have ordered computers, but they actually aren't going to start the project for a few months. So Larry and Sergei would go grab them off the loading dock, spin them up, use them 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 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, then that's going to 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 up Stanford's network bandwidth. At one point, they're using about half the bandwidth of the entire university to be serving out google.com pages. And 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.

[David Rosenthal]

Yep. So here we are, end of the 1998 academic year. It's clear this is going to be a company. This has to be a company. Stanford's about to tip over if it stays as a project anymore.

[Ben Gilbert]

Stanford has been very kind to say we're going to keep 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.

[David Rosenthal]

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 1% of the company or something like that. Stanford did very, very well for their largess here.

[Ben Gilbert]

Yes.

[David Rosenthal]

So Larry and Sergey go to a professor in the CS department at Stanford named Dave Cheriton. 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 a founder of Granite Systems and had stayed as a professor. Cisco had just acquired granite for 220 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 make it into a company? So Dave emails Andy that evening. Andy replies right away. He's like, sure, I'm kind of busy tomorrow, but how about we meet at your house at 8am in the morning? I'll come by on my way to the office. And thus begins the story of Google's legendary seed financing round and the crazy cast of characters involved in it. But before we tell that story, now.

[Ben Gilbert]

Is a great time to talk about our presenting partner, JP Morgan Payments. So, listeners, you've heard us talk about specific aspects over the last few episodes like biometric payments, their developer platform and their supply chain financing. But today we wanted to pop up a level and tell you about the acquired and J.P. morgan partnership itself.

[David Rosenthal]

Well, first is the team. The folks there at JPMorgan are a, absolutely world class and B, really get acquired. In what makes this community special. Just look at the Chase center show we did. They took our vision and said what if we did all this times 10? And now we're about to go do it all over again at Radio City.

[Ben Gilbert]

And deeper than that, they're just an insanely trusted brand. JPMorgan Payments is the world's largest payment franchise. They power 18 of the top 20 corporations in the world. And most companies we've covered on the show, in fact, over 90% of the Fortune 500 companies do business with them.

[David Rosenthal]

A couple years ago we were worried that, oh, JPMorgan payments might only be for big companies, but it's not. We've seen startups that heard about them on acquired become customers. And that's our goal in picking partners is to find the very best companies that create value for listeners and will scale with your success and be around forever. That is JP Morgan Payments. They literally do $10 trillion in payment volume a day. Think about how insane that is. And with JPMorgan processing over 50% of all US E commerce transactions, their software and payment rails basically underpin our entire global financial system.

[Ben Gilbert]

Yes, and lastly, every single one of your companies needs payments. JP Morgan thinks about payments as a lever for growth. Not just vanilla operational stuff. They've been investing heavily with products now for fraud prevention, fx, working capital and more. All of course built enterprise grade and with developer tools and APIs. You can learn more at jpmorgan.com acquired, which itself is a cool Custom site they've built that has details on the products we've been talking about all season, plus a little behind the scenes video of acquired live at Chase center from last year. When you get in touch, just tell them that Ben and David sent you or shoot us a message in Slack and we'll get you connected with their team. All right, David, the Google Seed round.

[David Rosenthal]

Yes, Here we go. So 8:00am the next morning, Larry and Sergey rouse themselves out of bed over on the Stanford campus, 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, show me what you got. They demo Google for him. Andy loves it. He's like, Great, I'm in. $100,000. And Larry and Sergey are like, we weren't talking about 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 $100,000, basically just throws it at them, 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.

[Ben Gilbert]

No investment documents, no valuation, just here's $100,000. I assume I will get something for my investment.

[David Rosenthal]

Yep, exactly. And this was the forcing function for Google Inc. To get founded.

[Ben Gilbert]

So Larry and Sergey need to be able to like, spin up an entity, have that own the intellectual property from Stanford, and set up a bank account for that entity such that they can deposit this check before it expires.

[David Rosenthal]

It takes a couple months to get all this done.

[Ben Gilbert]

Yes.

[David Rosenthal]

Which, depending on who you ask, is either very good or very bad. Because in the intervening months, 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 Sriram, who started advising them on starting this company, spinning things out.

[Ben Gilbert]

And longtime acquired listeners will recognize this name from our Amazon episode.

[David Rosenthal]

Oh, yes. Ram had left Netscape and joined a startup called junglee that Amazon.com then acquired. And so Rahm had a little bit of liquidity. He throws in for $250,000 into the round. And he's like, hey, do you guys want to meet Jeff?

[Ben Gilbert]

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 94, this is 98. Amazon just went public the year before. I mean, it's kind of crazy that at this point in time, it was little Larry and Sergei grad students meeting public CEO Jeff Bezos.

[David Rosenthal]

Yeah, yeah.

[Ben Gilbert]

It's almost like when your six month old baby is hanging out with a 14 month old, you're like, oh my God, they're so different. But they're going to be classmates in a couple of years. They're basically the same age.

[David Rosenthal]

Exactly. So Rahm arranges a meeting, and the next time that Jeff is in Silicon Valley, they all meet at Rahm's house. And similar to Andy Bechtelsheim, Jeff's like, great, Rahm, what are you in for? 250. I'm in for 250 too. And so all in, they end up raising a million dollars at a $10 million post money valuation. And yes, Jeff Bezos does a quarter of Google's seed round.

[Ben Gilbert]

It's so crazy. You know, we knew about this in the past because we talked about 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 50 founder friends in addition to the main VC, that's not surprising at all. But Jeff is a quarter of the money in the seed round.

[David Rosenthal]

Yeah.

[Ben Gilbert]

One of four investors, is that right?

[David Rosenthal]

That's right. Yep. It's Andy, Dave, Ramon, and Jeff. 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 $20 billion today.

[Ben Gilbert]

And even if he did sell at IPO, he turned that 250k into something like 200 million at IPO.

[David Rosenthal]

Right, right, right. Nice returns. And Amazon stock was probably in the dumpster when Google went public, so, you know, could have used the money. Anyway, Google is now an official company. They've got a million dollars in cash from their crazy seed round.

[Ben Gilbert]

It seems like they might burn through that kind of fast because of their business model of trying to store the entire Internet on 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?

[David Rosenthal]

Well, first, office space. So famously, they go find space in a Menlo park garage, a house owned by one Susan Wojcicki, who was a manager at intel and soon would become herself an early Google employee and then.

[Ben Gilbert]

Eventually CEO of YouTube.

[David Rosenthal]

Yeah, exactly.

[Ben Gilbert]

But besides office space, it's time to put your product out into the world. And I think it's worth drilling in here. What was the state of search in 1998 when Google becomes a company?

[David Rosenthal]

Yep. I think it's worth saying a little bit more about two other players to set the context. The first is AltaVista. Folks who are old enough might remember AltaVista pre Google was like pretty good.

[Ben Gilbert]

It was pretty good.

[David Rosenthal]

Altavista has a fascinating history. This is wild. I didn't know this until doing research for this episode. Do you know where altavista came from?

[Ben Gilbert]

I do, but most people don't. Dec Digital Equipment Corporation.

[David Rosenthal]

Dec, Digital Equipment Corporation's Western Research Laboratory, which was their Palo Alto research lab, their equivalent of Bell Labs. But dec, I mean the company we talked all about in our Microsoft series, where Dave Cutler came from who wrote Windows NT and a legendary, legendary company.

[Ben Gilbert]

Right. Hardcore enterprise big hardware computing company, the minicomputer company.

[David Rosenthal]

Judy Faulkner wrote Epic on a DEC midicomputer. Right?

[Ben Gilbert]

Yep.

[David Rosenthal]

This is where altavista came from. And the big insight that they had was you can go crawl the web to build the index in parallel. So before altavista, 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'd 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 because remember, it's all growing so fast.

[Ben Gilbert]

Oh, fascinating. And it's a super parallelizable process. Why not? Oh, and this makes sense because DEC hardware would be pretty well suited for this. They've got a big enterprise appliance that they need applications for.

[David Rosenthal]

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. So if you think about what are the competitive vectors of search, what makes one search engine better than others? It's not just 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.

[Ben Gilbert]

Yep.

[David Rosenthal]

One is speed. How fast are you going to return.

[Ben Gilbert]

The results, 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.

[David Rosenthal]

Right. It was like AI Today you're doing deep research, you're just like, okay, great, send a query, go get some lunch, come back. So funny. Exactly. We'll get more into speed in a minute. But the other attribute that's super important is the index. How big is the index of pages that you're searching across? And before AltaVista 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 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 going to be that useful.

[Ben Gilbert]

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 crawled, that was cumulative and they just kept adding new sites to it and assuming you weren't doing many updates.

[David Rosenthal]

Right, right, right. Oh, man, how times have changed. So when altavista spins out of Deck and launches as a commercial company and entity in and of itself, its big claim to fame is, is its index. It has 16 million pages in its index versus the competitors. AltaVista still kind of sucked at relevancy and speed. So the information retrieval algorithms that AltaVista and others were using 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, you just spam dog food in invisible text all over your page.

[Ben Gilbert]

Or even not invisible, you just want to make the dog foodiest dog dog food page on the web.

[David Rosenthal]

Exactly. And the other thing that, you know, I guess altavista was probably fine at this, but not good, was speed. And that was a particular problem. I mean, altavista had great hardware from.

[Ben Gilbert]

Deck and really expensive hardware too. That's the 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 DEC hardware for search, which we should say 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? Because to date, 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? 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.

[David Rosenthal]

Yes, exactly Ben. Search as a industry was not interesting. One, because the economic upside was capped. And two, also people love directories and portals and Yahoo, like Yahoo was the big player, not altavista or Excite or Lycos or Infoseek or any of these others. So Yahoo was the site that was taking off like wildfire. They'd gone public in 1996 at a billion dollar market cap. By 1998, when Google.com is launching as a company, Yahoo's a $20 billion public stock. This is the juggernaut. And what was so great about Yahoo? Like yes, it was started by Jerry Yang and David filo, you know, two other Stanford PhDs, but it wasn't technology driven. It started as Dave and Jerry's guide to the Internet. It didn't start as their like academic research. What Yahoo was was exactly that. It was a hand curated guide 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, technology. Search engines will never be able to replace human curation. And human thought about what the most interesting sites on the web are. Hell, this is why Larry's original idea was this annotation idea. It was humans who are going to rank things.

[Ben Gilbert]

And for the size that the web was at the time, Yahoo was correct.

[David Rosenthal]

Yes.

[Ben Gilbert]

When you have a small number of total websites, curating them is interesting. But when you have 10,000 times more websites and 10,000 times more niches that people are interested in, directory is not going to be an efficient way to surface what people are looking for. If you believed that the Internet was going to get as big as it did, so search became a more interesting front door. But for this period of time, directory was an amazing front door to the Internet.

[David Rosenthal]

Yep. Now here we are in 1998, the Internet is already big enough that yes, it's clear there are a lot more interesting web pages out there.

[Ben Gilbert]

So Yahoo has search to address that.

[David Rosenthal]

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 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.

[Ben Gilbert]

So interesting. It is the epitome of kind of just good enough technology. It 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 having enough human editors to cover all the big categories, 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.

[David Rosenthal]

Yes.

[Ben Gilbert]

Okay, so that's what's going on at Yahoo and all the portals. The opinion of Larry and Sergey is a. We don't want to do a homepage 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 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, 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. 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 700% year over year. So isn't that going to be really valuable? Yes, but we don't know how yet.

[David Rosenthal]

But the problem is actually even more dire than what you're saying. As usage is growing, they need more infrastructure, but they're not making any money.

[Ben Gilbert]

Right. And for each piece of this, you need more infrastructure. You need 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 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.

[David Rosenthal]

Yep. 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 PageRank and everything we've been covering. Two though, is the infrastructure to actually make this whole thing work and scale efficiently.

[Ben Gilbert]

Yes.

[David Rosenthal]

So right after they raise the angel round, Larry and Sergey go out and they recruit just like unbelievable top tier engineers and computer scientists to come rewrite the code and work on this infrastructure problem. So pretty quickly they get Urs, Holza and then Jeff Dean, who are just these absolute legends. They are both still at Google today. Urs is now a fellow, but he ran all of Google's infrastructure from 1999 until 2023. Before joining, he'd done his PhD at Stanford and he was a professor at UCSB. He'd also written the primary Java virtual machine that sun used as like the official Java virtual machine.

[Ben Gilbert]

Oh wow.

[David Rosenthal]

And Larry and Sergey recruit him out of academia to come join his employee number eight. And his initial job title was search engine mechanic because quote, everything was broken. So that's ers. And he builds all this incredible infrastructure. Jeff Dean, who they also recruit around the same time from Deck Engineer at Dec. Yes, yes. And Jeff is basically like Google's Dave Cutler. So Today Jeff runs AI at Google. He also implemented the first version of AdWords, built AdSense, rewrote the core search pipeline five times, co invented and implemented BigTable, MapReduce, TensorFlow and Gemini. He actually keeps his resume up to date online. We'll link to it in the show notes. It's incredible.

[Ben Gilbert]

We're bearing a little bit of a lead here. We spoke with Jeff to prep for this episode and I watched a handful of talks he's given. Delightful human and God, what a great engineer.

[David Rosenthal]

Just generational talent. But this is like that 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 and scale and it was only because of these guys that it did well.

[Ben Gilbert]

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 after the dot com crash. But this in 98, 99 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 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 Sergey's vision, the excitement around the idea of how novel their approach was. Everything.

[David Rosenthal]

Yep. 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 and the architecture coming out of Stanford was super unique and novel. This was a really, really interesting thing to work on. And why was that? So the Google index that they needed to build and operate on for the search engine for PageRank to work was so much bigger than any other index out there. Google needed, like, the entire page to compute all the rankings and find the links, find the backlinks. They needed to architect Google with this huge distributed computing system. So the index was so big that it wouldn't fit 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 is they break the giant index into tons and tons and tons of little chunks, they're called, of individual 64 megabyte files, small files, tractable files, 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 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 just returns only the chunks that it needs, not the whole index, and that makes the whole thing possible.

[Ben Gilbert]

So basically, that one server you're talking about can kind of just say, 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, pull from all those different chunks concurrently.

[David Rosenthal]

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, but then what's actually getting returned to them to operate on is only just the chunk data that they need.

[Ben Gilbert]

Hmm. 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.

[David Rosenthal]

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 anywhere. And Larry and Sergey Already had to grab commodity hardware, hard drives and motherboards directly back at Stanford. Well, URS comes in and he's like, whoa, we can just keep going with this. Let's keep using cheap commodity components and hardware. And yeah, they'll suck and they'll fail a lot and things will burn out. But that's okay because we've got this distributed file system. We'll just replicate everything like three or five times, right?

[Ben Gilbert]

And we can cleverly design software to account for the fact that we have commodity hardware, commodity ram, 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 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 DEC server?

[David Rosenthal]

So I read that industry average server hardware failure rate at the time was around like 3 to 4% per year. Google's hardware failure was over 10% per year. But the whole system was designed that it didn't matter. It was all just replicated.

[Ben Gilbert]

Super interesting.

[David Rosenthal]

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, they technically become the world's largest computer manufacturer.

[Ben Gilbert]

Oh wow.

[David Rosenthal]

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 their data center and then data centers and their early.

[Ben Gilbert]

Data centers, they're never really putting them in PC housing, right?

[David Rosenthal]

Yes. So these early, you know, quote unquote machines they're building, they're not even putting PC cases on them. They just 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 them in their data center racks.

[Ben Gilbert]

The photos of these early Google quote unquote server racks 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 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. 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, 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 kind of handle it all in software.

[David Rosenthal]

And 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 than anyone else out there on the market. So once the business model kicks in, this is why Google search has like a 87% gross margin on it.

[Ben Gilbert]

Yep.

[David Rosenthal]

There's this incredible story of Google's first data center was a colocation data center facility, kind of a shared physical space in Santa Clara called Exodus. And the data center caged. The space that Google had allocated was right next to the cage for ink to me, which was a competing search engine out there that we'll talk about in a minute. And Google folks, talk about the ink to me, 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 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 inktomy cage next door. Borrowed, Borrowed, borrowed, borrowed. Yes.

[Ben Gilbert]

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? A parity bit adds one extra bit to memory that is 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. 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 kind of check and see, wait, 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 time.

[David Rosenthal]

Stuff goes wrong all the time.

[Ben Gilbert]

Well, because Google is using this commodity hardware, they then have to 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.

[David Rosenthal]

So the net of these constraints and the incredible technical team Google has is that they design everything from the ground up, the computing systems, the file systems, the data centers, the racks, the hardware, everything. And they built stuff like GFS, the Google file system, MapReduce. Yahoo would eventually feel like they needed to copy MapReduce to be competitive, and they would open source that as Hadoop. So people know Apache Hadoop, that is a Yahoo copy of Google's MapReduce.

[Ben Gilbert]

Yep. Of course, shepherded and stewarded mostly by people outside of Yahoo eventually, but that's where it came from.

[David Rosenthal]

Yep. And then ultimately, because Google is building their own hardware 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 and ad results instantly to users all over the globe.

[Ben Gilbert]

Yeah. So this speed really starts to become a bragging point for Google, where whenever you do a query, 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 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 and we're awesome, but B, we know it's the best stats that anyone out there could report to you.

[David Rosenthal]

Yep, it's a stake in the ground. So all this grows out of the constraints of, like, they don't have any money. First at Stanford and then this little angel around they raised, they don't have.

[Ben Gilbert]

A way to generate any money.

[David Rosenthal]

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 that Google, the company, has. But none of this would have mattered if they didn't figure out the business model. But before we tell the story of the building of the best business model of all time, now is the perfect.

[Ben Gilbert]

Time to thank a new friend of the show Anthropic and their AI assistant, Claude.

[David Rosenthal]

Yes. So as we were doing our research for this episode, looking through decades of interviews, SEC filings, technical papers, Claude was an awesome research partner. I actually had this crazy thing happen. I've never had this happen before. I was asking Claude a bunch of questions about early Google financials, and it kept giving me numbers that I thought were wrong, but the numbers it was giving me were consistent. So I went back and I checked against the numbers in the book I'd been using. It turns out that Google actually restated their early financials and Claude was all over it. So Claude actually saved me from making a somewhat meaningful error later in this episode. I've never had AI do that before.

[Ben Gilbert]

Yeah, now I wish we had Claude for all, what, 200 of our other episodes.

[David Rosenthal]

Yeah.

[Ben Gilbert]

I also played around with Claude's extended thinking mode in my research, especially analyzing Google's S1, which gave me a bunch of great insights that we'll share later in the episode.

[David Rosenthal]

Yep, this type of research is where Claude really shines. Compared to, well, traditional web search, Claude can analyze hundreds of pages of documents simultaneously. And now with its connection to Google Workspace, it can pull insights from files in Google Drive, check Gmail, and search the latest information, all while maintaining context about what you're actually trying to understand.

[Ben Gilbert]

And Claude is built by Anthropic, so, you know, it has a focus on being helpful, harmless, and honest. When you're doing serious research, like we do here at Acquired, you need an AI you can trust to be accurate and not just impressive.

[David Rosenthal]

Yep. Plus, Claude's new Opus 4 is widely regarded as the world's best coding model. So, as you can imagine, we talk to a lot of engineers doing what we do, and we keep hearing over and over again from developers that Claude is their favorite model.

[Ben Gilbert]

Acquired listeners can get half price on Claude Pro for three months using our link at Claude AI Acquired, that's C, L, A U D, E A, I Acquired. Or click the link in the show notes.

[David Rosenthal]

Yep, Claude thinks With you, not for you. And trust us, when you're trying to untangle 25 years of Google history, that makes all the difference. Our thanks to Claude and Anthropic.

[Ben Gilbert]

All right, David. So going from having no business to the greatest business model humankind has ever discovered, not exactly a straight line, huh?

[David Rosenthal]

No, not at all. So how does it all start so early 1999? Even despite the incredible infrastructure work and being able to scale cheaply, Google's still running out of money from the angel round. And they hire a recent Stanford undergrad named Salar Kamengar, who joins Google as employee number nine. And like many Stanford students at the time, he started using the search product while he was an undergrad and was blown away. And he's like, I gotta go work for this company. He basically bangs down Google's door, tries to get hired. Finally, they're like, okay, okay, come on in. And so the first thing that Larry and Sergey give to him to do is kind of, you might argue, the most important thing in the company. They're like, well, we're running out of money, so we need to go raise venture capital. We don't want to write the business plan in the pitch deck. You write the business plan in the pitch deck. So salary goes off and he writes the pitch deck for the Google series. A collaboration with Larry and Sergey. And they come up with a three pronged business model that they're going to present to VCs. Three ways that they're going to make.

[Ben Gilbert]

Revenue and it's hand wavy as hell.

[David Rosenthal]

Yes. All right, so number one, the biggest revenue driver projected going forward, the main Google business innovative new business model that they're going to pursue here. They are going to sell Google search technology to enterprises so that companies can use the same amazing consumer Google search technology to search their own documents and intranets. This is the business plan for Google for the Series A.

[Ben Gilbert]

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?

[David Rosenthal]

Yes.

[Ben Gilbert]

That will fund what we really want to do, which is google.com.

[David Rosenthal]

Now, it's pretty funny to talk about this. Now, in retrospect, they did have a couple reasons why they thought this might work. Number one was all the way back at Stanford backrub, 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. Also, before the Series A, somehow Larry and Sergey had managed to actually sell one of these deals to the company Red Hat.

[Ben Gilbert]

That's right. That was their first revenue. Right. Was Red Hat.

[David Rosenthal]

Yeah, the open source Linux company. They sold this enterprise search deal to red hat for $20,000. They're like, oh great, there's a market here. So that was going to be the main business driver. And then there were going to be two other business lines too in the company. One was going to 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 going to like it, but we'll put it in the business plan.

[Ben Gilbert]

And it seems like they didn't think through it any more than that because I couldn't find anything about. Is that going to appear on the search results page? Is that going to appear on google.com next to the search box? It seems like it was never real enough to actually have a plan for it.

[David Rosenthal]

And indeed, the Series A pitch deck and business plan, like was intentionally vague. I think part of the reason Larry and Sergey were like, okay, salary, new guy, you go do this, is like they didn't actually want to tell VCs that much.

[Ben Gilbert]

Yeah.

[David Rosenthal]

So that was number two. And then number three was that they were going to license 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. Inktomi had gotten started at this point in time. Inktomi was the next door neighbor at the data center Exodus in Santa Clara.

[Ben Gilbert]

And they built a sizable business selling white labeled organic search results to other portals.

[David Rosenthal]

Exactly. This was Inktomi's whole business is they just sold organic search results, white label to other portals.

[Ben Gilbert]

But there's five big customers and 50 total customers out there for this business.

[David Rosenthal]

Yep. So this is the business plan. This is the pitch deck. They go out. Remember, we're in spring 1999 here. 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 talking about this particular moment in time. He says nobody's feet were on the ground. It's a very Sir Michael way of putting things deliciously.

[Ben Gilbert]

Michael quote yes.

[David Rosenthal]

And Google's got all this usage and engagement and growth numbers. Hey, Internet companies trade on eyeballs. So of course this is going to be a hot deal. Famously, Kleiner and Sequoia end up splitting the deal. And Michael Moritz and John Doar are the two most legendary VCs in the world. They team up, they join forces, they split the deal, and they both join the board of Google at the Series.

[Ben Gilbert]

A, which is unheard of. The fact that Larry and Sergey were able to say, you both only get 12.5% of this company and you have to do it together. They both must have really, really, really wanted to do the deal.

[David Rosenthal]

That is true. And I love that even today, even you have that opinion. We heard from folks in the research that this really was like a Google PR masterstroke to see this narrative.

[Ben Gilbert]

Oh, well, they held a press conference in person with both Sir Michael and John Doerr there. It's the first Google press conference. Larry and Sergey are there in Google branded shirts.

[David Rosenthal]

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 Michael and John split together, but like they had been on boards together before, maybe they'd done one round or the other. And Sequoia and Kleiner split deals all the time, but hey, it was the dotcom era and everybody needed a PR strategy and that one worked well.

[Ben Gilbert]

Fascinating.

[David Rosenthal]

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.

[Ben Gilbert]

Yeah. I think in the middle of negotiations, they got another term sheet at $150 million valuation instead of 100. But I think they were sort of already pot committed to Sequoia and Kleiner Perkins. And I actually don't know who the 150 came from, but I do know it was someone who Ram Sriram set up the meeting with.

[David Rosenthal]

Interesting. And remember, Larry's older brother had co founded E Groups, which Moritz had funded at this point. So like, they knew they wanted to go with Sequoia and Kleiner. That was the goal all along.

[Ben Gilbert]

Yep.

[David Rosenthal]

Regardless, the round gets done. $25 million total raise at a $100 million post money valuation. $100 million valuation was genuinely wild for the time.

[Ben Gilbert]

Yeah.

[David Rosenthal]

Even in the heyday of the dot com craziness for a series A at 100 posts, that was newsworthy.

[Ben Gilbert]

So funny thinking about this today.

[David Rosenthal]

I know today. It's so quaint. It's so quaint.

[Ben Gilbert]

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 kind of the way it would have felt in tech at the time.

[David Rosenthal]

Yes, totally. But despite that, and despite all the hype around the Series A, there's still kind of an urgent imperative to make revenue. Yes, there's 25 million in the bank now, but you've got VCs involved and the playbook back in the dot com days was invest in the company, get quick revenue, go public.

[Ben Gilbert]

Yep.

[David Rosenthal]

So there's a fire lit under Google to figure out the business model. Right around the same time as the Series A happens, Larry and Sergey meet a guy from Netscape named Omid Kordostani.

[Ben Gilbert]

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? And I think he quickly gets the sense, maybe, but Netscape just got bought by aol, it's getting a lot less fun here.

[David Rosenthal]

And Omid was the VP of Sales and Biz dev at Netscape.

[Ben Gilbert]

Yes. So he's very familiar with building an Internet based business. And what these Google guys are doing is very interesting.

[David Rosenthal]

Yeah. And of course, Larry and Sergey, 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. And we should say too, Omid is an awesome guy. We talked to him in research.

[Ben Gilbert]

Yep.

[David Rosenthal]

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, there wasn't a lot of customer pull, shall we say, for this.

[Ben Gilbert]

Yes.

[David Rosenthal]

So for the first six plus months of the company, kind of the rest of 1999, after the venture funding, things are not looking good on the revenue front.

[Ben Gilbert]

David, do you remember this is way back in acquired history, what Doug Leone told us in February of 2020 when we were recording our episode with him.

[David Rosenthal]

Yes, yes, I know exactly what you're going to say. And I've got some more flavor on that quote. You give the quote.

[Ben Gilbert]

Okay, so the quote is from Sir Michael Moritz. He comes to Doug and they're running Sequoia Capital together at the time. And he says, doug, we've never paid so much for so little.

[David Rosenthal]

And that's the lore I Got a little more behind the scenes flavor on the quote.

[Ben Gilbert]

Mmm.

[David Rosenthal]

Apparently it was not Sir Michael who said it first. He might have just been repeating it back, apparently.

[Ben Gilbert]

Was it John Doerr?

[David Rosenthal]

It was Vinod 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 kind of have egg on their faces. They just paid $100 million post for a series A company with no revenue. The revenue is not materializing. We're now into the year 2000. The bubble is starting to burst and Google still basically has no business.

[Ben Gilbert]

Yeah, no business. But growing market share, fervent loving fandom among the people using it, providing real value to people. There's gotta be something here.

[David Rosenthal]

Yes, exactly. So the revenue imperative is becoming, 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. 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.

[Ben Gilbert]

And what do these ads look like, David?

[David Rosenthal]

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 images and banner ads like everybody else does because that'll slow down the page.

[Ben Gilbert]

Yes, it's like they always talk about it for taste, which is true. But yes, it's a performance thing.

[David Rosenthal]

Yes, it's a page performance thing. So there's these great stories about Tim in New York and Omid and the ad salesforce that they're 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, no images, just text. Trust us, it's gonna work.

[Ben Gilbert]

Not very exciting to these Madison Avenue guys. How are they paying for them right now?

[David Rosenthal]

Still cpm.

[Ben Gilbert]

So you buy a keyword and then you're promised that you're going to be an ad that appears on the page whenever that keyword is searched and you're going to pay per thousand impressions of that keyword. Is that right?

[David Rosenthal]

Yes.

[Ben Gilbert]

Okay. Not self Serve no web tools for this. This is like negotiated over the phone. And then they manually hand enter it into Google 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.

[David Rosenthal]

Yes. Not even on the phone. That would be really 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.

[Ben Gilbert]

Awesome.

[David Rosenthal]

Now, what was the pitch, though, to Madison Avenue about why this would work?

[Ben Gilbert]

Intent, baby.

[David Rosenthal]

Exactly. So the very first project that Jeff Dean did when he came over from December is Larry and Sergey. And Urs told him, all right, the VCs say, we gotta sell ads. Go figure out the tech to serve ads 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 going to have to just be text. 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?

[Ben Gilbert]

We know a guy at Amazon, we.

[David Rosenthal]

Know a guy at Amazon who happens to own a good chunk of this company. So Google goes and signs up as an Amazon affiliate, which.

[Ben Gilbert]

How crazy is this? The Google business model was validated, like doing customer development, you know, startup idea validation using Amazon affiliates as the mechanism.

[David Rosenthal]

Yes. Jeff Dean codes it up so that dynamically, as users are searching, 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 saying, go buy this book at Amazon, insert an Amazon affiliate link, and drive traffic over to Amazon. And the amazing thing is, of course, it actually works. Now, whatever the Amazon affiliate commission, you know, if it's 4% or 5% of the revenue of a $10 book, obviously is not going to change Google's fortune in the amount of money that they'll generate from this.

[Ben Gilbert]

But it's a test.

[David Rosenthal]

It's a test. And it's 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.

[Ben Gilbert]

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 shown a great result here because click through rates on search ads are higher than ads that are just randomly around the Internet. Because someone is intending to buy something, they have high intent. That's a great place to show an ad. The click through rate's gonna be higher. But what they also know because it was an Amazon affiliate links is they know the down funnel number too. They know conversion is actually higher from this traffic 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 you're gonna like the numbers. This is ultimately a math problem.

[David Rosenthal]

Yeah, it was an absolutely brilliant test and bootstrap of the first step of the Google Ad model.

[Ben Gilbert]

Yep.

[David Rosenthal]

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, they're winning some clients on Madison Avenue. Like, good, great. The more interesting piece for the next year, year and a half is the OEM search portal deals. And there's some big deals to come. Netscape, Yahoo, aol.

[Ben Gilbert]

This is white labeling Google search to be the search powering other places search activity that has tons of traffic, which.

[David Rosenthal]

Oh by the way is also going to train huge portions of the Internet to use Google search.

[Ben Gilbert]

Yes, it is. And specifically what were the portal deals at this period of time before Google had a real functioning 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.

[David Rosenthal]

Yep, it was the ink to me business model. It was exactly that. We're selling our search results for you to use on a third party page.

[Ben Gilbert]

And it's effectively like a B2B supplier. They're a vendor to a portal. More or less.

[David Rosenthal]

Yes. It turns out though that we're still in the era of the Internet where portals are pretty big ton of traffic.

[Ben Gilbert]

And they're not just any old vendor, they're a vendor that at the bottom of every page says powered by Google.

[David Rosenthal]

Yes. So pretty quickly after Omid joins from Netscape back in 1999, he goes back to his old colleagues at Netscape AOL and gets essentially like a proof of concept deal done with them. And that's for Google to backfill organic search results on Netscape's own directory service that they just launched to compete with Yahoo.

[Ben Gilbert]

So it's interesting, 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.

[David Rosenthal]

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.

[Ben Gilbert]

Right. Worth remembering. AOL way, way bigger 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 organ they're working with right now.

[David Rosenthal]

Yep, exactly. But relative to how small Google actually 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, you know, organic search results, there's so much traffic that it blows out Google's infrastructure.

[Ben Gilbert]

Well, it comes close. Basically. They're watching the analytics like a hawk. Omid gets an urgent call from Sergey saying the traffic is about to tip over and this is potentially company killing because 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.

[David Rosenthal]

Or be able to go sell to enterprises that they're thinking they're going to do at this point in time.

[Ben Gilbert]

Right. So they cannot tip over 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.com for today and we are going to prioritize all traffic from Netscape for our servers until we can stand up more machines.

[David Rosenthal]

Yeah, just think about this for a minute. Think about everything that Google is today. Never goes down universally available, basically everywhere in the world on every device. It's fricking Google. In 1999 they shut Google down so that they could serve Netscape's users.

[Ben Gilbert]

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.

[David Rosenthal]

It also ends up being the right 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 going to see Powered by Google at the bottom.

[Ben Gilbert]

And they got trained. I mean, so the Netscape deal brought in 3 million total searchers per day. And at first Google's 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 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.

[David Rosenthal]

It becomes the intel inside of search. Yes, it's the ingredient brand.

[Ben Gilbert]

That's exactly right. So now they've got some distribution, millions of users, but still very little revenue in June 2009.

[David Rosenthal]

Yep. So over the next year or so, obviously they're working on the other business models too, but 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 Yahoo.

[Ben Gilbert]

Yes. But before we tell that story, now is a great time to thank one of our favorite companies, Statzig. So David, it's funny in a way, Google was the first modern software company in the way we think about them today, with super cushy campuses, an engineering first culture, 20% time, which was copied by fast growing startups who wanted to be like Google.

[David Rosenthal]

Yep. Google also pioneered something else we take for granted though, which is great data tools for product and engineering teams. Google was really the first company to make analytics dashboards, AB testing, feature controls and other tools accessible across thousands of engineers and data scientists that they'd ultimately scale to. These tools enabled a fast moving, bottoms up approach to product development.

[Ben Gilbert]

So just like Google's office and culture, this practice also became the norm for future tech companies. And for the past 15 years or so, every major tech company has had entire teams of people rebuilding this stack of tools internally for themselves.

[David Rosenthal]

But something interesting is happening with the latest generation of tech giants. Rather than building these tools themselves, companies like OpenAI, Figma, Atlassian, Brex, Notion, Anthropic, they're just using Statsig.

[Ben Gilbert]

Yes, Statsig has rebuilt this entire suite of data tools that was available at just 10 or 15 big giant companies as a standalone company itself. This is experimentation with proper statistical analysis, feature flags for safe deployments, session replays, analytics and more, all backed by a single set of product data.

[David Rosenthal]

And using statsig is not just about saving engineering time. It's about getting world class infrastructure from day one. Rather than arguing about metric definitions or troubleshooting broken tools, your team can just focus on building a great product. And since they process an enormous amount of data, statsig does trillions of events per day. They also scale with you.

[Ben Gilbert]

And if you already have your own set of product data, they make it easy to extend into their tools. Statsig is warehouse native so they can plug directly into your existing product data, whether it's in Snowflake, Bigquery, whatever.

[David Rosenthal]

Yep. So if you're interested in giving your product team access to incredible data tools, go to statsig.com acquired. They have a generous free tier with a $50,000 startup program and affordable enterprise plans. That's Statsig S-T-A-T-S-I G.com acquired. And just tell them that Ben and David sent you.

[Ben Gilbert]

All right, David, so how did Google get big?

[David Rosenthal]

In June of 2000 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 2000. In June of 2000, Google signs the deal with Yahoo that they are going to take over all organic search result backfills on Yahoo.com, with the powered by Google branding. And Yahoo is going to invest $10 million in Google as part of this deal.

[Ben Gilbert]

Whew, what a deal.

[David Rosenthal]

This totally saves Google. Between the revenue that they got from Yahoo for this and the $10 million investment, it keeps the company going through the next couple years of the dot com winter until they figure out the AdWords business model.

[Ben Gilbert]

Yep. So traffic doubled to 14 million searchers per day on day one of this deal. June of 2000. We're now a year later than the Netscape deal. So started to get a material portion of web traffic here with 14 million searchers per day.

[David Rosenthal]

Yep. And the next year in 2001, the first full year of this Yahoo portal search deal, Yahoo pays Google $7.2 million for organic search results. So it's material. And again to underscore between the $10 million investment, this revenue, 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.

[Ben Gilbert]

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. 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 going to turn the revenue switch on? And we're sort of like hand wringing over here. We're only two years into the company's life. Think about startups today.

[David Rosenthal]

You don't have expectations of profitability.

[Ben Gilbert]

Yeah, exactly. Within a couple years of founding. But Google's got a very expensive business to run between the people and the infrastructure, and there's no more ability to finance it. So revenue really was the only option.

[David Rosenthal]

So in the midst of all of this, as Yahoo's coming online, the board is also pushing Larry and Sergey to hire a CEO.

[Ben Gilbert]

Yes.

[David Rosenthal]

So as part of the Series A process, John Doar had very begrudgingly extracted a promise from Larry and Sergey to hire a quote, unquote, professional CEO. Larry was CEO for the Series A, and CEO for the next couple years after the Series A, they really didn't want to do it. They were dragging their feet.

[Ben Gilbert]

It took 16 months to find a CEO. I don't think that was entirely because it was hard to find someone. I think some of that was, let's see how long we can get away without one.

[David Rosenthal]

Yes. My favorite story from the whole Google CEO hiring 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 CEO is take them around the Valley, take them on the tour, have them meet the CEOs of the great companies in the Valley, the public companies, and say, look, see what a great CEO can do for your business? So they do this with Larry and Sergey. They go around, they meet everybody in the Valley, they're unimpressed, they don't like any of them. And finally, after months of this, they come back and they tell Kleiner and 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 to come in and hire as our CEO here at Google.

[Ben Gilbert]

Oh, God. Who is it?

[David Rosenthal]

Steve Jobs.

[Ben Gilbert]

Really?

[David Rosenthal]

Yes, yes, yes.

[Ben Gilbert]

Because wasn't he like an idol of theirs?

[David Rosenthal]

Yeah, well. And he had just come back to Apple from Next. 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.

[Ben Gilbert]

I'm like, Nah, you know the option.

[David Rosenthal]

We'Re keeping our buyer high. It's Steve Jobs or nothing.

[Ben Gilbert]

Wow.

[David Rosenthal]

So great. Also, deeply Ironic, given what was to come between Apple and Google 10 years later.

[Ben Gilbert]

Yeah.

[David Rosenthal]

But that is for the next episode. So, anyway, it was a pretty contentious process through all of it. You know, 16, 17, 18 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 and had been at Sun. He was CEO of Novell. He was a business person, too. He'd been a CEO. Been a CEO of a public company. And famously, he hit the Venn diagram of everything. He also went to Burning man, as did Larry and Sergey.

[Ben Gilbert]

Right.

[David Rosenthal]

And so Eric joins in March of 2001. And again, I think Larry and Sergey were still kind of resentful of the process. I think it did 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 I don't really like. And Eric can do those things. 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.

[Ben Gilbert]

Yeah. And the three of them kind of ran the company together. I think they had a daily standing meeting. So it wasn't like 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.

[David Rosenthal]

Yep. And a trusted relationship between three people is just more manpower than two people.

[Ben Gilbert]

Yeah. And the organization at this point was. So we haven't talked about Googliness yet.

[David Rosenthal]

Yeah, let's talk about Googliness.

[Ben Gilbert]

Uniquely googly that there would have been organ rejection if Eric tried to take a heavier hand. I mean, he really kind of came in with a lens toward learning and understanding. There was somebody who decided 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 camped out like.

[David Rosenthal]

An engineer at Google.

[Ben Gilbert]

Had an office mate for many months with an engineer. And it's sort of this Googliness.

[David Rosenthal]

It was a little bit of an acid test for him.

[Ben Gilbert]

Yeah. Right. But this giant worldview, let's solve big problems together. Can we think bigger? No matter how crazy the solution, if it sounds like a good idea, it's worth running down. Googliness is kind of utopian in a way that makes all other companies look almost like an evil empire. It feels like a university in a lot of ways.

[David Rosenthal]

Yeah. That was the culture there.

[Ben Gilbert]

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.

[David Rosenthal]

Yep. But who are really high horsepower.

[Ben Gilbert]

Yeah, everyone there was ludicrously high IQ from the very beginning. But I think that sort of collaborative utopian thing went along with the iq.

[David Rosenthal]

The phrase that I heard a lot in the research from talking to folks who were early Google was a healthy disregard for the impossible. Was like the modus operandi there.

[Ben Gilbert]

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 1999 in their very first press release after the financing. That has been the mission statement.

[David Rosenthal]

It's also amazing how much that mission statement scaled.

[Ben Gilbert]

Yes, I was going to save this for way later in analysis, but organize the world's information. Not too broad, not too narrow, in many ways altruistic, to attract the right type of town 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. We believe that the most effective and ultimately the most profitable way to accomplish our mission is to put the needs of our users first. So there's this almost like trifecta of 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.

[David Rosenthal]

Yep. And I think Eric really bought into this because it was a risk. Even though he joined Google in 2001 and a lot of these portal deals were already underway. The Yahoo portal deal had already happened. It wasn't clear that Google was going to be like a smash hit home run. I think it was clear that it was going to 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, Novell, 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. And I think it was really him making a bet too, of like, no, this is what I want and I'M going to buy into this.

[Ben Gilbert]

Yep, totally agree.

[David Rosenthal]

All right, so what was Eric walking into here with Google and call it spring of 2001. We're now through getting the Yahoo portal deal done. Basically stabilized the ship, saved the company. Google's going to survive the dot com crash between the $10 million investment from Yahoo plus the revenue from that portal deal. Eric hasn't started yet, but Larry and Sergey now turn their attention back to ads and they're really not happy. Like the current state of play with ads, even though it's 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 is nowhere near as big as the pool of potential searchers and intent that's happening on Google.

[Ben Gilbert]

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.

[David Rosenthal]

Yep. And then scale two. Another reason it's not going to 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 going to need to scale the number of people you need to sell by hand. Like that sucks. Then you end up looking just like Yahoo. So that's on the scaling side then on the experience side, the user experience side. There's no notion of ad quality here. 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. And the ads aren't really lining up with that. There's no way to make sure 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 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.

[Ben Gilbert]

And they're pricing a little bit. Kind of finger in the air on what the price at any given keyword should be.

[David Rosenthal]

Exactly. So now, fall of 2000, they're like, okay, let's address this.

[Ben Gilbert]

Yes. So all four of those issues are things that Google's going to address in this next evolution of AdWords. But there's a whole part of the world that heavily inspired AdWords v2.

[David Rosenthal]

Yeah, AdWords v2. You might say is Google's Instagram Stories moment.

[Ben Gilbert]

Yes. There was an innovator in the space called Overture or its original name, goto.com we should tell you that story now. So Goto, Bill Gross started the company out of his startup incubator Idealab, and he did it with quite a bit of flair, coming to the world from the TED conference in February of 1998.

[David Rosenthal]

So same time as Google's about to launch.

[Ben Gilbert]

Right. 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 were fine. There was no one gaming the algorithms. 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. That still kind of worked.

[David Rosenthal]

Yep.

[Ben Gilbert]

So now you're starting to get in 1998 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. 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 going to 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 that would lead to only the most relevant listings for any given category.

[David Rosenthal]

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 that can solve the need you are expressing for through your intent in the search, I should be willing to pay more than anybody else to meet your needs.

[Ben Gilbert]

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 organic side and Bill sort of figured it out on the paid side. So Bill went so far as to. Goto didn't actually develop any organic search technology on their own.

[David Rosenthal]

They relied, it was all paid.

[Ben Gilbert]

Yes. Only on paid listings. And if you kept scrolling, they actually did show organic results, but they would license them from Inktomi and others. David, like you were saying, as a backfill alright, so the net of all this on the TED stage, 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, Goto would show you a list of the paid results exactly in order of who paid the most 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 21 cents, 23 cents, 24 cents.

[David Rosenthal]

Yeah, it was fully transparent.

[Ben Gilbert]

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 98, was that this whole cost per thousand impressions thing was wrong and that eventually he thought the whole world was going to 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 Goto advertisers only had to pay when a user actually clicked. And the origin of this is since Bill had a bunch of companies at IdeaLab, 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.

[David Rosenthal]

I mean, this is how advertising worked throughout all of human history to this point. There's that famous John Wanamaker quote of half the money I spend on advertising is wasted. The problem is I just don't know which half. 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, you don't have to worry anymore about what's wasted. You know, it's all performing.

[Ben Gilbert]

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, but on search engines it totally should be cpc. So how did it go? Well, it worked insanely well out of the gate. Goto did 100 million in revenue in one year.

[David Rosenthal]

Way more than Google.

[Ben Gilbert]

Yes, this is a good business model they have found, by the way, this is also self serve. There is a website where you as an advertiser can log in and, and place a bid. There is an auction that happens, you know, a real time auction where the person with the highest bid, again placed through the website is on the very top. Does this sound familiar to anyone who's used Google's advertising tools? So the 100 million happened in year one. By mid-1999, they had 8,000 advertisers. Compare that against what AdWords had when they launched in October of 2000, which was 350 advertisers in the beta program. To your comment about scale, David, this can just scale to so many more advertisers. Goto goes public within a year. Yeah, isn't this crazy? 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. 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 billed per click. Of course there should be an auction and the highest bidder is the one that wins. So 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.

[David Rosenthal]

The TED conference. 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 1998? Somebody actually had tried this earlier. There was a search engine called OpenText that did try paid search results in 1996. But the Internet was still enough of sort of a utopian community, like small enough and sort of an outgrowth of academia that, I mean, people booed Bill Gross and Goto on stage at Ted in 1998. In 1996, when open tax tried to do this, it was like they got kneecapped right away.

[Ben Gilbert]

Heresy.

[David Rosenthal]

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.

[Ben Gilbert]

Right. So it's funny, maybe they wouldn't have gotten the patents anyway since OpenText 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.

[David Rosenthal]

Look, originally Larry and Sergey were thinking this too, right?

[Ben Gilbert]

Yeah. The great irony is all this criticism. We're going to flash forward for a second. When Google does launch AdWords v2, 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 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 Goto. 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.

[David Rosenthal]

Yeah, but the interesting thing is the timing was not right in the mid-90s for this. Yes, by the time the bubble was sort of fully inflated, the Internet had become commercial enough that, hey, it was okay for Bill to try this.

[Ben Gilbert]

And.

[David Rosenthal]

And then he and Gotoin Overture set the example of like, oh, this is how you're going to monetize search. This is really how you're going to monetize the Internet. And then Google can look and see. Oh, maybe we should do that too.

[Ben Gilbert]

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 $360 million 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, Goto starts doing paid portal deals. This goes so well. They become a B2B company. They rebrand. This is when they switch from Goto to Overture. They start powering the ads for Dogpile Metasearch. Then they get to the big boys with AOL and MSN and eventually they get Yahoo. Yahoo alone was $100 million 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 Overture has it figured out these paid results. We are doing massive, massive white label rev share deals.

[David Rosenthal]

Once they get to Yahoo, some huge percentage of Yahoo's overall company revenue becomes paid search ads powered by Overture, right?

[Ben Gilbert]

Yes, I think it's like 75%. 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.

[David Rosenthal]

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. For Overture.

[Ben Gilbert]

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.

[David Rosenthal]

Yep.

[Ben Gilbert]

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 Goto tried to acquire Google?

[David Rosenthal]

Mm, I did not know that.

[Ben Gilbert]

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 with PageRank. 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 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 200 million?

[David Rosenthal]

Wow.

[Ben Gilbert]

Bill thinks actually seems fine. This seems fair. You guys are really onto something. They had a chance of getting acquired for 2x, the valuation of that extreme fundraise. Right.

[David Rosenthal]

Wow. Was Overture already public at this point?

[Ben Gilbert]

Yes. So then Bill goes to the rest of the Overture board. Board. And Overture at the time is worth $2 billion and the board. Their conclusion is basically how could we give up 10% of our very important, valuable revenue generating company to this little company with zero revenue?

[David Rosenthal]

It'd be a dilutive transaction.

[Ben Gilbert]

And so no deal.

[David Rosenthal]

Well, there's almost zero chance that Google becomes Google if that deal had happened. So.

[Ben Gilbert]

Yeah, exactly. That's the thing with these. Like what would have happened otherwise? Acquisitions.

[David Rosenthal]

Yeah. That's amazing. Well okay, so back to fall of 2000 when Larry and Sergey and Google can now finally 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, I think Larry and Sergey were kicking themselves of like we should have just done this from the beginning. Why did we waste time doing this the other way? And yeah, it's going to take a lot of technology to build this out and yeah, we're going to have to focus on it. But it's obviously the better business.

[Ben Gilbert]

Obviously Larry and Sergey, geniuses from their childhood through their undergrad research projects, the way that they conceptualize the original PageRank algorithm, everything truly geniuses. 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 adopting that and making that the thing that they run with.

[David Rosenthal]

So October 2000, they put Salar 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, they're not going to be able to implement any of the technology to bill people per click or anything like that.

[Ben Gilbert]

Or let in smaller advertisers and expand the pool.

[David Rosenthal]

Exactly. Which clearly Overture had shown there was a market for this if they had 8,000 advertisers against Google's, you know, couple hundred.

[Ben Gilbert]

Yes.

[David Rosenthal]

That they were selling by hand, famously.

[Ben Gilbert]

By the way, Tim Draper was looking to invest in Overture and eventually did lead their round. And to test it out, he actually opened up his computer and he bid on the keyword VC when they were pitching him.

[David Rosenthal]

That's amazing.

[Ben Gilbert]

That's the 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 started a bidding war over the term vc.

[David Rosenthal]

That's such a great story. I love it. Okay, so obviously they need self serve. That's the first thing to put work on. But Salar and Larry behind the scenes too are clearly thinking like, okay, how do we do this in a googly way? Yes, we're going to borrow a lot from Overture, but I think they had a spidey sense already that like a, that wasn't googly or we're so pure over here. But also that it wasn't quite right that Overture had gotten like three quarters of the way there on cracking the business model.

[Ben Gilbert]

Yep.

[David Rosenthal]

And so the thing that Salar and the team really start noodling on is we've got this beautiful algorithm in PageRank that can deliver highly relevant organic results. Is there a way that we could incorporate something like that into our ad system as well and ensure ad quality? Like yes, the paid system in and of itself goes a long way towards ensuring ad quality. Ben, as you were talking about earlier, but there's still potential for abuse here. 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, we're going to 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 the ads? I mean it's not just like fully pay to play 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 through rate. That might solve the problem.

[Ben Gilbert]

Such is the birth of Ad rank. You've got PageRank 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 Ovature, the self serve model, the auction, the cost per click based system and we add in click through rate and we feed it back into the algorithm creating ad rank which is really the main two things going into where is your ad gonna be positioned in the ranking? 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 ad to be showing at that right moment. Click through rates are a proxy for relevance.

[David Rosenthal]

Yes. And by the way, as a really nice side benefit of that, if your formula for placing ads is a combination 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 maximizing your own revenue as Google.

[Ben Gilbert]

Oh, that's interesting.

[David Rosenthal]

Highest price paying per click and then the highest likelihood to click that is the ad that you should show to maximize your own revenue.

[Ben Gilbert]

Oh, it's basically an expected value calculation.

[David Rosenthal]

Exactly.

[Ben Gilbert]

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 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.

[David Rosenthal]

All incentives are aligned for the user.

[Ben Gilbert]

Oh, and for the user. Because then it means that the user is only ever seeing products that are the most relevant.

[David Rosenthal]

Yep. So it's funny how all of this gets rolled out. It's fall of 2000, they started working on this. The first version they launch includes self serve and includes ad quality, but it doesn't yet include CPC or the auction, which is funny. It's sort of like they did the hardest technical stuff first.

[Ben Gilbert]

Interesting.

[David Rosenthal]

So this first rev in the fall of 2000 attracts a ton of advertisers. You've now opened the floodgates to the long tail of advertisers and you've introduced this click through rate element, this ad quality element, you know, ad rank, to how ads are going to get served. Advertisers pretty quickly figure out they're still paying on a CPM 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.

[Ben Gilbert]

That's so funny.

[David Rosenthal]

And they're not paying per click, so they're not costing themselves money when they're clicking on the ads.

[Ben Gilbert]

Right. It's actually an efficient use of impressions to use them internally to boost click through rate.

[David Rosenthal]

Exactly. So it becomes like for 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, okay, this is going to work. So then they fully borrow after that. We're now into 2001. They borrow the rest of the model from Overture with the cost per click payment basis and the auction model. Now, interestingly, they do one up Overture on the auction model, they go to the second price auction.

[Ben Gilbert]

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 above second place. So let's say I bid 20 cents, you bid 30 cents, and then some other guy bids 50 cents. Well, that other guy is going to win, but he's only going to have to pay 31 cents. 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 saying, well, we'd rather have our advertisers A, trust us and feel like we're not gouging and B, not feel like they have to constantly 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.

[David Rosenthal]

It's a version of Ben, you have this theory that you and I have been talking about that every great company has like a stored potential energy of value maximization that it doesn't fully maximize. Like Costco is the extreme example of this, but Google has this too.

[Ben Gilbert]

That's a great point. Yeah. The second price auction is storing potential energy in a way.

[David Rosenthal]

So there's a fun story around this. 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 going to be good for them, et cetera.

[Ben Gilbert]

They used to just write one check.

[David Rosenthal]

And send a fax and that check.

[Ben Gilbert]

Bought them a big batch of impressions. And now you have this confusing morass.

[David Rosenthal]

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 2002. And Sheryl 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 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. And so she calls up her mentor, Larry Summers, who had previously been the U.S. treasury Secretary and Cheryl had been his chief of staff there. She's like, larry, I'm having a hard time explaining this to advertisers how this model works. The second price auction, it's weird. And Larry's like, oh, this is what's called a Vickry 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 don't think it sinks in right away, but eventually advertisers get the message.

[Ben Gilbert]

That's 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, where they had to sunset them off the old model, bring them on to the new pricing. Even though it was better for everyone, it was miserable along the way. I have a funny coda for you to the whole Overture thing.

[David Rosenthal]

Great, go for it.

[Ben Gilbert]

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. 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 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, what am I supposed to get to bid to get the top spot? And also like, it makes it plain and clear you guys are 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 we're not going to mess with this click through rate thing, which ended up being crucially important to the model.

[David Rosenthal]

This also highlights something that we would be remiss not to say as well. The technical infrastructure to dynamically execute second bid auctions every single time a user is making a search query was incredible, especially at Google Scale in 2001 with.

[Ben Gilbert]

The technology available then yes, yeah, I.

[David Rosenthal]

Totally believe that Overture did try to implement it, had the same idea. And also that Overture had really good technology too. Like 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. So okay, we're talking about the pain of transitioning the Google Ad model and ultimately the whole business over to this new beautiful AdWords model and how hard that was to put some numbers on it. So in 2001, the year that the Yahoo deal saved the company, Google for the year ultimately did $86 million in revenue that year and $10 million in profit. So turn profitable in 2001. Like 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 and the old ad system that was in place. So Project Sunset and transitioning over to the new ad system 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.

[Ben Gilbert]

Right.

[David Rosenthal]

And, like, eventually economic incentives would kick in, but it was still a little tenuous there in Google land for a while.

[Ben Gilbert]

The other thing that's happening at this exact same time is Eric Schmidt arrives and discovers that 50% of Google's searches are outside the US but they have no international ad sales. There's no international business. So he almost jokingly tells Omid, just go get on a plane, go to the airport Monday morning, and I'll call you and tell you what market, where to buy a ticket to, and we'll just kind of go from there or.

[David Rosenthal]

Just pick a country and we'll, you know, figure it out.

[Ben Gilbert]

They kind of build basically these little startup teams in a bunch of different geographies that kind of 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? 2000, 2003, 04, something like that? Yeah. Eventually Google finally just withdrew, and rather than censoring results in 2010, but basically everywhere that is not China. Starting in 2001, with Schmidt being like, we need an international business, they grew themselves a just fine international business.

[David Rosenthal]

Yup, Yup, yup. So 2002 is this year of transition to AdWords for the company. So spoiler alert, it worked. In 2002, the company did $440 million of revenue. So up like, you know, whatever that is, 5, 6x from the 86 they did the year before while transitioning all of that revenue to the new model. And when I say all of that revenue, I really do mean all of it, because a lot of that 86 million, remember, was the portal partnership deals. By midway through 2002, Google's realizing that paid search on AdWords is working so well, we should stop having portals pay us for organic search. We should start paying them to do paid search on their sites and share the ad revenue. And that leads to the landmark summer 2002 deal with AOL.

[Ben Gilbert]

Oh, yes. But before we tell that story, now is a great time to thank one of our favorite companies, Vercell.

[David Rosenthal]

Vercel is such an awesome company. Over the past few years they've become the infrastructure backbone that powers modern web development. And now the AI wave too. If you've visited a fast responsive website lately, or used a slick AI native app with agents and hyper personalized interfaces, there's a good chance it was built and deployed on Vercel.

[Ben Gilbert]

Yeah, and the reason for that is that Vercel has completely reimagined the developer experience for the modern era. In the old world, developers had two completely different write code, then wrestle with deployment. Vercel eliminated that second component with what they call framework defined infrastructure that transforms your code into live globally distributed applications automatically.

[David Rosenthal]

But now Vercel is enabling something even more shipping live code as fast as AI generates it. So in the past, even the very best web companies used to deploy new production code roughly on a daily cadence. Now companies like DoorDash and Notion are just shipping constantly on Vercel.

[Ben Gilbert]

And Vercel is increasingly the platform to build full stack AI apps. Vercel has been synonymous with front end development, but now they do back end and agentic workloads as well.

[David Rosenthal]

Exactly. And Vercel is their own guinea pig with this stuff too. Their own AI product. V0 has two and a half million users who've generated more than 100 million messages with six app generations every second. And V0 runs entirely on Vercel's platform. We did an acq2 episode with Vercel CEO Guillermo back in February where we talked about all this. It's kind of wild.

[Ben Gilbert]

So if you want to learn more about what Vercel can do for AI and web development at your company, join customers like Runway Supreme, PayPal, Ramp, Nerdwallet, Leonardo AI Zapier and Scale AI and head on over to Vercel.com acquired. That's V E R C E L.com acquired. And just tell him that Ben and David sent you. Okay, so the AOL deal and one context setting thing just to see how fast Google's world changed in 2002 with the new AdWords system. It going phenomenally well as recently as late 2001. Just months before, there's a dinner with Terry Semel, who's the CEO of Yahoo. Kind of big media executive guy comes in, takes over, he's the big media CEO and he sits down with the founders and he says, so guys, I think we're your biggest customer, right? Us paying you for those organic results in the portal deal. And they say yep. And he says that's like less than $10 million that we're paying you. So you don't have a business, do you? The business can't be that big if we're your biggest customer at less than $10 million. And everyone's all excited about you. And they're like, we're excited about some of the things they have in the works. And they're clearly thinking about this new AdWords system that they're going to launch on the spot. He offers to buy Google for a billion dollars.

[David Rosenthal]

Wow.

[Ben Gilbert]

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 Semmel sits down. He didn't have a real sense of their revenue. He just knew that he was the biggest customer. So I think this kind of illustrates just what an insane 12 months it was to go from being in that position to the numbers that you just shared on. What is it, 5x revenue in a year?

[David Rosenthal]

Yep. They more than 5x revenue from 2001 to 2002. From that 86 million to 440 million in revenue.

[Ben Gilbert]

All right, so they're feeling real good about this. And so they decide to go to AOL, the big source of traffic. I mean, AOL has 34 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.

[David Rosenthal]

Yes. I mean, hell, 2002. I was probably just transitioning from using AOL as my way to access the Internet. As a senior in high school. I think we had maybe just gotten broadband like that year, maybe the year before.

[Ben Gilbert]

Funny how sometimes things feel like a lifetime ago and sometimes they feel like just yesterday.

[David Rosenthal]

Right? Right. So, yeah, okay, summer 2002, the transition to the new AdWords model is blowing the doors off. Google goes to AOL, which, by the.

[Ben Gilbert]

Way, Yahoo sees this and they come back and say, how about 3 billion?

[David Rosenthal]

I had heard about that 3 billion number.

[Ben Gilbert]

Google comes back and says, how about 5 billion? And of course, no deal gets done. And this would be the last time that they seriously try to acquire the company.

[David Rosenthal]

Yeah, but then Yahoo would buy Overture. But as I pointed out a minute ago, when Yahoo bought overture for $1.6 billion, that was a huge portion of Yahoo's market cap. If they had actually done the $5 billion price that the Google founders floated at them, it would have been reverse takeover. It would have been Google taking over Yahoo.

[Ben Gilbert]

Oh, that's a Good point. In fact, Google Throwing out 5 million is almost a farce. It's like, how about we buy you?

[David Rosenthal]

It's a counteroffer. Yeah, we'll buy you.

[Ben Gilbert]

That's so funny. So this AOL deal, the current state of things is that the 34 million AOL users, their search experience is powered by ink to me, on the organic side since 1999. 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 kind of talk about the philosophy behind it. But it's worth knowing the bullet points. Advertisers will all sign up with Google clean. They use Google's ui, so Google can sign them up or AOL can say, hey, advertiser, I know we have a long standing 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.

[David Rosenthal]

Okay. Go through the rest of the deal points. But this is huge.

[Ben Gilbert]

That is huge. Google will then share back 85 cents on the dollar to AOL for all of that revenue. AOL wants two things in exchange for turning over their entire business 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 7.4 million shares of Google at $3 per share. So a total of a $22 million investment. They get that as part of the deal. Two is a $100 million revenue guarantee.

[David Rosenthal]

Yep. We want to make sure that, hey, even if this whole thing falls apart, you're going to pay us at least $100 million and hopefully more if these ads perform well. And we're getting 85%.

[Ben Gilbert]

So here's the crazy thing. Google doesn't have $100 million when they're negotiating this deal in May of 2002. It's like just starting to work.

[David Rosenthal]

Yeah.

[Ben Gilbert]

So Sergey Brin 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. They took on a fixed dollar denominated obligation with that revenue guaranteed aol. So if there was upside to Google, it would have been a huge, huge win. But if there's downside in their business of serving.

[David Rosenthal]

Yeah, if they couldn't make it work on aol Right.

[Ben Gilbert]

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 it would have gone from like, oh, shucks, bummer to now that we've signed this deal, we're bankrupt.

[David Rosenthal]

Yeah. This was a really, really contentious decision, and I think it ultimately came down to Larry and Sergey pushing for this.

[Ben Gilbert]

You are absolutely right. There's a great quote in Ken Aletta's book about this 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.

[David Rosenthal]

Well, it's great. So, yeah, those are the deal terms, but that first 1 of advertisers are going to 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, when Boz Andrew Bosworth, the cto, had the insight that more ads equals better ads, and then argued to Zuck and Cheryl like, no, we need to show more ads in feeds and then they'll get better. The more ad inventory you have in your system, 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 was hugely, strategically valuable.

[Ben Gilbert]

Yeah, it's a market liquidity thing.

[David Rosenthal]

Yes, exactly.

[Ben Gilbert]

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.

[David Rosenthal]

Yes. If you have a 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, 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 ad 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.

[Ben Gilbert]

That's funny. I just want to pause for one second when you say magical. 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.

[David Rosenthal]

Sorry, I meant magical from an economic standpoint. Yes. It is the most magical economic transaction I think ever known to man.

[Ben Gilbert]

Right. 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.

[David Rosenthal]

Well, to your point at the beginning of the episode that Google, with this business model, makes more profits than any other company.

[Ben Gilbert]

Yeah.

[David Rosenthal]

Ergo, tautologically, it's the most magical business model ever discovered.

[Ben Gilbert]

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, 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.

[David Rosenthal]

It worked.

[Ben Gilbert]

It worked. AOL made $35 million in 2002, the first half year of the deal alone, and then in 2003 made $200 million.

[David Rosenthal]

Wow.

[Ben Gilbert]

Yeah, yeah.

[David Rosenthal]

Blow through the guarantee there.

[Ben Gilbert]

Absolutely. This made Google a major player in the paid listings market almost overnight. And they weren't at all before. Ovature dominated this market before. So this is a absolute bet. The company move that couldn't have gone better.

[David Rosenthal]

And they were taking all that inventory effectively from ooverture, who was AOL's partner before this.

[Ben Gilbert]

That's exactly right. This is also where Sheryl 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. 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 Omid 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. 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 going to 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 AdWords sales function to service this monster AOL deal. That was what she did at Google before going and becoming COO of Facebook.

[David Rosenthal]

We'll talk about that on the next Google episode here. Yes, this also, I think, 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 if we can have Google search paid in organic, be part of the user experience 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.

[Ben Gilbert]

Oh boy, will it ever. David, you want to do distribution? Do you want to go there right now?

[David Rosenthal]

Oh yeah, let's go there. Great.

[Ben Gilbert]

All right, I've been chomping at the bit. So we're going to 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 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. If you make 1,000 of a widget, you get cheaper pricing than if you make 10 of that widget. So just like everyone else, they amortize the fixed costs of their infrastructure and their employees and they have a better.

[David Rosenthal]

Infrastructure model as we were talking about earlier, et cetera, et cetera.

[Ben Gilbert]

Exactly. But there's this crazy thing that happens with Google where at scale, not only do their costs decrease on a unit basis, 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 and the winning bid is a higher price than it would be if they had less bidders.

[David Rosenthal]

Ah, this is another reason why you want a deeper market liquidity pool.

[Ben Gilbert]

Yes. The second thing too is you have bidders on keywords that are less common. So let's say you've just got the a 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 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 due to the auction system.

[David Rosenthal]

Yeah. There's a third statement that you need to add to Baz's insight from the Facebook days of more ads equals better ads. It's more ads equals better ads equals better business.

[Ben Gilbert]

Absolutely. I mean, it is crazy that there's this. You make more money per search, the bigger you scale.

[David Rosenthal]

Yeah.

[Ben Gilbert]

In this auction based marketplace system, it's.

[David Rosenthal]

Increasing returns to scale.

[Ben Gilbert]

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. And once you realize this and you get a little bit ahead, which this is where Google is right now in history, in that 2002 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, 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. 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 here in 2001, 2002, you want to be aggressive and gobble up this market as fast as you can, because someone else is going to have this insight too. So then the tactics, what do you do? One, pay massive revenue share to your distribution partners. In some cases up to 100% of the revenues generated. We'll talk about who the distribution partners are in a second. But even earlier we heard with that AOL deal, they were willing to give AOL 85%.

[David Rosenthal]

That's a huge split. Yep.

[Ben Gilbert]

Yes. So with some partners, they were incredibly aggressive. They were like, we're going to give you all the revenue for a while.

[David Rosenthal]

Just to get you on.

[Ben Gilbert]

Yes, exactly. If Google monetizes each search the most, then their rev share to distributors are going to 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 70%. So you know, press that advantage, go 100%. I even heard one example where they gave more than 100% where they kind of realize like the payback on this.

[David Rosenthal]

Is just so this property is so valuable to get this distribution.

[Ben Gilbert]

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 and so they were reporting very consistent metrics that they wanted to continue reporting. Google could irrationally do things like, eh, we're going to 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. Not like a billion dollars big or $10 billion 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 kind of thought like, geez, is the final payoff going to 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.

[David Rosenthal]

So we've been talking so far about distribution deals in terms of these search deals with portals. Tell us about some of the other crazy stuff they end up doing. Because once you realize this, the game just becomes get users and advertisers at all costs.

[Ben Gilbert]

That's exactly right. So currently people need to know how to type in google.com, that sucks. It would be really nice if you could get users without having to like hear that from a friend and load up a webpage 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 instead of on google.com?

[David Rosenthal]

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, yes, it's Microsoft.

[Ben Gilbert]

And Microsoft definitely did figure out this secret.

[David Rosenthal]

And just to be a little more specific on that, Google was already going and starting to pull away from the rest of the market. So it would have taken a boatload of money to try and compete with Google, even a year or two into.

[Ben Gilbert]

This, which almost no one except Microsoft has.

[David Rosenthal]

And then, spoiler alert for part two. Who would, a few years later, try to spend a boatload of money to compete with Google? Microsoft.

[Ben Gilbert]

Yes. Okay, so Microsoft's got Internet Explorer. Google doesn't have a browser. What do you do? It's December of 2000. We are not talking Chrome territory here. Google Toolbar, baby.

[David Rosenthal]

Google Toolbar, man. When this came up in the research, it was like the biggest blast from the past of both, man. I love that thing, man. I had not thought about that in about 15 years. And holy cow. 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.

[Ben Gilbert]

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 before they've figured out AdWords v2, they had just launched AdWords v1. So it's both the sort of offense we're talking about here, of 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 toolbar is.

[David Rosenthal]

What Google Toolbar is. Yeah. What toolbar is that?

[Ben Gilbert]

It was a plugin, the equivalent of a browser extension that would basically create a bar underneath your bookmarks bar, or I don't know if bookmarks bars were even a thing yet. Kind of where the booksmark bar is.

[David Rosenthal]

Yeah, at the top of the window.

[Ben Gilbert]

Yes. And it had a little Google Search box in it. Among some other functionality, you could just search right from the toolbar without having to go to the website. Right.

[David Rosenthal]

Nowadays every modern browser, you just search from the bar at the top of the browser.

[Ben Gilbert]

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. 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.

[David Rosenthal]

Yes. So how did they pay money to get users to install the Google Toolbar?

[Ben Gilbert]

Because they weren't paying users. The average annual revenue generated by a Google user was $2, but with Toolbar it was 10 plus dollars, even if you're being conservative. So that difference that somewhere of, you know, eight bucks a user call it 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 $8 more per user in this year. And by the way, average revenue per user ARPU is skyrocketing. It's growing very quickly. So this $8 is just this year's.

[David Rosenthal]

Going to become $20, $50, $100. Yeah.

[Ben Gilbert]

So Google just paid everyone that they possibly could to bundle Google Toolbar with their installer of an application. This includes 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, same thing. WinZip, same thing. They were hyper aggressive.

[David Rosenthal]

And just to be really clear about what's happening here, when users are downloading programs, what apps used to be called to run on their computers, Google is paying the maker of that program to include the Trojan horse payload of the Google Toolbar, which will then become a Trojan horse that lives in your Internet browser, in Internet Explorer. And Google will make a lot more money from you.

[Ben Gilbert]

So the most horrible way to describe this is that it's adware, it's spyware, it's a Trojan.

[David Rosenthal]

But users loved it.

[Ben Gilbert]

I loved the Google Toolbar totally, but the technique itself.

[David Rosenthal]

Are you going to get into pop up locking?

[Ben Gilbert]

No, lay it on me.

[David Rosenthal]

Oh, well. So as they were building the toolbar and thinking about like, okay, a users are going to love this because users love Google and being able to access search, 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 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.

[Ben Gilbert]

A pop up blocker, Just one more incentive to install it and become a sticky Google user. Yes, 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.

[David Rosenthal]

Amazing.

[Ben Gilbert]

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 decades. And this is a great one that'll be real close to home. David, you remember the Google Earth acquisition?

[David Rosenthal]

Oh yes, I do. Classic acquired episode.

[Ben Gilbert]

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 realized 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 your.

[David Rosenthal]

And the original Google Earth was a program that ran on your computer. It wasn't like baked into Google Maps, the web app.

[Ben Gilbert]

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 3D. It's super cool. They just bundled Google Toolbar with the installs of Google Earth and then it more than paid for itself and we don't need to do ads.

[David Rosenthal]

Way more than paid for itself.

[Ben Gilbert]

Yeah, it's crazy.

[David Rosenthal]

No need to put ads in Google Earth.

[Ben Gilbert]

It's so crazy. In the mid 2000s, ARPU would eventually grow, grow $10, $20, $30. 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 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.

[David Rosenthal]

Yeah.

[Ben Gilbert]

So the takeaway here is yes, they had the best product and yes, it was fast and yes, it was the best technically competent and yes, they had this amazing culture. But everyone kind of forgets about the fact that they were so aggressive in distribution deals. They didn't just let people magically find their way to Google.

[David Rosenthal]

Yep. And it was all so strategic. As I've been talking to people over the last month about making this episode, talking to friends think 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 beautiful ballet where every piece of the Google business model works together and reinforces the other pieces. And in concert it creates the best business model of all time.

[Ben Gilbert]

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, but they even had one called Google Desktop that would search your desktop and then incorporate those results privately into your web searches.

[David Rosenthal]

The original Google Enterprise search application. Yes, reincarnated as Google Desktop.

[Ben Gilbert]

But that's basically the strategy for all these applications and clients is how do we make you a more sticky Google user? So do you know the final chapter of this story of In 2004, a new PM is hired by Google. They come in and they take over this applications client team that includes Google Toolbar. That PM is Sundar Pichai.

[David Rosenthal]

That's right.

[Ben Gilbert]

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.

[David Rosenthal]

Well, it really highlights how important Google Toolbar was and how secretive the company was about this really being like the strategic linchpin of what they were doing or a strategic linchpin. 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, and that is AdSense, which is Google's.

[Ben Gilbert]

Kind of second big business line after AdWords on search pages.

[David Rosenthal]

Yep. And it's another brilliant insight of how to extend the strategic Google business model. Before AdSense, Google was limited to making money. When a search happened, that was the atomic unit of the Google business model.

[Ben Gilbert]

Was a search query, which actually doesn't happen that often. It's a really valuable thing when it happens because it's high intent. But most of the time someone loads up a page, it's a website that is not google.com right.

[David Rosenthal]

You're consuming content on the Internet much more often 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 Google can't monetize. But because of everything that they built for PageRank and organic search and understanding what's on a page and then serving the page's search results and then also for the ad system for ad targeting and ad quality and predicting click through rate, they realized that, well, actually we don't really need a query to happen to serve effective ads against what a user is consuming. What if we essentially run 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.

[Ben Gilbert]

It's a little bit different because they're matching the ads to content instead of to intent. It's sort of try to fit in with the content around it. But you know, if you're consuming content, you likely have some future intent around that content or maybe even loose intent right now.

[David Rosenthal]

Yep. And we've got this existing pool of advertisers in our system and their ads and their ads in the system.

[Ben Gilbert]

We could literally just run the same ads.

[David Rosenthal]

We can run the same ads on webpages. So In February of 2003 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.

[Ben Gilbert]

Which is why the auction works. If you had way more searches, then everybody would just be bidding, you know, one and two cents on everything all the time and winning.

[David Rosenthal]

Right, right, right. You always want to be supply constrained as a business.

[Ben Gilbert]

Yes.

[David Rosenthal]

So legendary Google engineer Jeff Dean builds AdSense in six weeks, the whole system.

[Ben Gilbert]

Of course he does.

[David Rosenthal]

They're 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 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 we're serving onto that page.

[Ben Gilbert]

I remember seeing these for the longest time when publisher enabled Google AdSense, you'd get like what looked like search results, just like three across in a banner.

[David Rosenthal]

Exactly. That's what adsense was in the beginning. And their favorite website for testing this was the website howstuffworks.com because all of the pages on HowStuff Works, it turned out, were like high intent, highly commercializable AdWords pages for AdWords queries. Like if you reverse engineered the ad search queries that would have run AdWords against them. They were great pages. So Susan Wojcicki 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 off The bat.

[Ben Gilbert]

Yeah. I've seen different estimates from different points in time. Sometimes that they share 67% of revenue, sometimes that they share 80% of revenue. But the right way to think about it is most of the revenue on a Click in Google AdSense actually goes to the website publisher. And Google takes the smaller part as their spiff.

[David Rosenthal]

Yes, that's right.

[Ben Gilbert]

Whereas if you actually own the search results page and you are running first party ads, you get 100%.

[David Rosenthal]

Yeah, 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?

[Ben Gilbert]

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 a troubled 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, 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.

[David Rosenthal]

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 put it on YouTube and Google deposits money in my account? This is the first version of that.

[Ben Gilbert]

An ad network running on a thing that you make is a beautiful thing for a small business owner.

[David Rosenthal]

Totally. And with all the liquidity of advertisers of Google. So they launched this thing, you know, Jeff codes it up at the beginning of 2003, kind of call it end of Q1. 2003, they launch AdSense by the end of the year. So just a few months later, it's doing over a million dollars a day in revenue.

[Ben Gilbert]

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 is 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 20% 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 20% time. Their own personal motivations, actually, particularly after September 11th, there's this super strong hunger for people to have a way to get rapidly updating news on a topic.

[David Rosenthal]

Yeah, you couldn't get that before you had to go to CNN.com right.

[Ben Gilbert]

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 their organic search ranking is really developing. What started as just PageRank plus then using the anchor text, they're starting to use all sorts of things later. By 2007, they were using 200 different pieces of information to determine 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. 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 belong.

[David Rosenthal]

We're doing a bad job on this query.

[Ben Gilbert]

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 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. PageRank really is the thing that got Google going, but that part of the algorithm isn't really the thing that's the main differentiable asset today.

[David Rosenthal]

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. You know, yes, we solved search. Google has never said we solved search.

[Ben Gilbert]

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 to approximate good results because we'll actually never have optimal results.

[David Rosenthal]

Yep, totally.

[Ben Gilbert]

And then the third big sort of thing that kept developing is their infrastructure. They put so much over these years into Building out all the hardware that we were talking about. A ton of software stuff.

[David Rosenthal]

Yep. And that hardware stuff shifted from, ooh, we're being really, you know, entrepreneurial, shall we say, and how we use commodity hardware cheaply to, oh, we're designing our own data centers.

[Ben Gilbert]

Yep, 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 that is pioneering.

[David Rosenthal]

Yep. Bigtable, MapReduce, et cetera, et cetera.

[Ben Gilbert]

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 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 you don't have a good way to understand synonyms, then you're never going to 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 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. So we're finishing out 2003 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 kind of Pre June of 2002 ish, they had to make trade offs and after, call it the end of 2002, there's no more trade offs ever. They always have the cash for every single thing they want to do.

[David Rosenthal]

Yes, we talked about 2002 and the 440 million of revenue and the 185 million of profits. 2003, that explodes to 1.5 billion in revenue and almost 350 million in operating income.

[Ben Gilbert]

What was operating income the year before?

[David Rosenthal]

$185 million.

[Ben Gilbert]

So it went from 185 to 350 in one year?

[David Rosenthal]

Yep, in one year.

[Ben Gilbert]

Wow.

[David Rosenthal]

So some of you might be listening and be like, well, wait a minute, sounds like their margins got a lot worse.

[Ben Gilbert]

And yeah, depending on your accounting, it did. You get to keep all the money from AdWords and you only get to keep 20% of the money from AdSense.

[David Rosenthal]

Yep. AdSense is the answer there. AdSense added like half a billion dollars in 2003 at much lower margin, but was awesome.

[Ben Gilbert]

Yeah. And as best we can Understand it, Google AdWords stayed an 85% gross margin business.

[David Rosenthal]

Yep. Incredible. Okay, so that takes us to the last chapter of our story today in 2004, which is the, I think today thought of as 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 2004. So I don't think other than Microsoft, there had ever been another company like this where there was no good reason for Google to go public. It was wildly profitable, generating plenty of cash, did not need the investment money.

[Ben Gilbert]

I assume they've never spent their IPO proceeds.

[David Rosenthal]

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, 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, who actually.

[Ben Gilbert]

Has the capital to fight us and they have no idea what a good business this is.

[David Rosenthal]

Yes, we can't let them know how good this is. Fortunately, I guess for the investing public and unfortunately for Google, the Jobs act had not been passed yet. And so the 500 shareholder rule was still in effect for companies in the US which was that if you crossed the threshold of having 500 distinct shareholders for your company, you had to report your financials publicly as if you were a public company.

[Ben Gilbert]

You know, David, I read all this too. They had venture capital backers. They had to go public. Sequoia and Kleiner Perkins are not going to be just sitting there on their hands like, we love being private shareholders forever.

[David Rosenthal]

We like dividends. Yes.

[Ben Gilbert]

No, in 2003, 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 end freaking funds that need to get their money out.

[David Rosenthal]

Well, I think the question is, did Larry and Sergey care about that? Whether they did or didn't, the 500 shareholder rule was a forcing function. But obviously the VCs.

[Ben Gilbert]

But to your point, I guess the VCs didn't control the board. Larry and Sergey controlled the company.

[David Rosenthal]

Yeah, exactly. Just like Bill and Paul and Microsoft. It was extremely rare that because Google never needed to raise VC money. After the Series A, Larry and Sergey, together with the employees in the option pool, controlled a majority of the votes in the company.

[Ben Gilbert]

Hmm. Meta, Google, Microsoft. There's something correlated between founder control and incredibly good capital efficiency in a business. Yeah, interesting.

[David Rosenthal]

Regardless, this is all academic because truly the 500 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.

[Ben Gilbert]

David put four underlines under that. This IPO made half of the 2,000 people who worked at Google millionaires.

[David Rosenthal]

Yes.

[Ben Gilbert]

There's a lot of interest, excited for this thing to go public.

[David Rosenthal]

Yes. So as we get to end of 2003, beginning of 2004, they know they're going to cross the threshold during 2004, they're going to 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.

[Ben Gilbert]

Shocking.

[David Rosenthal]

They don't like the IPO pops, they don't like how much money the banks make, et cetera, et cetera, et cetera, etcetera. So they're interviewing banks.

[Ben Gilbert]

We should say this IPO pop thing, it sounds good, right? It's like a phrase that 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 and then within one day upside that should have or really like is yours, because it happened in all the intrinsic value was built over these years, goes to the people who had access to buy your IPO shares, the investment bank's clients, 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.

[David Rosenthal]

Yes. So during the IPO process, they learn from Bill Hamrich of WR Hamricht, a 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. Something called a Dutch auction IPO process, which is this arcane thing that had been done before.

[Ben Gilbert]

How do you do good price discovery?

[David Rosenthal]

Well, the optimal way to do this is a reverse auction where you start the bidding high and you come down 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.

[Ben Gilbert]

Oh, my God, sounds perfect. They're like, this is like the whole business. This is what we do. Anyway. This is delightful.

[David Rosenthal]

There's this legend that Eric Schmidt talks about of. They also, they got a letter from a little old lady that 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 at their heartstrings. And I'm sure that's true too. But you can see why this appeals in a vacuum.

[Ben Gilbert]

This sounds perfect and like, everyone should do it.

[David Rosenthal]

Yes.

[Ben Gilbert]

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. Way.

[David Rosenthal]

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 going to start selling now, all of a sudden, the public markets are going to control a lot more of the company. There's risk that Larry and Sergey might collectively lose control of the company here.

[Ben Gilbert]

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. 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 dual class structure. We're a tech company.

[David Rosenthal]

Yes. Where the families of the New York Times company or Dow Jones back then, or basically all the major newspaper companies, 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 going to do a dual class.

[Ben Gilbert]

Share structure for Google too, which today is super common.

[David Rosenthal]

Yes. But Google started it. Google was the first tech company to do this. I mean, today it's everybody, it's, you know, Facebook, slash Meta, Alibaba, Shopify, Spotify, Coinbase, Airbnb, Zoom, Datadog. Every major IPO since Google, every major tech IPO has had this. Famously, Snapchat even pushed the envelope so far when they ipo, the public shares have no votes. So it's not even just super voting. It's like, oh, you public market, you get no votes whatsoever.

[Ben Gilbert]

That's like being a Green Bay packers shareholder.

[David Rosenthal]

Yeah, exactly. Google pioneered all of this, which I think is why in retrospect, this IPO is viewed as a famous success.

[Ben Gilbert]

Okay, so they do the Dutch auction.

[David Rosenthal]

In practice, it does not go well.

[Ben Gilbert]

But why? This is the. So the numbers on this are pretty crazy. They are initially floating in the Dutch auction using the software. And by the way, Google software engineers wrote the software.

[David Rosenthal]

I know. Amazing.

[Ben Gilbert]

Isn't this crazy? And I don't think it's like Google owned. I think they were collaborating with the investment bank. So 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. And they're trying to figure out where in the range between $108 a share and $135 a share should we price. Will it be fully subscribed? Well, the actual price where they end up filling the order is at $85 a share.

[David Rosenthal]

Yup. Which gives Google a $23 billion market.

[Ben Gilbert]

Cap at IPO and they raise $1.7 billion. You know this is like great, right? It's a $1.7 billion raise, $23 billion market cap. It looks like an astronomically high multiple that the company's been given. So you should walk away and say they really maximize value there. And they probably were just wrong in that initial range that they were looking for $108 a share to 1:35. And it only priced at 85. Well, trust the mechanism, I guess. It's only actually worth $85 a share.

[David Rosenthal]

Nope. Pops to a hundred bucks on closing of trading the very same day.

[Ben Gilbert]

18% BOP. Day one. Then by the end of the very next year, 16 months later, it is almost a 5X. Yeah, this thing was not at all priced correctly.

[David Rosenthal]

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. Dutch auction, ipo, not a great idea. Nobody has done it since it doubled.

[Ben Gilbert]

Within the first few months. Yeah, I mean, it's great pr, right? The stock's doing well. People think hi 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.

[David Rosenthal]

Yep. So funny. It's all kind of a footnote of history anyway, because what's a few percentage points between friends when the company would go to over $2 trillion today as we are recording this, or roughly 100x the market cap when it IPO'd.

[Ben Gilbert]

And David, you're not counting dividends.

[David Rosenthal]

Not counting dividends, right.

[Ben Gilbert]

Of course, if you reinvested dividends, you'd make significantly more than 100x since IPO.

[David Rosenthal]

Well, after our Steve Ballmer interview, never gonna not count dividends again. But to preview a little bit the rest of the series, Google's a 2.1, call it trillion dollar market cap company today. Roughly 100x since the IPO. Amazingly. I'm going to ask, do you know? I know you know what Google slash Alphabet's price to earnings ratio is right now?

[Ben Gilbert]

Ooh baby, I do know because I was just looking this up. It is kind of an all time.

[David Rosenthal]

Low 2020 price earnings 6x revenue. So compare that to its peer companies. Amazon's PE is 35, Microsoft is 37, Nvidia is 46, Apple is 30 and Meta is 27. And Google Alphabet is down at 20. And it's not like Alphabet's 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.

[Ben Gilbert]

This price sure seems to reflect that. Even though revenue is growing nicely and margins are quite high. Somebody, and that somebody is Mr. Market thinks the future is a lot bleaker than they do for those other companies.

[David Rosenthal]

Never mind that Google invented AI and published the transformer.

[Ben Gilbert]

Oh, we will get to it.

[David Rosenthal]

About all that. We will get to all that.

[Ben Gilbert]

No spoilers.

[David Rosenthal]

Okay, no spoilers, but okay. That's where we're going to leave Google for part one. But one more little, little start of a story to tease you with for part two next time. So the same month in April of, of 2004, when Google files its S1 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.

[Ben Gilbert]

But if you have one, that kind of sounds ridiculous. Don't launch on an April Fool's Day because people will think it's a joke.

[David Rosenthal]

Because the product they launch actually sounds way too good to be true. Web based email From Google with 1 gigabyte of free Storage for every single user. Now to put that in context, Yahoo and Hotmail, Yahoo Mail and Hotmail at the time had like two megabytes of free storage per user.

[Ben Gilbert]

I think it was 20x. The next best is the stat that I read on Gmail.

[David Rosenthal]

Yep. And it comes with Google search baked in across all of your emails. And it's entirely web based, runs in your browser anytime, anywhere. It's like the greatest April Fool's gift to Internet users everywhere that Google could provide here. So the question though is why did they do this? Knowing what we now know about Google.

[Ben Gilbert]

David, wouldn't it be great if there was a reason, like a really compelling reason for someone to be logged into Google? And wouldn't it be great if we could just attach more things to a user's life that could be entry points to Google Search and the greatest business of all time, search ads.

[David Rosenthal]

What if, Ben, what if?

[Ben Gilbert]

Okay, David, we're going to tell the whole Gmail story as a part of chapter two, but I do have to give you one thing that is specific to this episode.

[David Rosenthal]

Ooh, go for it.

[Ben Gilbert]

So the engineer who started Gmail, Paul Buchheite, now of course a partner at Y Combinator and actually with Brett Taylor, started Friendfeed.

[David Rosenthal]

That's right.

[Ben Gilbert]

Paul Buchite is awesome and recently launched a new venture fund and actually the original coiner of the term don't be evil at Google.

[David Rosenthal]

That's right.

[Ben Gilbert]

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.

[David Rosenthal]

It in his 20% time. Right.

[Ben Gilbert]

This is a 20% project. And it starts as I'm going to look in your Unix directory at your mail and I'm just going to treat that like the web, just the same way that we treat web pages. And so I'm just going to take a search box and I'm going to point it at your mail folder and I'm going to let you search. That's it. 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, 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, I should just go grab ads from our ad database and just kind of Display them around and see how well the content matches. He's showing this off internally. Larry and Sergey see it and they go, wait, does this work on websites too? And so the thing that led to.

[David Rosenthal]

AdSense, ah, this was the beginning of the idea for AdSense was actually part.

[Ben Gilbert]

Of the prototyping process of, of Gmail.

[David Rosenthal]

Amazing. I love it, I love it. And I love how you saved this to the end because you knew we were going to do the little teaser on Gmail.

[Ben Gilbert]

Well, you texted me, you said, I think we should do a little Gmail foreshadow in the.

[David Rosenthal]

Ah, great. Yes, great, great, great.

[Ben Gilbert]

So thank you to Paul Buchite for sharing the story with us.

[David Rosenthal]

Amazing.

[Ben Gilbert]

All right, bringing it home.

[David Rosenthal]

That is the building of Google search business. So let's bring this one home.

[Ben Gilbert]

Yeah. So David, this chapter, this episode definitely feels like the building of the castle.

[David Rosenthal]

Yep. And maybe next episode is going to be the building of the city around it, the state around it, the nation state around it.

[Ben Gilbert]

Yeah. And depending on your metaphor, is it an entire property, a platform that they're building around it, a city? Is it a moat? Is it a. Yeah, but it's definitely. This one is building the castle.

[David Rosenthal]

We'll have to see. All right, let's go into Playbook for part one. Ben, what do you got?

[Ben Gilbert]

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 them out to someone, starts with the best original algorithm insight. 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 this amazing original algorithm for organic search is 1, 2 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, factoring in relevance 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 system that they developed three clever infrastructure advantages. They just invented stuff and they thought about problems differently and they reasoned from first principles 4. They hired the best people, truly only world class people for a very long time. And because when the dot com crash happened they could basically get anybody that they wanted there. In the second half of this episode, Paul Buchheit 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. So that's 4. 5. Culture. A culture of thinking insanely big, mostly by inexperienced 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, 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 is very impressive. So culture, which includes power law dynamics by the way, being willing to make big bold bets because they could be these multibillion dollar payoffs. That's five, six. The self reinforcing data network effects, once it takes off. I think that is underappreciated about Google. A lot of people say oh, the algorithm. But like the algorithm is so dependent on all the data that is generated. 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 the business behind it is actually the best business of all time.

[David Rosenthal]

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, place of users and queries and advertisers. Everything that we just talked about. Like once Google had that realization of oh, our business gets better the more users and advertisers we have and thus we should be willing to spend basically anything to increase those two pools.

[Ben Gilbert]

This is my quintessence.

[David Rosenthal]

Okay, I'm stealing your quintessence. I love it.

[Ben Gilbert]

I feel like this is the most unique insight of this episode is whoa. These are economies of scale that don't just reduce your costs as you get bigger, but it increases your revenue as you get bigger.

[David Rosenthal]

Yeah. Okay, great. Well, I didn't mean to steal your thunder with quintessence. Sorry about that.

[Ben Gilbert]

We did our quintessence earlier this episode.

[David Rosenthal]

Okay, good, good, good.

[Ben Gilbert]

All right, give me your playbook.

[David Rosenthal]

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. When you and I were talking about doing this and starting the Google series, the reason 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 going to do Google unacquired, we got to start at the beginning and understand how Google was built, because that's what we do. And I've thought, oh, this episode will set the stage to then get to today. Telling the story, though, and doing the research. I was like, today is exactly the same. The parallels.

[Ben Gilbert]

I had the exact same thought between.

[David Rosenthal]

What happened between 1996 and 2002 feels like everything that we are living through.

[Ben Gilbert]

Right now, 2021 to today.

[David Rosenthal]

Right. Or even, let's start with the ChatGPT moment.

[Ben Gilbert]

Put sharper. I thought this was going to be, well, we're going to 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. 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.

[David Rosenthal]

Totally transferable lessons and dynamics.

[Ben Gilbert]

Yep.

[David Rosenthal]

When you were telling the story of Goto and Overture and the launch at TED and how upset people were, but how really, I was thinking, like, well, what would the analogy be today? Like, what if somebody made a chatbot, you know, an llama model, and what it told you was just what people paid to tell you. People would go crazy if that happened. But is that worth trying? Should somebody try that? Let's see.

[Ben Gilbert]

Product design here on acquired by David Rosenthal.

[David Rosenthal]

Yeah, right, right, right. Probably a bad idea, but it feels like such a similar moment that we're in. That's just what struck me over the head, doing all of this. Like, wow, history doesn't repeat itself, but it does rhyme.

[Ben Gilbert]

Yep.

[David Rosenthal]

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 Sergey 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 search engine to understand it.

[Ben Gilbert]

Right.

[David Rosenthal]

And then if they'd started a few years later, it would have been too late. It would already been too big. You would have needed too much technology and power to make it work. It was the perfect window.

[Ben Gilbert]

There was a very narrow window to start the Google of that era.

[David Rosenthal]

And again, maybe this is a sub point of my first playbook theme of just the parallels to today.

[Ben Gilbert]

Yep. All right, Powers. What of the seven powers 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. And the seven are counter positioning, scale economies, switching costs, network economies, process power branding and cornered resource. 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. Here you could argue versus Yahoo.

[David Rosenthal]

Well, it's interesting because it was a new industry. They were counter positioned against the other search engines that existed at the time in that they, as we talked about with Excite when they were trying to sell backrub to Excite, the other search engines wanted you to stay on the page 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.

[Ben Gilbert]

Right. And Google was just better. Being better is not counter positioning. The best argument for counter positioning is versus the portals.

[David Rosenthal]

Yeah. Versus Yahoo.

[Ben Gilbert]

It may have become clear at some point that search actually is important, but the portals couldn't really pivot to it because they couldn't give up all of their portal ad revenues.

[David Rosenthal]

Yeah, I think that's also right. And also take Yahoo. Yahoo had constructed itself as a media company even though it was started by two electrical engineering PhDs from Stanford.

[Ben Gilbert]

Right.

[David Rosenthal]

And just couldn't 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 Ink to me together to create a packaged competitor to Google. This was the ill fated Project Panama at Yahoo. Which by the way acquired Easter egg. That is where Jan Koum and Brian Acton met at Yahoo. And then they would get so frustrated and leave and start WhatsApp. But yeah, I think there's counter positioning against Yahoo there.

[Ben Gilbert]

Okay, Scale economies for sure. There's more powers here too. But the whole thing is scale economies and it's more than just the traditional one. I mean think about Hamilton's traditional definition here is that 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.

[David Rosenthal]

Or a user acquisition cost.

[Ben Gilbert]

Right. They can amortize that across more users, but also as they scale, they make more revenue per user.

[David Rosenthal]

Right.

[Ben Gilbert]

I don't know what that is. Is that a new power?

[David Rosenthal]

Super scale economies. Yeah.

[Ben Gilbert]

Where does this come from? Auction based businesses. Whenever you have auctions to determine pricing, the more liquidity you have, the higher price is. And so are there other businesses that we can kind of 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, they maximize their available take on any given micro auction? This is weird. I'm trying to think in another auction based world 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.

[David Rosenthal]

Oh, is this just network economies? That the more queries you have, the more advertisers you'll have? The more advertisers you'll have, the more.

[Ben Gilbert]

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.

[David Rosenthal]

Yeah, maybe you're right. Maybe there's something unique to auction models here because the price is dynamic.

[Ben Gilbert]

Hamilton, if you're listening, we need to talk.

[David Rosenthal]

Yeah, great. Okay, let's keep going.

[Ben Gilbert]

Yep. Switching costs.

[David Rosenthal]

Not yet.

[Ben Gilbert]

Not yet.

[David Rosenthal]

Talk about that in the next episode.

[Ben Gilbert]

When you're not logged in and there's no personalization, no real switching costs yet.

[David Rosenthal]

Yep.

[Ben Gilbert]

And everything else you'd switch to is worse. Honestly, Branding?

[David Rosenthal]

Yeah, to a certain extent.

[Ben Gilbert]

Absolutely. They built a brand of trust and speed 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 2002 to 6. I was 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.

[David Rosenthal]

Yeah, I would agree with that too. I think it's weak branding power, though, because that's not a branding power like Hermes has branding power. It's gone away over time. Now it's just a.

[Ben Gilbert]

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, they're rational actors.

[David Rosenthal]

They had an employment brand, though, to your point.

[Ben Gilbert]

They absolutely had an employment brand.

[David Rosenthal]

Smart people would be willing to do anything to work at Google.

[Ben Gilbert]

Yep. And lastly, cornered resource. Not really at this point in time.

[David Rosenthal]

Not really.

[Ben Gilbert]

And process power. I also don't think there's much there.

[David Rosenthal]

Yeah, I don't think so. Okay, quintessence, we already talked about yours. Do you want to say another word on it?

[Ben Gilbert]

No. The increasing returns to scale the revenue side is unbelievable. And the fact that they can have that insight 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 arpus are only going to grow up, people are going to be sticky forever. It is worth investing heavily to win this race. It's amazing.

[David Rosenthal]

Yes. I love your quintessence. It's totally right. I will second and underline it. One not quite as good, but alternative. Quintessence I want to put out there about Google is a quote from a page in Steven Levy's book In the plex. On June 8, 2007, Justin Rosenstein, who until recently had been a Google product manager, sent an email to his colleagues. I am writing to spread good news. The missive said, Facebook really is that company. 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, 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 toward the promised land. That was Google. Google was that company. Microsoft was the first that company. Google was that company. And then Facebook was that company.

[Ben Gilbert]

That's exactly right.

[David Rosenthal]

And they are exceedingly, exceedingly rare.

[Ben Gilbert]

Yes, they are. So that about captures it.

[David Rosenthal]

That's my quintessence Google was that company.

[Ben Gilbert]

All right, carve outs.

[David Rosenthal]

Carve outs.

[Ben Gilbert]

I have a three way tie of three excellent TV shows that I watched in the last, I guess, two months because we didn't do carve outs with Steve Ballmer.

[David Rosenthal]

Great.

[Ben Gilbert]

The first and I think the most landmark of mine is the rehearsal with Nathan Fielder, Season two. Oh my God. I don't want to spoil anything for anyone, so if you're a person who believes that anything is spoilers, stop. I'll tell you things that you'll learn in the first 10 minutes of the first episode. Nathan, just to give you some quick background, a decade ago did a show called Nathan for your where he went and helped small business owners figure out how to make their businesses better improve on a key area. But it's all kind of satirical. The way that he helps them accomplish their goals is very bad for their business in most other respects. He's an incredible comedian. Really dry sense of humor. And the thing that he did in Nathan for your 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. Obviously a bad idea, but great tv. In the rehearsal, he commits to the bit so unbelievably hard it takes years of his life. And he has 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 in this season of the rehearsal, he builds elaborate, elaborate sets and hires a bunch of actors to simulate 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.

[David Rosenthal]

Sounds amazing.

[Ben Gilbert]

Commitment to the bit at an all time. Great.

[David Rosenthal]

Are we committed to the bit?

[Ben Gilbert]

We are nowhere near as committed to the bit as Nathan is.

[David Rosenthal]

It sounds like we're not.

[Ben Gilbert]

Yeah, it's inspiring. Okay, so that's one Two is a much more casual, very enjoyable show called you'd Friends and Neighbors on Apple tv. It's Jon Hamm. 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, 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, but the last eight episodes are like some of the best Star wars canon that exists.

[David Rosenthal]

I love it. Ben, you are my, in addition to being my best friend, you are also my smart friend who has like great TV recommendations. So I love that you get to be that smart, you know, TV recommender. Friend for the Internet too.

[Ben Gilbert]

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.

[David Rosenthal]

I would like to.

[Ben Gilbert]

This is for listeners.

[David Rosenthal]

This isn't for you two little kids. Tough, tough. My carve outs. I've got two. Well, I've got one standard carve out. Gamecraft Season three Gamecraft podcast. We did a crossover with Mitch and 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, Mitch and Blake are two of the best in the business. My next carve out related to that is actually sort of a real time dilemma carve out. 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. So as I said before, I think I did a preemptive carve out. I was so excited for Switch 2. Switch 2 finally launched. I haven't gotten one yet. I have a reservation 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.

[Ben Gilbert]

All right, what's the decision?

[David Rosenthal]

As I was watching reviews on YouTube, I started getting into Steam Deck content and now I'm desperately conflicted. Do I want to get the Switch 2 like I'd been planning or do I want to go in a totally different direction and get a Steam Deck? Mm.

[Ben Gilbert]

Well, acquiring listeners, tune in. If you weren't interested in Google Part 2 on its own merits, now you're going to be on pins and needles from David's come about.

[David Rosenthal]

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.

[Ben Gilbert]

So tweet a picture. Listeners need to.

[David Rosenthal]

I'll throw a picture. Yes, yes, yes. All right, that's what I got.

[Ben Gilbert]

Awesome. Well listeners, we would love to See you in New York City. Acquire FM NYC if you want to come and be a part of the ridiculous acquired experience we are planning at Radio City Music hall with our good friends at JP Morgan Payments. Speaking of JP Morgan Payments, thank you to our partners this season JP Morgan Payments offers trusted reliable payments infrastructure for your business, no matter the scale. To Anthropic, the makers of Claude, an excellent AI assistant that I used a ton in prepping for this episode.

[David Rosenthal]

Me too.

[Ben Gilbert]

I mean it is transforming the way acquired works, which is just awesome. To statsig the best way to do experimentation and more as a product development team and vercel your complete platform for web development. We've got some thank yous. We talked to a zillion people as seems to be the new precedent when we do these large tech companies. One off the top. Arvind Navaratnam for Worldly Partners did an awesome write up on the company as usual which he will make available by clicking the link in the show notes and then, David, you've been maintaining the list.

[David Rosenthal]

Yes, I've been maintaining the list of some of the folks we should thank for helping us with this episode in addition to the many other folks we talked to who we can't mention. But thank you. You know who you are. But specifically thank you to Craig Silverstein, Google's first employee. To Anna Patterson, to Omid Kordostani, Alan Eustice, Clay Beauvor, Brett Taylor, Jeff Dean, Jen Fitzpatrick, Danny Sullivan, Nick Fox and to Paul Buchheite.

[Ben Gilbert]

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.

[David Rosenthal]

All star lineup. 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.

[Ben Gilbert]

Yep. All right, listeners, we'll see you next time.

[David Rosenthal]

We'll see you next time. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now, huh?