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People gaga over Google IPO prospects

By Griff Witte
The Washington Post

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Type "Google IPO" into the vaunted search engine. Within 0.07 seconds, links to 14,000 Web sites come bounding back.

The links lead in every direction: online columnists predicting the company's initial public offering of stock will be the first bang of Internet Boom 2.0, discussion threads in which investors pine for a piece of the company, a blogger who insists the Google IPO "is evil."

Most of the sites are in English, but many are in French, German or Japanese. There's even a Web site called "Google IPO Central: Your Unofficial Source for Discussion and News about the Upcoming IPO."

The company's refusal to comment on whether it will go public does little to dampen the buzz. For denizens of Silicon Valley and Wall Street alike, the Google IPO has been decreed a monumental event even before it happens, one that could lift the long-struggling tech sector out of its doldrums.

"It's way better than even money that this is the IPO of the decade," said Roger McNamee, a managing director of the tech-oriented private equity firm Silver Lake Partners. "Everybody and their grandmother knows Google. Demand is going to be off the charts."

But because anticipation is so high, some analysts wonder just how successful the IPO can be when measured against the hype.

They worry, too, that a public Google will ultimately buckle under to investor pressure for ever-higher profit margins and sacrifice the very thing that has made it so popular: the purity of its search.

The analysts point to other search companies that went public, such as Yahoo! In the process, they diluted their focus as they ventured into job listings, horoscopes, chat rooms and personal ads.

"If they are not developing a particular product, and their competitor has it, they may feel pressure to go in that direction to please investors," said Danny Sullivan, editor of Search Engine Watch, a site that provides analysis of the industry.

"It's 'I've got to keep up with the Joneses whether or not the Joneses are doing the right thing.' Right now they have the luxury of avoiding that," Sullivan said.

In this case, the Joneses are two of the world's best-known tech companies — Yahoo! and Microsoft. Both would like to capture a chunk of the enticingly lucrative search market from Google. As the bloodletting begins, Google has the curse and the blessing of enjoying a squeaky-clean reputation for putting the integrity of the search process ahead of commercial interests.

"Google is all about providing access to information, not being a venue for ads," said Peter Norvig, Google's director of search quality. Norvig said that although the company offers paid search results, they're clearly marked and never get in the way of the objective results that remain the company's focus.

It's that philosophy that has earned the loyalty of millions of Internet users who rely on Google to navigate the almost unfathomable depths of the Web. But it also means the company has a high capacity to disappoint if it undercuts principles for profits.

"When you're God, you have quite a long way to fall if you do something wrong," Sullivan said. "It's hard to think of a company that's been put on a pedestal as much as they have."

Google's ability to earn profits while not bombarding users with ads is a direct outgrowth of the founders' vision, tech analysts say. Sergey Brin, a University of Maryland alumnus, and Larry Page, a veteran of a Washington, D.C., software company, created Google as idealistic Stanford University graduate students.

The company still lists under "10 things Google has found to be true" that "you can make money without doing evil."

To be sure, going public is not Brin's and Page's first choice. Both have indicated they're in no hurry to do an IPO.

But because of Securities and Exchange Commission regulations governing private companies of a certain size, Google would be forced to disclose its financials in the spring even if it didn't go public. Since it will soon lose a key benefit of staying private, most analysts consider it a near-certainty Google will go public. The rewards could be enormous.

"You think of all the Microsoft millionaires. I'm sure the Google people are starting to make their calculations," said Michael Moe, chief executive of Think Equity Partners, a San Francisco investment bank.

Analysts' estimate Google's value at $15 billion to $20 billion and say an IPO could generate up to $4 billion.

The company won't release figures, but analysts put its annual revenue at $500 million to more than $1 billion, with profits $150 million to $300 million.

The money pours in along two primary paths: by allowing advertisers to display links to their sites based on a user's search terms, and by providing Google search capability on other Web sites, such as AOL and washingtonpost.com.

Google's size and proven profitability make it, in the minds of many on Wall Street, much less of a gamble than the failed Silicon Valley startups with strong technology but shaky business models.

"The company seems to be a printing press for money," said David Menlow, president of IPOfinancial.com, an IPO research firm. He said "virtually any price" for the stock "will be considered acceptable."

Meanwhile, other companies are catching up in the race for the best search technology.

"Everybody's really, really close," Search Engine Watch's Sullivan said. "Google is still perceived to be the leader. But their competition can be as good or better than them on many queries."

Think Equity's Moe said, "What they've accomplished in five years is nothing short of remarkable. The question is whether they have what it takes to create the next act."

Not even a Google search can answer that.

Copyright © 2004 The Seattle Times Company