The Google Guys (14 page)

But profit, not revenue, is the primary metric for valuing a company's stock. And there, the press got the numbers wrong. Every article said that Google's 2003 profit was $106 million, while Yahoo's was $238 million. That's what the companies reported. But the press—and apparently the Wall Street analysts—overlooked one important fact. The two companies applied vastly different write-offs to their earnings.

This was due to a decision by Larry, Sergey, and the financial team at Google to make their financial reporting squeaky clean before the IPO. Accounting rules require companies to write off different expenses before reporting net income, such as the depreciation of the value of the equipment they own. One of the biggest expenses is stock options, incentives to keep employees by allowing them to buy company stock at a discount. Yahoo had been writing off stock options for years. But, about to become a public company, Google wrote off a huge number of stock options in 2003—$229 million versus $22 million for Yahoo. Since many of these discounts do not reflect actual expenses, many analysts use operating income (before expenses) to value a company. In 2003, Yahoo's operating income was $296 million, while Google's was $342 million. Google was already more profitable than Yahoo, and growing faster. None of the Wall Street analysts or reporters mentioned this fact.

The press also soundly criticized Google for creating a two-class stock system. The common stock shareholders were to get one vote per share on important issues, while Larry, Sergey, and CEO Schmidt got ten. In their letter in the prospectus, Larry and Sergey explained why: “[T]he standard structure of public ownership may jeopardize the independence and focused objectivity that have been most important in Google's past success and that we consider most fundamental for its future. Therefore, we have implemented a corporate structure that is designed to protect Google's ability to innovate and retain its most distinctive characteristics.”

This was seen as bad “corporate governance,” allowing the executives to ignore stockholders' demands when running the company. The press neglected to mention that most of their own parent companies—including those of the
New York Times
,
Washington Post
, and
Wall Street Journal
—have similar two-class stock systems for exactly the same reason. Management does not want shareholders to pressure them into maximizing profits and stock prices quarter to quarter while sacrificing long-term goals.

And in their letter to shareholders, Larry and Sergey clearly warned prospective buyers of the consequences:

This did not go a long way toward making investors feel more comfortable with the stock. The business reporters writing about the IPO actually thought their reporting was fair. BusinessJournalism. org even reported on this conservatism as a good thing, quoting David Callaway, editor in chief of CBS MarketWatch .com, as saying, “The media is more balanced in their approach to the Google IPO than they were five years ago. They're reflecting a public that's been burned before by these tech IPOs.”
⁸
This time, the public was burned by a press that was overly skeptical, backed by a bitter Wall Street and Larry's and Sergey's refusal to provide any information beyond the prospectus, which took time and knowledge to analyze.

So what do Larry and Sergey think of the whole process? There's a clue to their attitude in Google's IPO prospectus. In that document, Google's original estimate of the value of the stock it would sell in the IPO was an unusually precise $2,717,281,828. Most companies round it off to the nearest million or so and the press reported it as simply “over $2.7 billion.”

But mathematicians recognize the joke—the figure's similarity to
e
, a famous “irrational” number (one whose digits go on forever after the decimal point without ever repeating a pattern). Known as “Euler's constant” or the “natural logarithm,” the value of
e,
rounded to nine decimal places, is 2.717281828.

In other words, Larry and Sergey tried to set their IPO price at a valuation of exactly $
e
billion, to the nearest dollar. They have shown, in more ways than one, that any stock valuation is, inherently, irrational. As irrational, perhaps, as executives who put doing great things for the world above shareholders' interests.

It is unbecoming for young men to utter maxims.

 

 

I
n February 2006, Larry Brilliant went to Google headquarters to talk to Larry and Sergey about a job, heading the company's philanthropic arm,
Google.org
. Dr. Brilliant spent a good part of the day in a room with Larry and Sergey, and talked very little about
Google.org
.

“We just talked about life and where they want to go,” says Dr. Brilliant. “And they were amazing. I had never met anyone like them before. I hadn't worked for anybody in about forty years and was not interested in the idea of working for a big company. But with Larry and Sergey I changed my mind.”

What impressed him about Larry and Sergey was their over-the-top idealism and extreme desire to do important things for the world. When he arrived at Google to talk with them for the first time, the pair had just decided to set up operations in China, which meant conforming to China's strict censorship rules. Thus Google had become a censor, and it grated on Larry and Sergey's conscience. It became the topic of their conversation.

“We talked about whether Google should be in China or not,” Brilliant says. “Every question came back to, what's the morally right thing to do?”

The topic was a sensitive one for Google. “I don't think there's any big company in the U.S. that isn't constantly looking at its relationship with China,” says Brilliant. “It's a huge business partner, and it's an unusual business partner. It has a series of pressures that we're not used to. We don't understand them very well. But whatever the issue was, with Larry and Sergey, it would come down to, what's the morally right thing to do?”

That's one thing that has never changed about Larry and Sergey. “To this day,” says Brilliant, “we've been through a lot of crazy things, and never once has there been an issue where they failed to make the correct moral decision. They think about the moral issue first. Everything else is secondary—including whether Google will do well by it, or if it's good for business. I had never seen a big company in which the two people who controlled it had such an amazingly strong moral base. It feels strange to say that to somebody writing a book, because it sounds like puffery, but it's absolutely true. It's why I came to Google.”

Yes, it sounds like spin, and the public is right to be wary of such claims. We're used to such spin control from big corporations such as oil companies spouting about the great things they do for the environment without ever spilling a drop of oil. But everyone who has had close contact with Google or its founders comes away asserting it's true. One former executive, with no reason to promote the company anymore, asserts, “Everyone in the company really does believe in it.”

Increasingly, though, people accuse Google of “evil” deeds. The first question should be, what does Google mean by
evil
?

Sergey is the primary arbiter of what it means not to be evil. He has described it as a dedication to not taking advantage of customers as well as trying to do good things for the world. But it didn't start as a promise never to do anything that others might think is wrong, such as chopping down old-growth redwood trees to make a lot of money. It started as an internal mandate for how to run a company and do well by employees.

It first came up at Google when a few executives were trying to make a decision about a group of employees who did not seem to be working out. One of the executives turned to the others and said, “Let's just do this, but don't be evil about it.” At another meeting a few days later, someone said the same thing. Eventually the rule was written down and institutionalized. Says Google economist Hal Varian, “It became something of a principle, not something laid down from above. It came about organically. It was about internal functioning. Later, when Larry and Sergey wrote the founders' letter to shareholders [for the IPO] they incorporated it into the letter.”

Now Google is stuck with it. Everything the company does, big or small, is judged on whether the act is considered ethical. And, in fact, Larry and Sergey themselves have extended the definition to include business practices. On the corporate Web site, under the heading “Ten things Google has found to be true,” the principle is number six on the list: “You can make money without doing evil.” The part about making money is important. In the explanation of their truism, they did not write about treating employees well, but about the company's advertising policy: No intrusive ads; no pretending ads are search results; providing only useful and relevant ads. They promised objectivity and honesty, not fake search results from paid advertisers, a business practice employed by all other search engines when Google was started.

Some may interpret that view as one that says, “We're moral, and you're not.” But Craig Silverstein, who has been with Google from its founding, says it's more subtle than that. “Larry and Sergey do not believe corporations are intrinsically evil,” he says. “They believe, and Google's corporate philosophy is that, being a corporation, it's still possible to be an ethical company. You can be much more successful that way.”

To simply say that Google has indeed been more successful that way understates the definition of success. Google's moral compass has done it well in an age of hyper-competition. But with the wide publicity of the principle that became described as simply “Don't be evil,” Google found that it had almost impossible expectations to live up to. Says Andrew Anker, the former Wired Digital executive, “It was clear to me that they would push the wrong buttons. The issue is, don't pretend that you aren't evil.” Anker believes that the sheer success of Google made it suspect. “Nobody can have a seventy-five percent market share and still be liked. You're going to piss people off, and those things will snowball. People want cuddly Sergey and Larry dolls. The problems Google is having is that the more warm and cuddly people are, the more disappointed you are when they let you down.”

And they do let people down.

For one thing, Google—and all major online services—are voluntary censors. Larry and Sergey came to the reluctant view, against their instincts, that censorship sometimes serves their users' self-interests. To some extent, they convinced themselves of that concept. But they did so slowly and thoughtfully, weighing many facts before coming to this conclusion. “Larry and Sergey—all of us, in fact—have a culturally liberal view,” says Google CEO Eric Schmidt.

“We all have to be in a room together. Larry says if it's something that's going to end up in the newspaper, we have to understand it.” The sessions are not simply meetings of like minds. “Between the three of us, on any particular issue, we'll disagree on the details,” says Schmidt. “We go around and around on the issue.”

When the discussion goes around, it ends up in Larry's and Sergey's laps. A few years ago, when asked by a reporter from
Wired
magazine what defines evil, Schmidt jokingly said, “Whatever Sergey says it is.” More recently, he told me, “The rule is ‘it depends.' We don't actually have a one-paragraph rule. Our process is to rely on people with good judgment.”

As computer scientists, they take great pride in relying on the smart people they have hired, as long as they dig up the facts to justify their position. Schmidt says Google's dedication to the facts is stronger than that at almost any other company. “An awful lot of businesses are run based on intuition, experience, all those things which we don't value very much. We value the analytical, ‘prove it' approach. I'll make a broad criticism: a lot of executives look nice, they're smart, they're well-spoken, they give nice speeches, they use all the right marketing words, but they're not fundamentally insightful because they didn't start from an analytical premise.”

Larry and Sergey get their experts to collect all the facts about these issues, then debate them in meetings and set the general policies. The executives responsible for the details then make the decisions on the particular issues, but with the approval of the founders, especially when they are controversial ones. While they don't like censorship and try to avoid it wherever possible, they have come to accept the difficult fact that it's impossible to do business in the world without it.

A couple of years ago, management refused to block the search engine from pointing people to an anti-Semitic site called JewWatch. Bloggers angrily decried that decision as essentially condoning evil. Sergey publicly defended the company's position as an anti-censorship stance. And, of course, all the publicity increased traffic to the site.