Google

Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

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

David: Ooh, that’s right.

Ben: How do you feel?

David: We’re about to go from the stage of one—very, very small audience of one—to the very, very big stage.

Ben: Where if we make a mistake, no one will notice. We just rerecord it and it’s like it never happened.

David: We should try that at Radio City. Just be like, ah, strike that. Let’s take that again.

Ben: Yeah. Hey, this is authentically Acquired, you guys. This is how we do it. You’re going to look at the inside. Probably not, though. All right, let’s do it.

David: Let’s do it.

Ben: 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: I’m David Rosenthal.

Ben: 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. 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 of a century. But it wasn’t always this way.

David: No, it was not.

Ben: 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: None of which were very interesting.

Ben: 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, J.P. Morgan 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: 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: And Google’s market position has been seemingly unassailable at least until really this year, until the AI wars really heated up.

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 a good product is far from the only reason that Google became dominant.

Today, we’ll tell the story of why Google was nowhere near the first search engine. It was the last.

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

Ben: A little. A few percentage points issue.

David: A few percentage points of issue, yeah.

Ben: 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.

If you want more Acquired between each episode, check out AQC2, 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: It was bananas. It was awesome.

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

David: 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 less than 100 tickets remaining right now out of the 6000 total. If you haven’t grabbed yours yet, go do it 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. Details on all of that are in the Acquired Slack. We’re so pumped.

Ben: We cannot wait to see you there. 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: I have no idea. That’s a great question.

Ben: Not that far back. Where do we start?

David: Well, you know what? We should ask Google. But to do that we need to tell the story of Google. 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. 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: And would send his son there as well.

David: Both of his sons, 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: Pretty Michigan-heavy.

David: Pretty Michigan-heavy, but pretty amazing childhood in the early mid-70s here for Larry and his older brother. 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: Incredibly unique. Are you kidding me? Larry Page grew up with two computer science academics as parents in the 70s, which would’ve meant that his parents would’ve needed to start in the 50s. Very, very few households.

David: Right at the same time as the PC era is coming online, and Microsoft, to just have that be your air, your daily existence growing up as a kid. How incredible is that?

Ben: Amazing.

David: Even more so for future Google to come for the 1979 to 1980 academic year when Larry is six and seven years old. His dad does a sabbatical year at Stanford. The whole family goes out and lives in Palo Alto, and Stanford and early Silicon Valley there, makes a big impression on young Larry.

Then he continues to 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. 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 bumbling academic guys, who weren’t really business minded, and Google was a research project, and this all happened by accident that they built the best business of all time. Absolutely freaking not. We want to dispel that notion 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: 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 ethos that those two get, but the same fire was there.

David: 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. In order to do that, you need to do more than just invent things.” 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: He’s alluding to two things there. One is companies are the vehicles by which you bring ideas to the masses. 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: Larry got this all along and Sergey did too.

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: And isn’t the way this all went down that Larry was visiting and Sergey was already in the program. I think Sergey was leading some tour to try to sell Larry on joining the program. Larry is, even though he is the new guy there, he’s challenging Sergey 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. They’re almost like bickering back and forth in this verbal sparring of who’s smarter even though they just met. That’s 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: 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 has 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.

Well, it turns out Anna was a postdoc at Stanford at this time, and she’s the one who organized this new student’s weekend. She organized Larry and Sergey meeting. She told me that the first night of the weekend, so the first event, the first time that they actually met was at drinks at the British Bankers Club in Menlo Park.

This magical friendship—bickering back and forth but real partnership—was started there and it was already going that night. Larry and Sergey end up shutting the bar down that night, and another famous local Stanford alum picks up the tab for the group. Can you guess who that person was?

Ben: I don’t know. Lay it on me.

David: Charles Schwab.

Ben: No way.

David: Yup. 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, I got you guys.

Ben: That’s awesome. So Charles Schwab funded the first date of Larry and Sergey.

David: 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.

Ben: Funny.

David: 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. 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. Maybe reminds me a little bit of you and me.

Ben: On a very different scale, yes.

David: On a very different scale.

Ben: But that’s interesting. Equal co-founders. I’m wracking my brain, 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: 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 100.

Ben: It’s fascinating. Maybe Jensen, Curtis, and Chris at NVIDIA. But over time, it became Jensen. Yeah, you’re right. This is unique for us to be covering true founder-partners that made it decades together.

David: Even Warren and Charlie, Charlie was never full-time at Berkshire Hathaway.

Ben: And certainly owned way less.

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

Ben: It’s really interesting.

David: Okay, so Sergey, what’s his story? Sergey 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. Sergey’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.

When Sergey’s four years old, his dad attends an international mathematics conference—this is 1977–1978—and realizes, oh, I got to get my family to the west. We got to get out of here.

It takes them two years to be able to emigrate out of the Soviet Union. but they eventually come to the US. His dad becomes a math professor at the University of Maryland. His mom becomes a researcher at NASA’s Goddard Space Flight Center.

Ben: So Larry’s parents are both computer science professors. Sergey’s dad is a math professor and his mom works for NASA.

David: Yes.

Ben: The pool is small of people with backgrounds like that in the 80s.

David: As you would imagine, Sergey’s 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: I have no idea.

David: He interned at Wolfram Research.

Ben: No way. Really?

David: Yeah. Stephen Wolfram.

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

David: I know. Developers of Mathematica, that 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: Frankly, it pencils now that you’re starting to get the picture of these two over time. In the far future closer to today, Sergey is the one doing stuff like Google Glass and skydiving videos. The zany parts of Google are Sergey’s DNA, and the really honed products, 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: Yeah. Okay, so fall of 1995, Larry arrives at Stanford. Sergey’s already there. Terry Winograd is his PhD advisor. 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. The idea they have is this worldwide web thing seems to be becoming a thing. Here, where 1995, where a year after Netscape was started a couple of years after Mosaic.

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

David: Ooh, yeah. Lay it on me.

Ben: This is from John Battelle’s book, The Search, which is excellent. “From 1993 to 1996, the web grew from 130 sites to more than 600,000.” If you compute that rate of growth over that four year period, it a 723% growth year over year for four years. That is exponential.

David: This is the version of the Jeff Bezos realization where it’s like, I got to leave Dijon and I got to build Amazon. Nothing like this has ever happened before.

Ben: The Internet is a phenomenon like no other, and it keeps going. 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: And just a couple of years before, two other PhD students at Stanford had started this thing called Yahoo. 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, a directory of websites. The idea is like, oh, this could be a decentralized annotation system where anybody can say what’s interesting about a website.

Ben: It’s funny. I thought I knew the whole history of Google. I somehow missed this.

David: Terry, Larry’s advisor, is like, okay, I like the problem space, shall we say, of the web for your dissertation here, Larry. But why don’t you go refine this idea a little more and come back to me?

Larry goes off, and of course he’s collaborating with Sergey on this. As they think about it, they realize that actually there’s a fundamental flaw in what they were planning for the sanitation system. 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. 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 way to rank them, you might say.

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: Ah, yes. We should say page 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: Exactly. Larry goes back to Terry and he is 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.”

Ben: Ding, ding, ding, ding, ding.

David: And thus, at least the germ of the idea for PageRank as we all know it today, is born.

Ben: 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. This is something that has been done somewhere before the web very close to home for all these Stanford folks—Academia.

David: Of course, yes.

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

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

Ben: How many important papers cite your research paper.

David: If you’re in an important journal, what did those papers say? And this becomes the inspiration for how they’re going to do the ranking of webpages.

Ben: This was actually a research field before the web, the study of academic citations. There’s already a body of work around how to do this well.

David: Oh, interesting. I didn’t know that, actually. It makes sense.

Ben: It’s like how Hollywood loves making movies about Hollywood. Academia loves doing papers about papers. There are some examples to look at of how might one use references or citations to weight importance.

David: So we’re almost all the way there to the huge leap that would become PageRank, 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.

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, anybody who’s creating a link can make anchor text for it. Write whatever they want, then just today, Cmd+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. You get not only a citation of the link, but a few words of what the author of that link thought about it.

Ben: 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 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.

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: Yup. Terry’s like, yeah, do this for your dissertation. Great. Let’s do this project.

Ben: Reputation on the web, that’s going to be valuable.

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

Ben: The web was actually small enough that you could go suck it all up then.

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

Ben: Pretty insane.

David: 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 all the links.

Ben: And then reverse compute all the links to answer that one seemingly simple question of what webpage is linked to me.

David: If you had tried to undertake this as a brand new project, even just a year or a couple of years later, it would’ve been impossible because the web would’ve already gotten so big that to just start and create an index copy like this, a full copy…

Ben: Even one year later would’ve been tens of millions of dollars and within a couple of years would’ve been hundreds of millions of dollars.

David: Prohibitively expensive.

Ben: So we’re in what, 96–97 here?

David: Yup. We’re in 96, the back half of that first academic year of Larry at Stanford. 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 back links for ranking webpages.

They spin up backrub.stanford.edu, and Larry writes the first implementation of PageRank and the crawler to go do this. He writes it in Java, it’s super buggy, and basically doesn’t work. They ask one of their friends there at Stanford, a guy named Scott Hassan to help them. Scott’s a better coder than Larry Sergey is. He codes it up in Python and it actually 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: And they hadn’t even come up with the name Google. Nothing about this. It’s not a search engine.

David: Exactly. If you go to that project homepage, you can find past versions of this on the Internet or images. I think there’s even a recreation of it out there.

Ben: With the really weird black and white picture of a BackRub with the red text over it.

David: I think that picture actually was on backrub.stanford.edu. It looks like somebody’s back.

Ben: They certainly didn’t search Google images for it. I know that.

David: Exactly. The text on the page says, “BackRub is a ‘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 an implementation of a crawler and the PageRank algorithm.

Ben: 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: Yup. Again, even though Larry really wants to start a company, he’s thinking he’s going to get his PhD and they go forth here.

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

David: So Larry and Sergey are building BackRub here, and I mentioned Scott Hassan, 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. What do you do? You go start a company.

Ben: It’s your obligation to go, take, and smash this piñata.

David: So Scott Leaves, starts a company called eGroups. That company a couple of 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: Ugh, man, you’re stumping me today. No.

David: Larry’s older brother Carl Page.

Ben: Oh, that’s this company?

David: Yes.

Ben: Wow.

David: 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 just want to start a company and then they raised money. Sequoia and Mike Moritz would end up funding eGroups.

Ben: And then they sell it for $400 million to the leading web company at the time. That seems like a good idea.

David: Larry and Sergey start thinking, ooh, wait. Maybe we should do something commercial around this. This seems like it would have value.

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. 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: Because they effectively have it working at this point, even though it’s not 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 have the proof of, hey look, this ranking is actually a good ranking of how authoritative these websites are.

David: 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.

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.

Ben: And we should say, there was a large list of other search engines, portals, internet properties.

David: Search engine–like things.

Ben: That existed, and had traffic. Archie, Gopher, Alta Vista, HotBot, Inktomi, Lycos, Yahoo, Excite, Infoseek.

David: The list goes on and on and on, yes. The closest they get that spring and summer is with Excite. This story’s amazing.

Supposedly—this is according to In the Plex, Steven Levy’s book, a 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 Doer. The two of them are running the firm, and Vinod is on the board of Excite.

Somehow, Larry and Sergey—I think they bring Scott along—get a meeting with Vinod and they hammer out a deal that Excite is going to license this BackRub 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. Larry and Sergey are going to come work at Excite that summer, implement BackRub for their search—basically make Excite into Google—then they’re going to leave and they’re going to go back to Stanford in the fall.

They get so far that they run a side-by-side test of Excite’s search results, the original algorithm and then the BackRub algorithm. The legend goes that they’re demoing this test to Excite’s CEO as a final step to finalizing this deal.

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.

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: It is amazing that as early as 1996–1997 this time period, this very important conflict of interests is teased out. This is basically why Google beat Yahoo.

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.

Google from this point, basically forever was how quickly can we deliver someone something relevant so they can leave Google and I’ve had a good experience finding what they really wanted?

David: 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. Here what BackRub is doing is they’re going to kneecap your page views.

Ben: 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: This deal was never going to happen with Excite or anybody else because it broke the business model.

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

David: Exactly. That fall in 1997, Larry and Sergey go back to school. All these get-rich-quick deals have fallen apart. Nobody wants BackRub. Larry’s just like, well F it. 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. IE they wanted eyeballs, page views. They didn’t understand search and they weren’t technology people.”

Ben: And when he says we talked to others, they tried to sell PageRank to Yahoo for $1 million and were rejected. There are 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: They get back to campus. They’re like, all right. We’re going to build a real search engine ourselves. First order of business, the name. BackRub, you probably not going to fly.

Ben: Describes the technical underpinnings but doesn’t really describe the searching.

David: They’re casting about trying to find the right name to encapsulate what they’re doing, this new good form of search. The story is that Larry’s dorm mate suggests the term Google.

Ben: Oh wait, do you know the name before this?

David: Oh no.

Ben: Do I know something you don’t? Oh this is great.

David: Oh, go for it.

Ben: The name is Whatbox.

David: Whatbox?

Ben: Whatbox. It rolls right off the tongue. It’s a box that you type stuff into. It’s a question.

David: Okay. I get it.

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

David: Well hey, I guess if Facebook can be a product name and a company, then yeah, maybe we could all be Whatboxing things.

Ben: We are all WhatsApping, so to be fair…

David: Yeah. It wasn’t that crazy.

Ben: It wasn’t that crazy. But yes, Whatbox’s out. Next name, how did Google come about?

David: Larry’s dorm mate suggests that they might want to use the term Googol, which is the mathematical term for one followed by 100 zeros.

Ben: 10 to the 100th power.

David: 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 Googol was spelled G-O-O-G-L-E.

Ben: Misspells, really? I thought googol.com was taken.

David: Oh, maybe that’s it. Like anything here, there are a lot of legends floating around.

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

David: Exactly. This is before you’ve got to Google, did you mean in the search box? 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: 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 really colorful before the drop shadow thing. There’s even one before that that’s completely illegible, and this is the one that we’re talking about. But it was rainbow-colored.

David: Yes it was. We’ll link to it in the show notes and on social media. It’s fun to look at. But basically that homepage design of all the colorful logo in a search box, that was it then. That’s it today.

Ben: 1997 onward.

David: So that 97–98 academic year is when they’re building BackRub 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. Then it starts spreading into Silicon Valley. It’s like bringing the Stanford network to its knees with all the traffic that is happening on google.com out of Stanford.

Ben: 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. There’s now a keyword that we’re ranking things for, not just arbitrarily ranking them. That keyword relies heavily on the anchor text descriptions.

There are these two early key innovations. There’s waiting results based on backlinks and there’s description from anchor text. And it really did just 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: Oh yeah, yeah, yeah.

Ben: There are these famous stories of other researchers that have ordered computers, but they actually aren’t going to start the project for a few months. Larry and Sergey 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.

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. Obviously, that’s a problem.

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.

David, to your point, it’s not a heavy website. It’s a white page with an image, a search box, and then when you go to the results page there are no images. 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: Yup. 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: 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: 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 1% of the company or something like that. Stanford did very, very well for their large yes here.

So Larry and Sergey go to a professor in the CS department at Stanford named Dave Cheriton. Dave had started an ethernet company called Granite Systems with Andy Bechtolsheim 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. Larry and Sergey are like, oh, okay Dave, he is one of our professors. He knows how to do this stuff. He’s like, well why don’t you talk to Andy about how we could spin this out and make it into a company?

Dave emails Andy that evening. Andy replies right away. He’s like, sure. I’m busy tomorrow, but how about we meet at your house at 8:00 AM in the morning? I’ll come by on my way to the office. 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…

Ben: Now is a great time to talk about our presenting partner, J.P. Morgan Payments. 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: Well first is the team. The folks there at J.P. Morgan are: (a) absolutely world class, and (b) really get Acquired and 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: And deeper than that, they’re just an insanely trusted brand. J.P. Morgan 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: A couple of years ago, we were worried that oh, J.P. Morgan 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 J.P. Morgan payments.

They literally do $10 trillion in payment volume a day. Think about how insane that is. With J.P. Morgan processing over 50% of all US e-commerce transactions, their software and payment rails basically underpin our entire global financial system.

Ben: Lastly, every single one of your companies needs payments. J.P. 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, 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: Here we go. So 8:00 AM the next morning, Larry and Sergey roused themselves out of bed over on the Stanford campus, head on over to downtown Palo Alto at Dave’s house. Andy drives up. He’s like, 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? Larry and Sergey are like, but we weren’t talking about raising money. We just wanted some advice to start a company. 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. Andy’s like, you guys figure this out. That’s your problem, not mine. I’m good for the money.

Ben: No investment documents, no valuation. Just, here’s $100,000. I assume I will get something for my investment.

David: Exactly, and this was the forcing function for Google Inc. to get founded.

Ben: So Larry and Sergey need to be able to 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: It takes a couple of months to get all this done, 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 $100,000 to the funding here.

Larry and Sergey meet a former Netscape guy named Ram Shriram who started advising them on starting this company, spinning things out.

Ben: And longtime Acquired listeners will recognize this name from our Amazon episode.

David: Oh yes. Ram had left Netscape and joined a startup called Junglee that amazon.com then acquired. So Ram had a little bit of liquidity. He throws in $250,000 into the round and he is like, hey, do you guys want to meet Jeff Bezos?

Ben: Who at this point, it’s interesting. You think about Amazon and Google as equally old companies. Jeff is the elder statesman of the Internet. His company was started in 94. This is 98. Amazon just went public the year before.

It’s crazy that at this point in time, it was little Larry and Sergey’s grad students’ meeting public CEO Jeff Bezos. It’s almost like when your 6-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: Exactly. Ram arranges a meeting. The next time that Jeff is in Silicon Valley, they all meet at Ram’s house. Similar to Andy Bechtolsheim, Jeff’s like, great. Ram, what are you in for, $250,000? I’m in for $252,000.

All in, they end up raising $1 million, at a $10 million post money valuation. And yes, Jeff Bezos does a quarter of Google’s seed round.

Ben: It’s so crazy. We knew about this in the past because we talked about it on the Amazon episode, but whenever I heard someone reference Jeff Bezos was an angel investor in Google, I always thought, well yeah, but you look at any of these startup cap tables and there are 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. One of four investors. Is that right?

David: That’s right. You have Andy, Dave, Ram, 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: And even if he did sell at IPO, he turned that $250,000 into something like $200 million at IPO.

David: Right. Nice returns. Amazon stock was probably in the dumpster when Google went public, so 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: It seems like they might burn through that fast because of their business model of trying to store the entire internet on their servers. But you got a million dollars, you’re no longer a Stanford project, you’re spun out, you got investors. What’s next?

David: Well, first office space. 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: Eventually CEO of YouTube.

David: Exactly.

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

David: I think it’s worth saying a little bit more about two other players to set the context. The first is Alta Vista. Folks who are old enough might remember Alta Vista pre-Google was pretty good.

Ben: It was pretty good.

David: Alta Vista 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: I do. But most people don’t. DEC—Digital Equipment Corporation.

David: DEC—Digital Equipment Corporation’s Western Research Laboratory, which is their Palo Alto research lab, their equivalent of Bell Labs. But DEC, the company we talked all about in our Microsoft series where Dave Cutler came from, wrote Windows NT, a legendary company.

Ben: Hardcore, enterprise, big hardware computing company.

David: The mini computer company. Judy Faulkner wrote Epic on a DEC mini computer, right?

Ben: Yup.

David: This is where Alta Vista came from. The big insight that they had was you can go crawl the web to build the index in parallel. Before Alta Vista, all the other web crawlers out there that were building search engines were just single-threaded processes. You’d go crawl one page and then you’d go crawl another page and then you’d go crawl another page. 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: Oh, fascinating. And it’s a super parallelized 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: 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. 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, the innovation, the ranking, and the relevancy that was the most important thing. There are actually two other vectors that are critical. One is speed—how fast are you going to return the results…

Ben: 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, then go do something else, and wait for it to come back.

David: 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.

Ben: So funny.

David: 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? Before Alta Vista and parallelization of crawling all the indexes of all the other search engines were super small. Maybe a million pages was the biggest. 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: And the funny thing about this period of time, too, is very rarely were people actually updating their index. When something would say a million pages crawled, that was cumulative. They just kept adding new sites to it and assuming you weren’t doing many updates.

David: Oh man, how times have changed. When Alta Vista spins out of DEC and launches as a commercial company and entity in and of itself, its big claim to fame is its index. It has 16 million pages in its index versus the competitors.

Altavista still sucked at relevancy and speed. 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. If you wanted to rank highly for dog food, you just spam dog food in invisible text all over your page.

Ben: Or even not invisible. You just want to make the dog foodiest dog food page on the web.

David: Exactly. The other thing that (I guess) Alt Vista was probably fine at this but not good, was speed. That was a particular problem. AltaVista had great hardware from DEC.

Ben: 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, 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. 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. To do a really good job at it, it would be very expensive to run.

It is funny. As you can imagine, the powers that be at DEC 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 DEC hardware.

David: Exactly, Ben. Search as an industry was not interesting. (1) Because the economic upside was capped. And (2) also, people love directories and portals and Yahoo. Yahoo was the big player, not Alta Vista or Excite or Lycos or Infoseek, any of these others.

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.

What was so great about Yahoo—yes, it was started by Jerry Yang and David Filo, two other Stanford PhDs—it wasn’t technology-driven. It started as Dave and Jerry’s Guide to the Internet. It didn’t start as their academic research.

What Yahoo was was exactly that. It was a hand-curated guide directory to the Internet. It was like the yellow pages with even better annotations to why you would want to look at a particular given site. That’s what people thought. 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, was humans who are going to rank things.

Ben: And for the size that the web was at the time, Yahoo was correct. 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, search became a more interesting front door. But for this period of time, directory was an amazing front door to the Internet.

David: Yup. Now here we are in 1998. The Internet is already big enough that yes, it’s clear there are a lot more interesting webpages out there.

Ben: Yahoo has search to address that?

David: Exactly. The model was hybrid. All these portals, Yahoo included, went hybrid. When you search on Yahoo, the results you get at the top of the page are their hand-curated directory-driven results. Then they backfill with a search engine. They would partner with these search engines to provide backfill results. People thought that this was the ideal solution.

Ben: So interesting. It is the epitome 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, yeah, yeah. Search just has to be good enough. The curation is the thing that matters.

We’re a media company. We have 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. We’re effectively a media company that has search just in case.

Okay, that’s what’s going on at Yahoo and all the portals. The opinion of Larry and Sergey is, 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. 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.

There’s this 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. Isn’t that going to be really valuable? Yes, but we don’t know how yet.

David: 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: Right, and for each piece of this, you need more infrastructure. You need the crawler to go crawl the whole web and store, not entire webpages, but little pieces of webpages that you can reference from your index. You need the index itself. You need to serve the webpages up for when people are doing the searches. There are a bunch of components of this infrastructure that all need to scale and they all need to scale differently.

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

Right after they raise the angel round, Larry and Sergey go out and they recruit just unbelievable top-tier engineers and computer scientists to come rewrite the code and work on this infrastructure problem. Pretty quickly, they get Urs Hölzle and then Jeff Dean, who are just these absolute legends. They’re 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’s 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 the official Java Virtual Machine. Larry and Sergey recruit him out of academia to come join as employee number eight. His initial job title was Search Engine Mechanic because “everything was broken.”

So that’s Urs. He builds all this incredible infrastructure.

Jeff Dean, who they also recruit around the same time—

Ben: From DEC, right?

Ben: At DEC, yes. Jeff is basically Google’s Dave Cutler. Today, Jeff runs AI at Google. He also implemented the first version of AdWords, built AdSense, rewrote the course 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: 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: Just generational talent. But this is 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 in scale. It was only because of these guys that it did.

Ben: Here’s the crazy thing. Later—there’s an easy point to make—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 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, how novel their approach was, everything.

David: 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, 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. Why was that?

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 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. 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.

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. They get stored on lots and lots of different disks, lots of different machines, lots of different servers, and ultimately different data centers all over the world.

Then there’s a separate server that keeps a master mapping of all the chunks, where the chunks physically are. 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. That makes the whole thing possible.

Ben: Basically, that one server you’re talking about can 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. That way it can just pull in a parallel way from all those different chunks concurrently.

David: Yup. I think that’s even abstracted. From a computer 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: Google was 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: I think that’s right, which enables the whole thing in the first place and is technically extremely interesting. But now the physical infrastructure side, because you have all these chunks and they can live anywhere. 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, oh, we can just keep going with this. Let’s keep using cheap commodity components and hardware. 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 three or five times.

Ben: 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 design Google with the idea to take into account the fact that the hardware is not enterprise-grade. That means we can get cheaper hardware and run in a distributed computing way.

Frankly, I think this makes it interesting to a lot of engineers who 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: I read that industry average server hardware failure rate at the time was around 3%–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: Super interesting.

David: 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: Oh wow.

David: Because they’re not buying fully-baked servers. They’re just buying components and assembling them into this sea of components.

Ben: Proto data center.

David: In their data center and then data centers.

Ben: And their early data centers, they’re never really putting them in PC housing, right?

David: Yes. These early “machines” they’re building, they’re not even putting PC cases on them. They just mount the motherboards directly on corkboard. Then they put the RAM and hard drives in there, and then they just stuff them in their data center racks.

Ben: The photos of these early Google “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, by square footage.

When you give a computer scientist a constraint, they will optimize for it. The goal is how much of Google can I power in this square footage? The way that you optimize around that is, well, incredible density of hardware.

We’re not putting cases on these computers. We’re putting corkboards in. Imagine just a sheet of cork, which is an insulator, so that these electrical components that you don’t want to conduct between each other are not going to conduct between each other. You just stuff a server rack full of corkboards with all this commodity hardware strewn about it. It looks unbelievably messy. It’s extremely economical. Then you just handle it all in software.

David: 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. Once the business model kicks in, this is why Google search has a 87% gross margin on it.

There’s this incredible story of Google’s first data center, was a co-location data center facility, a shared physical space in Santa Clara called Exodus. The data center cage, the space that Google had allocated was right next to the cage for Inktomi, which was a competing search engine out there that we’ll talk about in a minute.

Google folks talk about, the Inktomi cage had all these gleaming Sun machines, lots of space and lots of airflow, and all this incredible cable management. Then you had this Frankenstein Google thing next to it.

To your point Ben, they were only paying by square footage. They weren’t paying for power. They were sucking up all the power of the data center. I heard a story that they actually at one point may or may not have stolen a power circuit from the Inktomi cage next door.

Ben: Borrowed. Borrowed.

David: Borrowed. Borrowed. Yes.

Ben: One fun illustration of what it means to be on commodity hardware versus enterprise-grade hardware, Jeff Dean shared a fun story with us. On enterprise-grade hardware, you would have something in RAM which is called a parity bit. In consumer-grade hardware you don’t.

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. If it’s odd, it’ll set the parity bit to zero.

The con of this is now you need an extra bit. 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.

You can check and see, wait. It’s supposed to be an odd number according to the parity bit, but it’s an even number. Likely something went wrong. When I say something went wrong, this is from random radiation that is just flying around the universe. At any given time—

David: Stuff goes wrong all the time.

Ben: 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? It’s that, 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: 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. 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. If you look at Apache Hadoop, that is a Yahoo copy of Google’s MapReduce.

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

David: 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. That means they can deliver search and ad results instantly to users all over the globe.

Ben: 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. 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. We’re going to show all those numbers to you because: (a) we’re engineers who are awesome, but (b) we know it’s the best stats that anyone out there could report to you.

David: It’s a stake in the ground. All this grows out of the constraints of they don’t have any money. First at Stanford and then this little angel around they raised.

Ben: They don’t have a way to generate any money.

David: And yeah, they don’t have any way to generate any money. 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’ve 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 time…

Ben: To thank a new friend of the show, Anthropic, and their AI assistant, Claude.

David: 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. Claude actually saved me from making a somewhat meaningful error later in this episode. I’ve never had AI do that before.

Ben: Now I wish we had Claude for all 200 of our other episodes. I also played around with Claude’s extended thinking mode in my research, especially analyzing Google’s S-1, which gave me a bunch of great insights that we’ll share later in the episode.

David: This type of research is where Claude really shines compared to 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: 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: Plus Claude’s new Opus 4 is widely regarded as the world’s best coding model. 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: Acquired listeners can get half price on Claude Pro for three months using our link at claude.ai/acquired, or click the link in the show notes.

David: Claude thinks with you, not for you. 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: All right, David, going from having no business to the greatest business model humankind has ever discovered, not exactly a straight line, huh?

David: No, not at all. How does it all start? 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.

They hire a recent Stanford undergrad named Salar Kamangar who joins Google as employee number nine. Like many Stanford students at the time, he started using the search product while he was an undergrad, was blown away, and he’s like, I got to 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.

The first thing that Larry and Sergey give to him to do is you might argue the most important thing at the company. They’re like, well we’re running out of money so we need to go raise venture capital. We don’t want to write the business plan in the pitch deck. You write the business plan in the pitch deck.

Sally goes off and he writes the pitch deck for the Google Series A, 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 revenue.

Ben: And it’s hand-wavy as hell.

David: 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: You know that this 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. Can we make money doing something else with our technology that will fund what we really want to do, which is google.com?

David: It’s pretty funny to talk about this now in retrospect. They did have a couple of 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 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: That’s right. That was their first revenue, right? Was Red Hat.

David: 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. That was going to be the main business driver.

Then there were going to be two other business lines too in the company. One was going to be, well sure, okay VCs, you make us. We’ll sell 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: 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? But it seems like it was never real enough to actually have a plan for it.

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

That was number two. 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 nextdoor neighbor at the data center exodus in Santa Clara.

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

David: Exactly. This was Inktomi’s whole business. They just sold organic search results white labeled to other portals.

Ben: But there are 5 big customers and 50 total customers out there for this business.

David: Yup. This is the business plan, this is the pitch deck. They go out, remember we’re in spring 1999 here. Even though this is a little hair-brained, it’s still the dot-com bubble. Money is still flowing. There’s a great Michael Moritz quote in Steven 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.

Ben: That’s a deliciously Michael quote, yes.

David: And Google’s got all this usage, 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. Michael Moritz and John Doerr, the two most legendary VCs in the world team up, join forces, split the deal, and they both join the board of Google at the Series A.

Ben: 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: That is true. I love that even today, even you have that opinion. We heard from folks in the research that this really was a Google PR master stroke to seed this narrative.

Ben: 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: 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 they had been on boards together before. Maybe they’d done one round or the other, and Sequoia Kleiner split deals all the time. But hey, it was the dot-com era and everybody needed a PR strategy, and that one worked well.

Ben: Fascinating.

David: But the point is this was a hot deal. There are 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: I think in the middle of negotiations, they got another term sheet at $150 million valuation instead of $100. But I think they were already pot committed to Sequoia and Kleiner Perkins. I actually don’t know who the $150 million came from, but I do know it was someone who Ram Shriram set up the meeting with.

David: Interesting. And remember, Larry’s older brother had co-founded eGroups which Moritz had funded at this point. They knew they wanted to go with Sequoia and Kleiner. That was the goal all along.

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. Even in the heyday of the dot-com craziness for a Series A and $100 million post, that was newsworthy.

Ben: So funny thinking about this today.

David: I know. Today it’s so clean. It’s so clean.

Ben: 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 the way it would’ve felt in tech at the time.

David: Totally. But despite that and despite all the hype around the Series A, there’s still an urgent imperative to make revenue. 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. So there’s a fire lid 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 Kordestani.

Ben: 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: And Omid was the VP of Sales and Business Development at Netscape.

Ben: He’s very familiar with building an internet-based business. What these Google guys are doing is very interesting.

David: Of course, Larry and Sergey, as the great recruiters that they are, like hey, why don’t you come work here? Omid joins Google, essentially as chief revenue officer. He’s tasked with, okay, take this business plan. Take these three areas and make them a reality.

We should say too, Omid is an awesome guy. We talked to him in research. He goes out and of course the first innovative business model that they pitch the VCs, 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. For the first six-plus months of the company, the rest of 1999, after the venture funding, things are not looking good on the revenue front.

Ben: 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: Oh, 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: The quote is from Sir Michael Maritz. He comes to Doug and they’re running Sequoia Capital together at the time. He says, “Doug, we’ve never paid so much for so little.”

David: That’s the lore. I got a little more behind-the-scenes flavor on the quote. Apparently, it was not Sir Michael who said it first. He might have just been repeating it back.

Ben: Was it John Doerr?

David: Apparently, it was Vinod in the Kleiner partnership. That’s what I heard. This is 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 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: No business, but growing market share, fervent loving fandom among the people using it, providing real value to people. There’s got to be something here.

David: Exactly. The revenue imperative is becoming, well, more of an imperative, shall we say. And Omid’s a smart guy. He’s like, I’m not going to just keep banging my head against enterprises here. We’re going to pursue the other two business lines that are obvious. 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.

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: What do these ads look like, David?

David: 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: It’s like they always talk about it for taste, which is true, but yes, it’s a performance thing.

David: It’s a page performance thing. There are these great stories about Tim in New York, Omid, and 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 no images, just text. Trust us, it’s going to work.

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

David: Still CPM.

Ben: So you buy a keyword and then your promise 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: Yes.

Ben: Okay. Not self-serve, no web tools for this. This is 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: 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. Google had to install fax machines at its headquarters to take these insertion orders for these ads that they were selling.

Ben: Awesome.

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

Ben: Intent, baby.

David: Exactly. The very first project that Jeff Dean did when he came over from DEC is Larry, Sergey, and Urs told him, the VCs say we got to sell ads. Go figure out the tech to serve ads on google.com. But don’t do anything to degrade search or user experience.

Jeff works with Marissa Mayer who just joined from Stanford, undergrad, and they’re like, okay, 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: We know a guy at Amazon.

David: We know a guy at Amazon who happens to own a good chunk of this company. Google goes and signs up as an Amazon affiliate.

Ben: Which, how crazy is this? The Google business model was validated, doing customer development, a startup idea validation using Amazon affiliates as the mechanism.

David: 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.

The amazing thing is, of course it actually works. Now, whatever the Amazon affiliate commission, 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: But it’s a test.

David: 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: 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’ve shown a great result here, because click-through rates on search ads are higher than ads that are just randomly around the Internet. Someone is intending to buy something, they have high intent. That’s a great place to show an ad. The click through rate’s going to be higher.

But what they also know, because it was an Amazon affiliate link, 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.

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 going to like the numbers. This is ultimately a math problem.

David: It was an absolutely brilliant test and bootstrap of the first step of the Google ad model.

So that’s gen one of the Google ads business. They get it set up, it’s going, it’s making some money. They’re winning some clients on Madison Avenue. Good. Great.

The more interesting piece for the next year, year-and-a-half, is the OEM search portal deals. There are some big deals to come—Netscape, Yahoo, AOL.

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

David: Which, oh by the way, is also going to train huge portions of the Internet to use Google search.

Ben: Yes it is. 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: It was the Inktomi business model. It was exactly that. We’re selling our search results for you to use on a third party page.

Ben: And it’s effectively a B2B supplier. They’re a vendor to a portal more or less.

David: It turns out, though, that we’re still in the era of the Internet where portals are pretty big.

Ben: Ton of traffic. And they’re not just any old vendor. They’re a vendor that at the bottom of every page says Powered by Google.

David: 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 a proof of concept deal done with them. That’s for Google to backfill organic search results on Netscape own directory service that they just launched to compete with Yahoo.

Ben: It’s interesting. We always think about Netscape the browser, but this was presumably the Netscape homepage. Whenever you opened up, it would go to netscape.com or something, and there’d be all these Netscape services there available and one of which was search.

David: Yup. I presume having been acquired by AOL, this was now more of a strategic priority for Netscape, because this is AOL’s whole business model at this point besides the monthly dial up fees.

Ben: 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 the small part of the organization they’re working with right now.

David: Exactly, but relative to how small Google actually is at this point in time, it’s still big enough that when they flip the switch and Google on Netscape goes live with Google powering the organic search results, there’s so much traffic that it blows out Google’s infrastructure.

Ben: 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. This is potentially company-killing because this is their big, strategic priority. If they prove that they’re untrustworthy to Netscape and can’t deliver, then how are they going to keep Netscape business, let alone get any other portal deals?

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

Ben: So they cannot tip over. 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: Just think about this for a minute. Think about everything that Google is today—never goes down, uniVercelly 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: Yes. 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: 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: And they got trained. The Netscape deal brought in 3 million total searchers per day. At first, Google’s sitting there begging these early portals, hey please put Powered by Google on, 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: It becomes the ‘Intel Inside’ of search. Yes. It’s the ingredient brand.

Ben: That’s exactly right. Now, they’ve got some distribution, millions of users, but still very little revenue in June, 2009.

David: So over the next year or so, obviously they’re working on the other business models too, but Omid keeps signing up some smaller portals, some international portals on the success of the Netscape deal, getting more of these OEM portal deals for Google. Then, they start working on the big kahuna—yahoo.

Ben: Yes. But before we tell that story, now is a great time to thank one of our favorite companies, Statsig. 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: 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: So just like Google’s office and culture, this practice also became the norm for future tech companies. 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: 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: 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: 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. Since they process an enormous amount of data as Statsig does trillions of events per day, they also scale with you.

Ben: 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: 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.com/acquired. Just tell them that Ben and David sent you.

Ben: All right, David. How did Google get big?

David: 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: What a deal.

David: 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 of years of the dot-com winter until they figure out the AdWords business model.

Ben: 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: 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. It’s material. 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: That’s such a good point, and something that’s often pretty overlooked. There was no potential for Google to raise more money here. The venture capital gravy train was over. We’re sitting here saying, oh, they really need to make money. When are they going to turn the revenue switch on? And we’re like hand ringing over here. We’re only two years into the company’s life. Think about startups today. You don’t have…

David: Expectations of profitability.

Ben: Exactly, within a couple of 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: In the midst of all of this, as Yahoo’s coming online, the board is also pushing Larry and Sergey to hire a CEO. As part of the Series A process, John Doerr had very begrudgingly extracted a promise from Larry and Sergey to hire a “professional CEO.” Larry was CEO for the Series A and CEO for the next couple of years after the Series A. They really didn’t want to do it. They were dragging their feet.

Ben: 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: My favorite story from the whole Google CEO hiring process was the standard playbook here that John, Mike, Sequoia, and Kleiner would run with founders when convincing them to hire a CEO. Take them around the valley, take them on the tour, have them meet the CEOs of the great companies in the Valley at the public companies and say, look, see what a great CEO can do for your business?

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. Finally after months of this, they come back and they tell Kleiner and Sequoia, 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: Oh, God. Who is it?

David: Steve Jobs.

Ben: Really?

David: Yes.

Ben: Because wasn’t he an idol of theirs?

David: 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’ve said yes. But I think it was more like a hey, a little thumbing their nose at the VCs. I’m like, nah. We’re keeping our buyer high. It’s Steve Jobs or nothing. So great. Also, deeply ironic given what was to come between Apple and Google.

Ben: Ten years later, yup.

David: But that is for the next episode. Anyway, it was a pretty contentious process. Through all of it, 16, 17, 18 months in, finally Eric Schmidt emerges as probably the only viable candidate out there. 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. Famously, he hit the Venn diagram of everything. He also went to Burning Man as did Larry and Sergey.

Ben: Right.

David: And so Eric joins in March of 2001. Again, I think Larry and Sergey were still resentful of the process. I think it did come to work pretty well. They, and Larry especially realized, hey, there are parts of being a CEO, especially as we’re getting bigger that I don’t really like. Eric can do those things. I don’t really want to run a finance org. I can have Eric do those things. 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: Yeah, and the three of them ran the company together. I think they had a daily standing meeting. It wasn’t like there was a CEO that took over and put the founders out to pasture. It was CEO, 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: And a trusted relationship between three people is just more manpower than two people.

Ben: We haven’t talked about googliness yet. It was so uniquely googly that there would’ve been organ rejection if Eric tried to take a heavier hand. He really 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, so he was camped out…

David: Like an engineer at Google.

Ben: He had an office mate for many months with an engineer. It’s this googliness.

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

Ben: Yeah, 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 an evil empire. It feels like a university in a lot of ways.

David: That was the culture there.

Ben: And they wanted the mentality of a campus, too, where they want inexperienced people who don’t know what they don’t know. They try novel approaches to problems. They collaborate more than they otherwise would’ve.

David: But who are really high horsepower.

Ben: Everyone there was ludicrously high IQ from the very beginning. But I think that collaborative utopian thing went along with the IQ.

David: The phrase that I heard a lot in the research from talking to folks who are early Google was a healthy disregard for the impossible. It was the modus operandi there.

Ben: And it’s this culture that comes up with a mission statement to organize the world’s information and make it uniVercelly accessible and useful. This was in 1999 in their very first press release after the financing, that has been the mission statement.

David: It’s also amazing how much that mission statement scaled.

Ben: 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 talent that you want, but also one that lends itself to tremendous monetization. If you’re going to organize the world’s information and you have a bunch of smart people, you are going to be able to create a money printing machine based on organizing the world’s information.

They actually have a great quote in their IPO prospectus. “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.” (a) There’s this almost a trifecta of wonderfully-altruistic sounding mission, that (b) lends itself to this incredible monetization model, (c) as long as we’re putting the needs of our users first.

David: 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 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,

Ben: Novell.

David: 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. I think it was really him making a bet, too, of no, this is what I want and I’m going to buy into this.

Ben: Totally agree.

David: 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 stabilize the ship, save 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. 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 hands sold on Madison Avenue. 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: They can’t really scale this business. It would require getting an enormous amount of spend from each of the small number of customers they already have.

David: Then scale two, another reason it’s not going to scale well, is that it’s all sold by hand. 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. That sucks. Then you end up looking just like Yahoo. That’s on the scaling side.

Then on the 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. The ads aren’t really lining up with that. There’s no way to ensure that they’re good.

Ben: They may or may not, yes.

David: Exactly, so that’s a problem. 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 not participating in the economic value.

Ben: And they’re pricing a little bit finger in the air on what the price any given keyword should be.

David: Exactly. Now in fall of 2000, they’re like, okay, let’s address this.

Ben: 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: AdWords v2 you might say is Google’s Instagram stories moment.

Ben: There was an innovator in the space called Overture, or it’s 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 flare coming to the world from the TED Conference in February of 1998.

David: So same time as Google’s about to launch.

Ben: Right. 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. Search engines weren’t well understood yet. So the old hey, go search for dogs and the most relevant website is probably the one that says dogs the most. That still worked.

Now you’re starting to get in 1998, all this stuff like keyword stuffing, white text on a white background, people getting porn insights to appear in search results no matter what you’re searching for, hijacking traffic, all that stuff.

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.

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: And at the time, this was 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’re expressing for through your intent in the search, I should be willing to pay more than anybody else to meet your needs.

Ben: Absolutely. It’s just a different way of solving, ranking, and relevance than Larry did. Larry and Sergey figured it out on the organic side and Bill figured it out on the paid side. Bill went so far as GoTo didn’t actually develop any organic search technology on their own. They relied—

David: It was all paid.

Ben: 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.

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 will talk about here in a minute.

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. They would show you the price that someone was willing to pay for your click. Right there on the page, you could see 21 cents, 23 cents, 24 cents.

David: It was fully transparent.

Ben: Yes. 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, that eventually he thought the whole world was going to move beyond this to a cost per click or pay per click pricing. He thought, why not just do it today? So GoTo advertisers only had to pay when a user actually clicked.

The origin of this is since Bill had a bunch of companies at Idealab, he could uniquely feel this pain point. He 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: 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: And the nuance is CPM actually works fine in brand building situations, but on conversion you actually care about the click. 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. It’s reasonable the way that it shook out that a lot of brand, 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: Way more than Google.

Ben: 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 place a bid. There is an auction that happens, a realtime 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 8000 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. Isn’t this crazy? You’re probably sitting there thinking, how are they not the dominant player? One thing that did not happen was patents. They did not patent the idea of the auction or of pay-per-click.

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

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: 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 a utopian community, small enough and an outgrowth of academia that people booed Bill Gross and GoTo on stage at TED in 1998. In 1996 when OpenText tried to do this, they got kneecapped right away.

Ben: Heresy, yeah.

David: 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: 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: Originally, Larry and Sergey were thinking this too, right?

Ben: 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 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. Then it’s followed by the organic results after that. What was once criticized as absolutely heretical has come to become basically the dominant model of search and search monetization today.

David: But the interesting thing is the timing was not right in the mid-90s for this. By the time the bubble was fully inflated, the Internet had become commercial enough that hey, it was okay for Bill to try this. Then he, GoTo, and 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. Then Google can look and see, oh, maybe we should do that too.

Ben: 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.

Within the next two years, they realize that they can take this paid search model they have and bring it to portals too. 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 gett Yahoo. Yahoo alone was a $100 million deal.

Google’s playing over here in fun pennies on the ground land where they’re, please sir, give me some money for the organic results. Meanwhile, Overture has it figured out these paid results, we are doing massive, massive white label rev share deals.

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

Ben: Yes. I think it’s like 75%. 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. It is our revenue.

David: And Yahoo’s market cap had gotten decimated when the bubble popped. This was a large portion of Yahoo’s market cap that they spent for Overture.

Ben: But what choice did they have? They were over a barrel. The majority of their revenue was coming from this vendor who was rev sharing with them.

David, to end the Overture story before we go over to what Google learn from all this and start implementing, some fun trivia. Did you know that GoTo tried to acquire Google?

David: I did not know that.

Ben: Here’s how it went down. I asked Bill about this. Bill thought it was a match made in heaven. Google’s got the best way to bring relevant organic search with PageRank. Really amazing for informational, non-commercial searches.

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.

Larry and Sergey, before they raised the Sequoia and Kleiner round, came to Bill and said, what about $200 million?

David: Wow.

Ben: 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.

David: Wow. Was Overture already public at this point?

Ben: Yes. Then Bill goes to the rest of the Overture board. Overture at the time is worth $2 billion. 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: It’d be a diluted transaction.

Ben: And so no deal.

David: Well, there’s almost zero chance that Google becomes Google if that deal had happened, so yeah.

Ben: Exactly. That’s the thing with these ‘what would’ve happened otherwise’ acquisitions.

David: That’s amazing. Back to fall of 2000 when Larry and Sergey and Google can now finally focus on improving their ads product. I think we heard this from folks in the research.

Once they saw how well the GoTo and Overture model was working, I think Larry and Sergey were kicking themselves of, we should have just done this from the beginning. Why did we waste time doing this the other way?Yeah, it’s going to take a lot of technology to build this out and we’re going to have to focus on it, but it’s obviously the better business.

Ben: 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: 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: Or let in smaller advertisers and expand the pool.

David: Exactly, which clearly Overture had shown there was a market for this. They had 8000 advertisers against Google’s couple of hundred that they were selling by hand.

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

David: That’s amazing.

Ben: That’s the historical proof I have that Overture had self-serve, and then he got outbid. It was like one penny, two pennies, and then he started a bidding war over the term ‘VC.’

David: Oh, that’s such a great story. I love it. Okay, so obviously they need self-serve. That’s the first thing to work on. But Sal 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 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.

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.

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?

If we’re an online self-serve system, we’re measuring clicks. We’re going to ultimately switch to paper click. We could track those click-through rates. What if we made that a signal to the ranking of how we show the ads?

It’s not just 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: 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 Overture—the self-serve model, the auction, the cost per click-based system. 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 your ad is going to 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: 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: Oh, that’s interesting.

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

Ben: It’s basically an expected value calculation.

David: Exactly.

Ben: 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: All incentives are aligned for the user.

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

David: Yup. It’s funny how all of this gets rolled out. It’s fall of 2000. They start 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 like they did the hardest technical stuff first.

This first rev in the fall of 2000 attracts a ton of advertisers. You’ve now opened the flood gates to the long tail of advertisers, and you’ve introduced this click-through rate element, this ad quality element—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 because that’ll boost the click through-rate and then their ads will get shown.

Ben: That’s so funny.

David: They’re not paying per click, so they’re not costing themselves money when they’re clicking on the ads.

Ben: It’s actually an efficient use of impressions to use them internally to boost click-through rate.

David: Exactly. It becomes for a set of months, the greatest arbitrage in the history of the Internet was to click on your own ads.

Ben: That’s so funny.

David: Oh and Google. But it proves that this is going to work. 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: This is such a genius mechanic. There are 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.

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 is only going to have to pay 31 cents. You might say, well that’s silly for Google. 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 like check and fiddle, and look to see who the other bidders are, and if they want to adjust their price. It’s actually a long-term value maximizing thing to do, even though in the short run, of course you’re leaving pennies on the table each click.

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

Ben: That’s a great point. The second price auction is storing potential energy in a way.

David: 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: They used to just write one check.

David: And send a fax.

Ben: And that check bought them a big batch of impressions. And now you have this confusing morass.

David: There’s a fun little story about how to educate advertisers around how this model works. All of this full version of AdWords that we know today, had launched at the very beginning of 2002.

Sheryl Sandberg had joined the company right around that same time too. She was working on ads. Part of her job is to 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. She calls up her mentor, Larry Summers, who had previously been the US Treasury secretary, and Sheryl had been his chief of staff there.

She’s like, Larry, I’m having a hard time explaining this to advertisers. You know how this model works, the second price auction, it’s weird. Larry’s like, oh, this is what’s called a Vickery 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. I don’t think it sinks in right away, but eventually advertisers get the message.

Ben: 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 onto the new pricing. Even though it’s better for everyone, is miserable along the way. I have a funny coda for you to the whole Overture thing.

David: Great. Go for it.

Ben: 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.

Overture 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.

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. You’re like, well, what am I supposed to bid to get the top spot? And also, it makes it plain and clear, you guys are supposed to be transparent. Now you’re this confusing black box.

Overture did not take the pain of transitioning over to this new model. 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: 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.

Ben: In 2001 with the technology available then, yes.

David: I totally believe that Overture did try to implement it, had the same idea. Also that Overture had really good technology too. I think that is true. But again, back to Google’s infrastructure, the commodity hardware, the scaling out data centers, the distributed file system, and distributed computing, to really scale this, you needed special infrastructure that only they had.

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. 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 turned profitable in 2001.

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. Project Sunset and transitioning over to the new ad system put a large portion of that revenue at risk.

Ben: Oh yeah.

David: It was not necessarily an easy decision. It was an easy decision because the performance was so clearly better. Eventually economic incentives would kick in, but it was still a little tenuous there in Google land for a while.

Ben: 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.

He almost jokingly tells Omid, just go get on a plane. Go to the airport Monday morning. I’ll call you and tell you what market where to buy a ticket to, and we’ll just go from there.

David: Or just pick a country and we’ll figure it out.

Ben: They build basically these little startup teams in a bunch of different geographies that 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 accrued 22%, 2003 accrued to 29%. Today it’s half of Google’s business. 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? 2002 and…

David: 2003–2004, something like that.

Ben: 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: Yup. So 2002 is this year of transition to AdWords for the company. Spoiler alert: it worked. In 2002, the company did $440 million of revenue. So up whatever that is, 5x–6x from the $86 million they did the year before, while transitioning all of that revenue to the new model. 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 and 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. That leads to the landmark summer 2002 deal with AOL.

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

David: Vercel is such an awesome company. Over the past few years, they’ve become the infrastructure backbone that powers modern web development. Now, the AI wave too. If you 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: 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 jobs: 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: But now, Vercel is enabling something even more incredible—shipping live code as fast as AI generates it. 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: And Vercel is increasingly the platform to build full-stack AI apps. Vercel has been synonymous with frontend development, but now they do backend and age agentic workloads as well.

David: Exactly. Vercel is their own guinea pig with this stuff, too. Their own AI product, V0, has 2½ million users who’ve generated more than 100 million messages with 6 app generations every second. V0 runs entirely on Vercel’s platform. We did an ACQ2 episode with Vercel’s CEO Guillermo back in February where we talked about all this. It’s wild.

Ben: 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, then head on over to vercel.com/acquired, and just tell them that Ben and David sent you.

Okay, so the AOL deal. One context-setting thing just to see how fast Google’s world changed in 2002 with the new AdWord 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 of Yahoo. Big media executive guy comes in, takes over the big media CEO.

He sits down with the founders and he says, so guys, I think we’re your biggest customer. Us paying you for those organic results in the portal deal. They say, yup. He says, that’s less than $10 million that we’re paying you. 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. They’re like, we’re excited about some of the things they have in the works, and they’re clearly thinking about this new AdWord system that they’re going to launch. On the spot, he offers to buy Google for $1 billion dollars.

David: Wow.

Ben: Even knowing you aren’t doing much revenue. And this is at a time Google was so secretive pre-IPO. No one knew, other people in the business. Terry Semel sits down. He didn’t have a real sense of their revenue. He just knew that he was the biggest customer. I think this 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: Yup. They more than 5x revenue from 2001 to 2002 from that $86 million to $440 million in revenue.

Ben: So they’re feeling really good about this, so they decide to go to AOL, the big source of traffic. 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: 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 that year, maybe the year before.

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

David: Right? Okay, summer 2002, the transition to the new AdWords model is blowing the doors off. Google goes to AOL.

Ben: Which by the way, Yahoo sees this. They come back and say, how about $3 billion?

David: I had heard about that $3 billion number.

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

David: 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’ve been reverse takeover. It would’ve been Google taking over Yahoo.

Ben: Oh, that’s a good point. In fact, Google throwing out $5 million is almost a fart. It’s like, how about we buy you?

David: It’s a counter offer, yeah. We’ll buy you.

Ben: That’s so funny. This AOL deal. The current state of things is that the 34 million AOL users, their search experience is powered by Inktomi on the organic side since 1999—the last 3 years—and Overture—the last 2 years. It’s 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 the whole package now.

Google wins the deal. Here’s the shape of the deal. We can 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. Google can sign them up. Or AOL can say, hey advertiser. I know we have a longstanding relationship. You can buy ads on our properties other than search, but for search, here’s the URL you go to to place your order with Google.

David: Okay, go through the rest of the deal points, but this is huge.

Ben: 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 more coverage. 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: Yup. 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: Here’s the crazy thing. Google doesn’t have $100 million. When they’re negotiating this deal in May of 2002, it’s just starting to work.

Sergey Brin has a quote. He says, “We could have gone bankrupt. This is quite literally Google betting the company.” The way to think about it is financial leverage. They took on a fixed dollar denominated obligation with that revenue guaranteed AOL. if there was upside to Google, it would’ve been a huge, huge win. But if there’s downside in their business of serving…

David: If they couldn’t make it work on AOL…

Ben: Right. They obviously have very high confidence that it would, but if something happens and they’re like, oh shoot, we actually can’t sell these things at the rates that we thought, it would’ve gone from like, oh shucks, bummer, to now that we’ve signed this deal, we’re bankrupt.

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

Ben: You are absolutely right. There’s a great quote in Ken Auletta’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: Well, that’s great. Yeah, those are the deal terms, but that first one 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 Andrew Bosworth, the CTO, had the insight that more ads equals better ads, and then argued to Zuck and Sheryl 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. Onboarding all of AOL’s search ad inventory into Google’s system, was hugely strategically valuable.

Ben: It’s a market liquidity thing.

David: Exactly.

Ben: 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: 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’ve been very hard to bootstrap from a cold start, because you would’ve had this inventory problem. You wouldn’t have been able to deliver the magical, high quality ad experience because you would’ve 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: It’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 the least offensive. They’re the most likely to be what I’m looking for without giving me any delight whatsoever.

David: Sorry. I meant magical from an economic standpoint. It is the most magical economic transaction I think ever known man.

Ben: 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: Well, to your point at the beginning of the episode that Google with this business model makes more profits than any other company, ergo tautologically, is the most magical business model ever discovered.

Ben: So the Inktomi 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. 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: It worked.

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

David: Wow. Yeah. Blow through the guarantee there.

Ben: Absolutely. This made Google a major player in the paid listings market almost overnight. They weren’t at all before. Overture dominated this market before. This is a absolute bet the company move that couldn’t have gone better.

David: And they were taking all that inventory effectively from Overture, who was AOL’s partner before this.

Ben: 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. She was looking for the right job to do. She’s poking around the company. I think she’s a business unit manager or something like that, but Google didn’t really have business units.

Omid sits down with her and says, you’re looking for a big job, right? and she says yes. He said, we have this huge AOL deal that we just signed. We have a ton of new advertisers and a bunch of categories that we have no idea how to service. We need an army of people to handle these thousands of new advertisers.

They have to be smart and they have to be adaptable because we have no systems built for this yet. 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.

She basically hired all these great people, built out the entire AdWord sales function to service this monster AOL deal. That was what she did at Google before going and becoming COO at Facebook.

David: We’ll talk about that on the next Google episode here. This also (I think) as Google’s digesting this deal and realizing the huge strategic value of it, this really gives them license to then go play offense on traffic acquisition everywhere.

Basically the light bulb now goes off of if we can have Google search, paid and 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: Oh boy, will it ever. David, do you want to do distribution? Do you want to go there right now?

David: Let’s go there. Great.

Ben: I’ve been chomping at the bit. 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. 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.

Search is a winner-takes-all market. Not just because it’s large, consumer-facing, and it’s horizontal across industries. There’s something more to it than that, a second layer.

They’ve got all the traditional economies of scale that you would expect it. If you make 1000 of a widget, you get cheaper pricing than if you make 10 of that widget. Just like everyone else, they amortize the fixed costs of their infrastructure and their employees.

David: And they have a better infrastructure model, as we were talking about earlier, et cetera.

Ben: Exactly. But there’s this crazy thing that happens with Google where at scale not only do their cost decrease on a unit basis, their revenue actually increases per unit. Here’s what 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: This is another reason why you want a deeper market liquidity pool.

Ben: Yes. The second thing too is you have bidders on keywords that are less common. Let’s say you’ve just got the 100 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. It’s more likely that any given search results in revenue.

Having marketplace liquidity means you always generate the most revenue per search versus other smaller search engines. 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: There’s a third statement that you need to add to, Boz’s insight from the Facebook days of more ads equals better ads. It’s more ads equals better ads equals better business.

Ben: Absolutely. It is crazy that there’s this, you make more money per search the bigger you scale in this auction-based marketplace system.

David: It’s increasing returns to scale.

Ben: Exactly. Then keep following the logic tree. 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.

Once you realize this and you get a little bit ahead—this is where Google is right now in history, in that 2002 era—you can start pressing your advantage. Once you start doing that, it’s really hard for anyone to catch up.

The cycle is get distribution—we haven’t yet talked about how, but somehow we’ve talked about 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.

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: That’s a huge split.

Ben: With some partners, they were incredibly aggressive. It was like, we’re going to give you all the revenue for a while.

David: Just to get you on.

Ben: 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 given away 70%. Well that’s more than someone else’s 70%. So, press that advantage. Go 100%. I even heard one example where they gave more than 100% where they realize the payback on this is just so…

David: This property is so valuable, they get this distribution.

Ben: 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. Realizing this is a secret weapon.

This is also where being private was nice. Some of the other search engines were public by this point. 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 $1 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. They had the stomach to invest very, very, very heavily, where others 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: 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: That’s exactly right. 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 hear that from a friend and load up a webpage to start searching and hopefully you bookmark it. You don’t own a browser. How do you get a Google search box to actually appear in the browser instead of on google.com?

David: Which, by the way, Microsoft owns the browser right now. If there’s anybody you need to be afraid about figuring out this secret, it’s Microsoft.

Ben: And Microsoft definitely did figure out this secret.

David: 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. It would’ve taken a boatload of money to try and compete with Google even a year or two into this.

Ben: Which almost no one except Microsoft has.

David: 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: 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: Google toolbar. Man, when this came up in the research, it was 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 crap, everybody thought this was just this gift that the benevolent Google gods bestowed upon the Internet ecosystem. No way. It was a hugely strategic business model piece for them.

Ben: Here’s how it worked. They shipped it super early in December of 2000. This is 2½ years after the company was founded. Before they’ve figured out AdWords v2, they had just launched AdWords v1.

It is both the offense we’re talking about here of go be aggressive, get users, but also defense. Google’s paranoid about Microsoft entering and using Internet Explorer as a weapon. If Microsoft owns the browser, they can direct the traffic wherever they want. Maybe we should, for younger people, explain what toolbars are?

David: What Google toolbar is. Yeah, what toolbars are.

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

David: Yeah, at the top of the window.

Ben: 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.

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

Ben: They’re used to be two different things. There was a URL bar and first that’s all there was. Then eventually they put in a search field inspired by the Google toolbar.

Here’s the economics on how it all works. Once Google toolbar was installed, a user averaged seven times the number of searches.

David: Obviously.

Ben: Which makes them seven times more valuable, which means you could pay a lot of money to get someone to install it.

David: So how did they pay money to get users to install the Google toolbar?

Ben: Because they weren’t paying users. The average annual revenue generated by a Google user was $2, but with toolbar, it was $10+ even if you’re being conservative. That difference, that somewhere of $8 a user call, is your budget to play with. 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. By the way, average revenue per user (ARPU) is skyrocketing. It’s growing very quickly, so this $8 is just, this year’s…

David: Going to become $20, $50, $100.

Ben: 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 a 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: 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 a Trojan horse payload of the Google toolbar, which will then become a Trojan horse that lives in your internet browser and Internet Explorer, and Google will make a lot more money from you.

Ben: The most horrible way to describe this is that it’s adware, it’s spyware, it’s a Trojan.

David: But users loved it. I love the Google toolbar.

Ben: Totally. But the technique itself…

David: Are you going to get into pop-up blocking?

Ben: No. Lay it on me.

David: As they were building the toolbar and thinking about users are going to love this because users love Google and being able to access search, 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. One of the most popular plugins for web browsers were pop-up blockers. Google decided, well hell, why don’t we make the Google toolbar also a pop-up blocker?

Ben: Just one more incentive to install it and become a sticky Google user. 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: Amazing.

Ben: 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. This is a great one that’ll be real close to home, David. You remember the Google Earth acquisition?

David: Oh yes, I do. Classic Acquired episode.

Ben: 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: The original Google Earth was a program that ran on your computer. It wasn’t baked into Google Maps, the web app yet.

Ben: And Google Maps was 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 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. We don’t need to do ads.

David: Way more than paid for itself.

Ben: It’s crazy.

David: No need to put ads in Google Earth.

Ben: It’s so crazy. In the mid-2000s, ARPU would eventually grow $10, $20, $30, and always a Google toolbar user was stickier than a non-toolbar user. They just had more and more and more budget to play with in acquiring users. 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.

The takeaway here is, yes, they had the best product. Yes, it was fast. Yes, it was the best technically competent. Yes, they had this amazing culture. But everyone 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: And it was also strategic. As I’ve been talking to people over the last month about making this episode, talking to friends, thinking about how to position it, 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: It’s funny. Toolbar happened to be the one that worked, but it wasn’t the only thing they tried. They tried so many desktop applications. They even had one called Google Desktop that would search your desktop and then incorporate those results privately into your web searches.

David: The original Google Enterprise Search application, reincarnated as Google Desktop.

Ben: But that’s basically the strategy for all these applications and clients, is how do we make you a more sticky Google user. 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: That’s right.

Ben: 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: Well, it really highlights how important Google toolbar was. And how secretive the company was about this really being like this strategic linchpin of what they were doing. Or a strategic linchpin.

There’s one more business-building story to tell here before we get to the IPO and the end of this episode. It’s another version of this extension of the Google business model. And that is AdSense.

Ben: Which is Google’s second big business line after AdWords on search pages.

David: 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 was a search query.

Ben: 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,

David: You’re consuming content on the Internet much more often or for a higher share of time than you are running queries and searches. 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 of search results, and then also for the ad system for ad targeting, ad quality, and predicting click-through rate, they realize 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’ webpages, and then reverse serve the keywords that we would’ve served for a search query that would’ve landed on that page? It’s absolutely brilliant.

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

David: And we’ve got this existing pool of advertisers in our system.

Ben: And their ads.

David: And their ads in the system.

Ben: We could literally just run the same ads.

David: We could run the same ads on webpages.

In February of 2003, they have this idea. 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: Which is why the auction works. If you had way more searches, then everybody would just be bidding, one and two cents on everything all the time and winning.

David: You always want to be supply constrained as a business. Legendary Google engineer Jeff Dean builds AdSense in six weeks. The whole system.

Ben: Of course he does.

David: They’re great stories. They launch it first on Google groups, and then they want to test it on true third-party websites to see how this works. As they’re testing it, what they decide to do is, oh, we’ll just buy display ad space on these other publishers. 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: I remember seeing these. For the longest time when a publisher-enabled Google AdSense, you get what looked like search results just three across in a banner.

David: Exactly. That’s what AdSense was in the beginning. Their favorite website for testing, this was the website howstuffworks.com, because all of the pages on HowStuffWorks, it turned out were high intent, highly commercializable AdWords pages for AdWords queries. If you reverse engineered the ad search queries that would’ve run AdWords against them, they were great pages.

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: 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. Google takes the smaller part as their spiff.

David: That’s right.

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

David: 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

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

David: Totally, and with all the liquidity of advertisers of Google. They launched this thing. Jeff codes it up the beginning of 2003, call it end of Q1 2003. They launched AdSense. By the end of the year, just a few months later, it’s doing over $1 million dollars a day in revenue.

Ben: That’s crazy. It’s just crazy how fast this grew. We’re zoomed in on AdSense right now, but we’re still pre-IPO here. The rest of the business is still very much developing.

It’s worth bouncing around to a few different parts of Google to share some updates that 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.

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…

David: News on a topic.

Ben: Yes.

David: You couldn’t get that before. You had to go to cnn.com.

Ben: So Google News is starting to really get some traction. 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.

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: We’re doing a bad job on this query.

Ben: 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.

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: It was just the start. 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. Okay, great. We’re done. We solved search. Google has never said we solved search.

Ben: 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 had the insight of the exponential curve of content on the Internet is growing faster than Google will ever be able to index it all or come up with clever strategies to sort it all. It’s so dynamically changing that we’ll actually never catch up. So we need to constantly be investing to approximate good results because we’ll actually never have optimal results.

David: Totally.

Ben: And then the third big 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: And that hardware stuff shifted from, ooh, we’re being really entrepreneurial (shall we say) and how we use commodity hardware cheaply, to oh, we’re designing our own data centers.

Ben: Absolutely. And we’re designing our own file systems with GFS, or I think we’ll talk about a lot of it in the next episode, but very real system-level software that is pioneering.

David: Bigtable, MapReduce, et cetera.

Ben: Yup. 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.

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. 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. They’re just pushing and pushing and pushing.

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 pre-June of 2002-ish they had to make trade-offs, and after (call it) the end of 2002, there are no more trade-offs ever. They always have the cash for every single thing they want to do.

David: 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: What was operating income the year before?

David: $185 million.

Ben: So went from $185 million to $350 million in one year.

David: Yup, in one year. Some of you might be listening and be like, well wait a minute. It sounds like their margins got a lot worse.

Ben: 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: Adsense is the answer there. Adsense added $0.5 billion in 2003 at much lower margin, but was awesome.

Ben: As best we can understand it, Google AdWords stayed an 85% gross margin business.

David: 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?

Ben: And today thought of as successful,

David: Today, thought of as yes, successful IPO. At the time, infamous and horribly unsuccessful Google IPO of 2004. 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: I assume they’ve never spent their IPO proceeds.

David: No, of course not. They’ve never not been wildly, wildly, wildly profitable. 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.

Ben: Who actually has the capital to fight us. They have no idea what a good business this is.

David: 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, 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 are a public company.

Ben: 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: We like dividends.

Ben: In 2003, in these funds that just went through the dot-com crash, so most of their other companies got wiped out. 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: 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: But to your point, I guess the VCs didn’t control the board. Larry and Sergey controlled the company.

David: Exactly. Just like Bill, 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, had controlled the majority of the votes in the company.

Ben: Meta, Google, Microsoft, there’s something correlated between founder control and incredibly good capital efficiency in a business. Interesting.

David: Regardless, this is all academic because truly the 500 shareholder rule would’ve required them to disclose their financials anyway. So might as well go public and make the VCs happy, I guess. And employees too. There was clearly pent-up employee demand, and there weren’t the same liquidity markets that there is today.

Ben: David, put four underlines under that. This IPO made half of the 2000 people who worked at Google millionaires.

David: Yes. There’s a lot of interest in going public. As we get to the 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.

Larry and Sergey really don’t want to do this. They don’t like anything about the process. They don’t like the IPO pops. They don’t like how much money the banks make, et cetera. They’re interviewing banks.

Ben: And we should say this IPO pop thing, it sounds good. 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 is yours because it happened in all the intrinsic value was built all over these years, goes to the people who had access to buy your IPO shares, the investment bank’s clients, 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: During the IPO process, they learn from Bill Hambrecht of WR Hambrecht, 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 have been done before.

Ben: How do you do good price discovery?

David: 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. You can imagine just how much this appeals to Larry and Sergey and Google.

Ben: Oh my God. Sounds perfect. They’re like, this is the whole business. This is what we do, anyway. This is delightful.

David: There’s this legend that Eric Schmidt talks about of they also got a letter from a little old lady, that hearing Google is about to go public, and really hoping she could get it, and that the small retail investor would’ve access too, and that pulled at their heartstrings. I’m sure that’s true, too, but you can see why this appeals.

Ben: In a vacuum, this sounds perfect and everyone should do it. Theoretically, this is also what the investment banker, what algorithm are they actually running? It should be something like this. 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? You should be running this algorithm in a loose human way anyway.

David: Now, 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 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: 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. 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 are a tech company.

David: 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. Larry and Sergey decide, oh great. We’re going to do a dual class share structure for Google too.

Ben: Which today is super common.

David: But Google started it. Google was the first tech company to do this. Today, it’s everybody. It’s Facebook/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’d the public shares have no votes. it’s not even just super voting. It’s like, oh you public, you get no votes whatsoever.

Ben: It’s like being a Green Bay Packers shareholder.

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

Ben: Okay, they do the Dutch auction.

David: In practice, it does not go well.

Ben: But why? The numbers on this are pretty crazy. They are initially floating in the Dutch auction using the software. By the way, Google software engineers wrote the software.

David: I know. Amazing.

Ben: Isn’t this crazy? And I don’t think it’s like Google owned, I think they were collaborating with the investment bank. It’s this weird joint partnership that they’re doing where it’s Google engineers, but it’s this investment bank running the process. 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: Which gives Google a $23 billion market cap at IPO.

Ben: And they raise $1.7 billion. This is great. It’s a $1.7 billion raise, $23 billion market cap that looks like an astronomically high multiple that the company’s been given. So you should walk away and say they really maximized value there. They probably were just wrong in that initial range that they were looking for, $108 a share to $135, and it only priced at $85. Well trust the mechanism. I guess it’s only actually worth $85 a share.

David: Nope. Pops to $100 on closing of trading the very same day.

Ben: Eighteen percent bought day one. Then by the end of the very next year, 16 months later, is almost a 5x. This thing was not at all priced correctly.

David: 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.

Ben: It doubled within the first few months. It’s great PR, right? The stock’s doing well, people think high of your company. That’s good for all sorts of reasons. But this did absolutely zero for making sure that the company doesn’t leave money on the table.

David: So funny. It’s all 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’re recording this or roughly 100x the market cap when it IPO’d.

Ben: And David, you’re not counting dividends.

David: Not counting dividends, of course.

Ben: You reinvested dividends, you’d make significantly more than 100x since IPO,

David: Well after our Steve Balmer interview, never going to not count dividends again. But to preview a little bit the rest of the series, Google’s a $2.1 (call it) trillion market cap company today, roughly 100x since the IPO. Amazingly, I’m going to ask, do I know you know, what Google/Alphabet’s price-to-earnings ratio is right now?

Ben: Ooh baby, I do know,. because I was just looking this up. It is an all time low

David: Twenty.

Ben: Twenty price earnings.

David: And roughly 6x revenue. Compare that to its pure companies. Amazon’s PE is 35, Microsoft is 37, NVIDIA is 46, Apple is 30, and Meta is 27. Google/Alphabet is down at 20. 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: This price sure seems to reflect that even though revenue is growing nicely and margins are quite high, somebody, and that somebody is mister market thinks the future is a lot bleaker than they do for those other companies.

David: Nevermind that Google invented AI and published the Transform paper.

Ben: Oh, we’ll get to it all. No spoilers, okay?

David: No spoilers, 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. The same month in April of 2004 when Google files its S-1 for its IPO, Google does an 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: But if you have one that sounds ridiculous, don’t launch on an April Fool’s day because people will think it’s a joke.

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

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

David: And it comes with Google search baked in across all of your emails. It’s entirely web-based, runs in your browser anytime, anywhere. It’s the greatest April Fool’s gift to internet users everywhere that Google could provide here. The question though is why did they do this knowing what we now know about Google?

Ben: David, wouldn’t it be great if there was a reason, 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: What if, Ben? What if?

Ben: 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: Ooh, go for it.

Ben: The engineer who started Gmail, Paul Buchheit, now of course a partner at Y Combinator and actually with Bret Taylor started FriendFeed.

David: That’s right.

Ben: Paul Buchheit is awesome and recently launched a new venture fund, and actually the original coiner of the term ‘don’t be evil’ at Google.

David: That’s right.

Ben: He’s working on Gmail. It’s very early. It’s 2001. He’s been working on this thing for 2½–3 years before it launches. We’re at the very beginning of it.

David: In his 20% time.

Ben: It’s a 20% project. 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. 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 the only functionality of what would become Gmail.

The search bar is actually the first feature of Gmail, and everything else came later. 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, just 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? So the thing that led to AdSense…

David: Ah, this was the beginning of the idea for AdSense.

Ben: Was actually part of the prototyping process of Gmail.

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

Ben: Well, you texted me. You said, well I think we should do a little Gmail foreshadow in the…

David: Ah, great.

Ben: So thank you to Paul Buchheit for sharing the story with us.

David: Amazing.

Ben: Bring it home?

David: That is the building of Google search business. Let’s bring this one home.

Ben: David, this chapter, this episode definitely feels like the building of the castle.

David: Maybe next episode is going to be the building of the city around it, the state around it, the nation state around it?

Ben: Then depending on your metaphor, is it an entire property, a platform that they’re building around it? A city? Is it a moat? But definitely this one is building the castle.

David: We’ll have to see. Let’s go into playbook for part one. Ben, what do you got?

Ben: The way that I framed playbook for this one is I tried to just itemize the bullet points of why did Google work. As I think through them, if I had to 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. They were truly dedicated to organic search. The aversion to paid inclusion, for as long as they were, served them very well. This amazing original algorithm for organic search is one.

Two, best execution of the search advertising model. 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 is literally the algorithm to maximize Google’s expected value. It is a harmonious system that they developed.

Three, clever infrastructure advantages. They just invented stuff. They thought about problems differently and they reasoned from first principles.

Four, they hired the best people. Truly only world-class people for a very long time. Because when the dot-com crash happened, they could basically get anybody that they wanted there in this 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. That’s four.

Five, 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 rearchitect 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 multi-billion dollar payoffs. That’s five.

Six, the self-reinforcing data network effects once it takes off. I think that is underappreciated about Google. A lot of people say oh the algorithm, but the algorithm is so dependent on all the data that is generated.

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: I would add on to the second to last one you had there the data network effects. It also is the flywheel effect of liquidity in the marketplace of users and queries and advertisers. Everything that we just talked about. 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: This is my quintessence.

David: Oh, okay. I’m stealing your quintessence. I love it.

Ben: 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: Okay, great. Well I didn’t mean to steal you thunder with quintessence. Sorry about that.

Ben: We did our quintessence early this episode.

David: Okay, great. Good.

Ben: All right, give me your playbook.

David: I’ve got two other 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.

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. It feels like understanding Google has never been more relevant. If we’re going to do Google on Acquired, we got to start at the beginning and understand how Google was built, because that’s what we do. I 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: I had the exact same thought.

David: Between what happened between 1996 and 2002 feels like everything that we are living through right now.

Ben: Yeah, 2021 to today.

David: Or even, let’s start with the ChatGPT moment.

Ben: 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: Totally transferable lessons and dynamics. When you were telling the story of GoTo and Overture and the launch at TED, and how upset people were but how brilliant, I was thinking, well what would the analogy be today? What if somebody made a chat bot, an LLM model, and what it told you was just what people paid it to tell you, people would go crazy if that happened. But is that worth trying? Should somebody try that? Well, let’s see.

Ben: Product design here on Acquired by David Rosenthal.

David: Probably a bad idea. But if 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.

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’ve been Yahoo. Because the web was just so much smaller. You didn’t need a technology-based search engine to understand it.

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

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

David: And again, maybe this is a subpoint of my first playbook theme of just the parallels to today.

Ben: 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. 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. 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. You could argue versus Yahoo.

David: 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 big players. There was no incumbent already there.

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

David: Versus Yahoo.

Ben: 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: I think that’s also right. Also take Yahoo. Yahoo had constructed itself as a media company even though it was started by two electrical engineering PhDs from Stanford and just couldn’t pivot. Famously tried to write about Overture, then it bought Inktomi, and then they spent years trying to put Overture and Inktomi 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, then they would get so frustrated and leave and start WhatsApp. But yeah, I think there’s counter positioning against Yahoo there.

Ben: Okay. Scale economies?

David: For sure.

Ben: There are more powers here too, but the whole thing is scale economies. And it’s more than just the traditional one. If you 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. This is for a given piece of infrastructure or software or hardware investment that Google wants to make…

David: Or a user acquisition cost?

Ben: Right. They can amortize that across more users. But also as they scale, they make more revenue per user. I don’t know what that is. Is that a new power?

David: Super scale economies? Yeah.

Ben: Where does this come from? Auction-based businesses. Whenever you have auctions to determine pricing, the more liquidity you have, the higher price is. Are there other businesses that we can 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. Christie’s would 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 loyal clients of a real estate brokerage.

David: 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: But typically network economies are when people join the network, it creates value for other people in the network. That is true from an advertiser to a searcher and a searcher to an advertiser. 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: Maybe you’re right. Maybe there’s something unique to auction models here because the price is dynamic.

Ben: Hamilton, if you’re listening, we need to talk.

David: Yeah. Great. Okay, let’s keep going.

Ben: Switching costs?

David: Not yet. Talk about that in the next episode.

Ben: When you’re not logged in and there’s no personalization, no real switching costs yet. And everything else you’d switch to is worse honestly.

David: Branding. Yeah, to a certain extent.

Ben: Absolutely. They built a brand of trust, speed, and fun. I had a Google shirt. I used to read Google blogs. I’m trying to think, let me date the year. 2002–2006, I was as big a Google fan of things that were googly as I was an Apple fan for that period of my time. 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: 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…

Ben: And for the literal definition, are people willing to pay more for the brand? Are advertisers willing to spend more on Google than elsewhere? No, they’re rational actors.

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

Ben: They absolutely had an employment brand.

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

Ben: Yup. Lastly, cornered resource. Not really at this point in time.

David: Not really.

Ben: And process power, I also don’t think there’s much there.

David: Yeah, I don’t think so.

Okay, quintessence. We already talked about yours. Do you want to say another word on it?

Ben: No. The increasing returns to scale, the revenue side is unbelievable. 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, are 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: 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 8th, 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: That’s exactly right.

David: And they’re exceedingly, exceedingly rare.

Ben: Yes they are.

Ben: That about captures it.

David: That’s my quintessence. Google was that company.

Ben: All right, carve outs?

David: Carve outs.

Ben: 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 Balmer.

David: Great.

Ben: 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. 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 You 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 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.

The thing that he did in Nathan for You was 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. 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. 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.

In this season of The Rehearsal, he builds 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. I am telling you, David, this is the tip of the iceberg. It gets crazy.

David: Sounds amazing.

Ben: Commitment to the bit at an all time. Great.

David: Are we committed to the bit?

Ben: We are nowhere near as committed to the bit as Nathan does.

David: It doesn’t sound like we’re not, yeah.

Ben: It’s inspiring. Okay, so that’s one. Two is a much more casual, very enjoyable show called Your Friends & Neighbors on Apple TV. It’s John Ham. It’s beautifully shot. It’s a little bit like following rich people around succession is, these fictional characters, but with an unexpected twist. Love Your Friends & Neighbors on Apple TV.

And then Andor season two on Disney was excellent. Starts a little slow at first. Three, four episodes are not as good as season one in my opinion, but the last eight episodes are some of the best Star Wars canon that exists.

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

Ben: 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 any of these.

David: I would like to.

Ben: This is for listeners. This isn’t for you.

David: Two little kids. Tough, tough. My carve outs, I’ve got two. Well, I’ve got one standard carveout: 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 Blaker, two of the best in the business.

My next carve out related to that is actually a real-time dilemma carve out. This is good because it could be a multi-part series here on Google. I’ll report back in the next episode which direction I went with this carve out. 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: All right, what’s the decision?

David: As I was watching reviews on YouTube, I started getting into Steam Deck content. 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?

Ben: Well, Acquired listeners, tune in. If you weren’t interested in Google Part II on its own merits, now you’re going to be on pins and needles from this carve out.

David: 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: Tweet a picture to listeners who need to know.

David: I’ll tweet a picture, yes. That’s what I got.

Ben: Awesome. Well listeners, we would love to see you in New York City. acquired.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 J.P. Morgan Payments.

Speaking of J.P. Morgan Payments, thank you to our partners this season. J.P. 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: Me too.

Ben: 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 writeup on the company, as usual, which he will make available by clicking the link in the show notes. Then David, you’ve been maintaining the list.

David: 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 Kordestani, Alan Eustace, Clay Bavor, Bret Taylor, Jeff Dean, Jen Fitzpatrick, Danny Sullivan, Nick Fox.

Ben: And to Paul Buchheit, to Bill Gross, to Wesley Chan, and to Izar Levkovitz. 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: That’s an 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: Yup. All right listeners, we’ll see you next time.

David: We’ll see you next time.

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