In the Plex How Google Thinks, Works, and Shapes Our Lives by Steven Levy

In The Plex How Google Thinks, Works, and Shapes Our Lives by Steven Levy

Few companies in history have ever been as successful and as admired as Google; the company that has transformed the Internet and become an indispensable part of our lives. How did Google do it? Veteran technology reporter Steven Levy takes us deep inside Google headquarters – aka the Googleplex – to show how Google really works. ―Does the world need another book about Google?‖ you might ask. With Android‘s remarkable success, Google‘s recent purchase of Motorola, a risk-taking ―new‖ CEO (Larry Page is back at the helm of the company) there are tons of new developments to report. Also, Steven Levy digs deeper than all who‘ve come before him, so he brings a fresh perspective to some of the stuff you may have heard about before. As a long-time senior reporter with Wired magazine, Levy has been poking around the Googolplex‘s corridors since the late 1990s. Levy spent two years researching In the Plex, and he enjoyed unfettered access to Google‘s two co-founders, plus many other top executives. Levy‘s insider perspective provided him with the keys to unlock the secrets of two of Google‘s most closely-guarded ―black boxes‖ – its advertising model, and its internal management philosophy. Needless to say, Google‘s search engine is an integral part of our daily lives, and the company‘s ad system on which it is based is arguably the single most important commercial product of the Internet age. For the first time ever, In the Plex reveals the full story of the development of this seminal money-making product. Levy also breaks-down Google‘s internal management philosophy to give us a better understanding of Google‘s strategy, values and reasons for success. And in doing so, he helps us understand the world of online business more generally, and allows us to make more accurate predictions about where this ever-changing marketplace is headed. But, to see where Google is going, we first need to understand where it began. So that‘s where this summary begins. The year is 1999, and it‘s five years before Google‘s Initial Public Offering, and months before its co-founders, Larry Page and Sergey Brin, came to the wise (but difficult) realization that they needed to hire outside help to achieve their vision. That help would come in the form of a professional CEO named Eric Schmidt

Google’s Early Years As just about everyone knows, Google was founded by two ambitious math wizards, Larry Page and Sergey Brin while they were attending Stanford University as PhD candidates. It was incorporated as a privately held company on September 4, 1998. Google began as a research project. Page and Brin wanted to simplify the challenge of finding information on the Internet, which was already growing by leaps and bounds. While the first wave of Internet search engines, such as Netscape, ranked results by counting how many times the user‘s search terms appeared on the page, Page and Brin developed a far better system that also analyzed the relationships between Web sites. They called their new technology Page- Rank, and set about to commercialize it. Google‘s first funding came in 1998 in the form of a $100K investment from Andy Bechtolsheim (a founder of Sun Microsystems). A year later, a crucial second round of funding came – this time $25 million – with VC firm Kleiner Perkins as the lead investor. Two years later, Page and Brin made remarkable progress continuing to improve and refine their Page-Rank technology. But they weren‘t making any money from the 70 million or so daily searches that were happening via their Web site and some of Google‘s initial investors were getting restless. One investor in particular, David Cheriton, began joking to friends that all he‘d gotten from his six-figure Google investment was a T-shirt. Times were tough. According to Levy, to several of the VCs represented on Google‘s board, the problem was no joking matter. According to one account, there was a real possibility that some funders would begin pulling their funding. Page and Brin begged the VCs to stay patient. As Levy reveals, Google‘s lack of revenues wasn‘t the VC investors‘ only concern. To their dismay, only a few months after Page and Brin took the $25 million from Kleiner Perkins and others, the founders began welshing on their commitment to hire a CEO. Page and Brin called up one of the VCs one day and said: ―We‘ve changed our mind. You know, we actually think we can run the company between the two of us.‖ This was a great concern to the members of the VC syndicate because, while Page and Brin were clearly geniuses and visionaries, they knew nothing about running a company. After that phone call, the investors really started to sweat. But they held off liquating their shares because, by then, they‘d come to know Page and Brin well enough to realize that the only way to get them to change their minds was through data. And the particular data the investors had in mind was first-hand exposure to the most brilliant CEOs in the Valley – names like Steve Jobs, Intuit‘s Scott Cook, and Amazon‘s Jeff Bezos. The investors offered the founders a deal: Page and Brin would have to meet with each of these CEOs, and if after that, they still thought they could run a company just as well, then the VC would reconsider forcing Brin and Page to bring in an outside CEO. After Page and Brin completed their ―Magical Mystery Tour of High-Tech Royalty,‖ they reported-back to the investors. They agreed to hire an outside CEO, but only one name in the industry would meet their standards: Steve Jobs. Of course, as Levy puts it, this suggestion was ―ludicrous for a googolplex of reasons.‖ Jobs was already the CEO of Apple, a successful,

Ss growing company. And in addition, he was Steve Jobs. ―You would sooner get the Dalai Lama to join an Internet start-up than Steve Jobs,‖ writes Levy. Eventually, Brin and Page came to their senses and agreed to hire a fellow named Eric Schmidt. Schmidt, then in his early forties, had been the chief technology officer at Sun Microsystems. He was familiar with boardrooms and bottom lines. But the big factor in his favour was that he was a renowned computer geek, with a Berkeley science PhD. ―We liked him because he really understood computer science,‖ explained Page to Levy. And what‘s more, Schmidt wasn‘t a stuffed shirt. As Brin later said, ―Of all the guys we interviewed, Schmidt was the only candidate who‘d ever been to Burning Man.‖ From the start, Schmidt adopted a public stance toward the founders showing respect and unfettered admiration, a position he carefully maintained for years thereafter. ―I fairly quickly figured out these guys were good at what they do,‖ he told Levy in early 2002. ―Sergey is the soul and the conscience of the business. He‘s a showman who cares deeply about the culture, the one who talks more, with a bit of Johnny Carson. Larry is the brilliant inventor, the Edison. Every day I am thankful I accepted this job offer.‖ As the years went on, the founders would occasionally let remarks slip here and there that left outside observers with the impression that they were a little bitter about having to bring in an outside CEO. ―I guess we need adult supervision,‖ said Brin on one occasion. But overall, Levy believes Page and Brin genuinely appreciated Schmidt‘s contribution. Still, there was more work to do than bringing in a capable CEO. The company still needed to figure out a way to make money. By early 2001, funds had gotten so low that Schmidt instituted a tough new policy that limited all expenditures to one day a week. If an executive wanted to spend any amount of new money he or she would have to petition Schmidt for approval in his office at 10am on Friday. But then, just as the dark storm clouds were gathering on the horizon, there came a sudden development that was, according to Levy, ―transforming, decisive, and, for Google‘s investors and employees, glorious.‖ Google had invented what would soon become the most successful scheme for making money on the Internet that the world had ever seen.

Google Ads: How to Make a Profit on the Internet It was 2001, and Google had a big secret. It was far and away Google‘s biggest secret; even better protected than the hidden algorithms that lay behind its search engine. Those who knew the secret (i.e. virtually everyone working at Google, and basically no one in the outside world) were instructed to keep their mouths shut. Outsiders who suspected the secret were given no winks of confirmation. No one dared spill the beans. According to Levy, what Google was hiding was how it had finally ―cracked the code‖ to making money online. Google‘s founders realized they‘d just invented one of the most important products in the world, and the company would soon be swimming in black ink. The secret finally slipped out on April 1, 2004. As a consequence of going public, Google was required to share its internal information with the bankers who would potentially handle the

IPO. Google‘s finance people had gathered the bankers in its headquarters, then located in Mountain View, California. On the eve of the meeting, chief financial officer George Reyes and his colleague Lise Buyer, came up with a plan to reveal the secret with a bit of humour (seeing as it was April Fool‘s Day, after all). Opening the meeting, Reyes welcomed the assembled group. Since the bankers had taken a big gamble by signing on without seeing the bottom line, Reyes said, he‘d go straight to the numbers. Then he put up slides with some financial figures on it. ―You could hear a pin drop,‖ Buyer would later recall. The slides indicated that Google was indeed making pretty good profits. The numbers were not earth-shattering, but were certainly more than respectable, especially for an Internet business in those days. It was obvious to Reyes and Buyer the financiers were pleased with what they were seeing. Then Reyes told the bankers he was sorry, but he‘d mistakenly put up the wrong slide. Could he display the real numbers? A balance sheet appeared with more than double the revenues, and the profits. ―April fools!‖ Reyes exclaimed. The bankers were stunned. ―As was typical with start-ups, Google was slow out of the gate in generating revenues,‖ explains Levy. ―But in 2001, revenues suddenly jumped, finishing at $86 million, more than a 400 percent jump from 2000. Then the rocket ship blasted off. Google took in $347 million in 2002, and just under a billion in 2003. By 2004, they would double that. And their profits were equally impressive.‖ Before the IPO, everyone already knew how amazing Google‘s search technology was. But if you were a banker in that room on April 1, 2004, you weren‘t thinking about Google‘s search engine, says Levy. Regardless of how great their search engine was at the time, that product paled in comparison to Goggle‘s truly fantastic achievement of figuring out a way to make real money from the virtual smoke-and-mirrors of the Internet. Today, more than a decade after its launch, Google‘s self-service advertising system, Ad Words, is still nowhere near being matched by any competitor. AdWords quickly became the lifeblood of Google, funding virtually every new idea and innovation the company conceived of thereafter. It‘s a veritable golden goose that keeps on giving. In developing AdWords, Page and Brin wanted to create a product that would work on ―Internet scale.‖ They realized that since many Google searches used unique and relatively esoteric keywords, there might be a possibility to sell ads for categories that otherwise never would have justified placement in magazines, or on billboards. On the Internet, Page and Brin realized it would be possible to make serious money by catering to the ―long tail‖ of small business that could not afford traditional advertising (picture, for example, a home-based business that sells hand-made Russian nesting dolls). The expanding availability of the Internet – supported by a robust search engine like Google‘s – had suddenly made smaller, long-tail enterprises much easier to reach. Cleverly, Page and Brin also figured out that by making their ad system self-service, Google could easily handle transactions with thousands of small advertisers, and the company‘s overhead would be so low (i.e. virtually no sales force required). So customers could buy online ads very cheaply, and if they got results, they‘d buy more.

Google‘s AdWords system is also successful because it‘s virtually invisible to consumers. Unlike the more visceral experience we have when watching a television ad, or seeing a loud billboard, many consumers don‘t readily appreciate that they‘re being subjected to advertising when it‘s subtly delivered through AdWords. When we use Google to search for a key word that a business has sponsored, a few words of text along with a link to the advertiser‘s home page will appear to the right of the search results. These words are labelled ―sponsored links,‖ but they‘re otherwise nondescript. AdWords prices were initially fixed according to the position on the page an ad would occupy. If the ad was in the most desirable position (i.e. the top ad on the right), the client would pay $15 per thousand exposures. The second position would cost $12, and so on. There was also an important consumer protection safeguard built-in to ensure that only useful ads would appear on top – advertisers couldn‘t pay their way to secure the best positions. Instead, the more successful companies (i.e. the ones that actually lured people to click on their AdWords) would get page priority. The percentage of people exposed to ads who responded to them soon became known as ―the click-through rate.‖ As Levy explains, Google‘s early commitment to ―ad quality‖ (i.e. giving page priority to ads that consumers actually cared about) was a vital component of the company‘s strategy, which viewed the ad system as a virtuous triangle with three happy parties: Google, the advertiser, and especially the user. Page and Brin knew that cluttered, unwanted ads would quickly make for unhappy customers. So, Google made it a high priority to calibrate their system to drive out ads that were irrelevant or annoying. Best of all for Page and Brin, they were making a profit without ―selling out‖ or surrendering their lofty ideals. Brin described it this way in one of his many interviews with author Steven Levy: ―Honestly, do you know what the most common feedback is about AdWords? It‘s ‗what ads?‘ People either haven‘t done searches that bring them up or haven‘t noticed them. Or, the third possibility is that they brought up the ads and they did notice them and they forgot about them, which I think is the most likely scenario.‖ The gobs of money that Google continues to make from AdWords (and its sister product AdSense) enable the company to fund a dizzying array of social initiatives and creature comforts that make it a unique competitor, and one of the most desirable American firms to work for. ―Larry and Sergey think that engineering and computer science can make a big difference in the world,‖ writes Levy. ―And to have the freedom to do it without having a gun to your head every quarter…is an immense luxury.‖

The Google Creed: Don’t be Evil Don't be evil is the informal corporate motto, or creed, of Google. While the official corporate philosophy of Google does not contain these three words, they were included in the original prospectus of Google's 2004 IPO, as part of a letter from the founders. The now infamous paragraph began like this: ―Don‘t be evil. We believe strongly that in the long term, we will be better served — as shareholders and in all other ways — by a company that does good things for the world even if we forgo some short term gains.‖

While Page and Brin are often credited with coming up with the ―don‘t be evil‖ mantra, the original idea actually came to Google via a former football coach turned tech entrepreneur named Bill Campbell. In Google‘s early days, the founders invited Campbell to sit down with a few key employees to hammer out a draft of the young company‘s corporate values. When Campbell accepted the invitation, he had no idea that the process he was about to spearhead would result in the creation of a unique motto for Google that would in some fundamental way become a ―guiding light‖ for the company and its employees, but also a real source of controversy as time went on. (It‘s easier for outsiders to criticize a company for its real and perceived screw-ups and missteps when the company willingly sticks its neck so far out by claiming not to be evil.) During an infamous brainstorming meeting on July 19, 2001, which was chaired by Stacy Sullivan, Google‘s head of human resources, two young guns named Paul Buchheit and Amit Patel first suggested that ―don‘t be evil‖ should be part of the company‘s values. While some of the others, including Sullivan, had initial reservations, Buchheit and Patel argued that ―once you put something in there, it would be hard to take out." Eventually, the group was convinced, and soon Page and Brin were as well. Almost immediately, Google‘s don’t be evil mantra had a powerful effect within the company. Amidst all of the change and complexity that Google employees were dealing with on a day-to-day basis, there was one thing that they could always go on by gut: what was evil and what was not. The mantra factored into all of the big decisions, but also many of the small ones too. For example, an employee might one day find herself in the office kitchen hungrily eyeing someone else‘s leftovers in the fridge and then think to herself: don’t be evil. ―Googlers came to understand the phrase can mean, ‗Don‘t take someone else‘s food without asking,‘‖ writes Levy. ―And they know it also applies to much bigger things, like maintaining a still line between advertising and search results, or dutifully protecting a user‘s personal information, or – much later in Google‘s corporate history – resisting the oppressive measures of the Chinese government.‖ To this day, don’t be evil is like a secret handshake among Googlers. An idea might come up in a meeting with a whiff of ―anti-competitiveness‖ to it, and someone will remark that it sounds...evil. And that‘s the end of the idea. Don’t be evil helps remind Googlers that their company is truly special. And so they almost always act accordingly.

Beyond Slogans – Management by Objectives Of course, Google relies on more than catchy slogans to manage its internal affairs. Even before they went public, Page and Brin cleverly adopted a management system called ―Management by Objectives and Key Results (OKR)‖. And according to Levy, the system has been so successful that Google still uses it to this day, despite all of the growth and personnel changes that have taken place over the last decade. A venture capitalist named John Doerr, who joined Google‘s board in 1999 following a $12.5 million investment in the company, introduced Page and Brin to the OKR philosophy. It was a system that Andy Grove had originally devised at Intel, but Doerr believed it would be just as useful for a start-up like Google. ―OKR is really important in rapidly growing companies

Ss because it allows you to be super clear about what priorities are,‖ Doerr told Levy. Doerr‘s efforts to start OKR‘s at other small start-ups had met with mixed results, so he had no idea what reaction Page and Brin would have. But the founders immediately saw the benefits and were enthusiastic to adopt it at Google. According to Levy, the secret behind OKR is not just to identifying what you want to do (i.e. setting a clear objective), but breaking down the task into small, measurable bites (―key results‖). In his book High Output Management, Andy Grove imagined the OKR system applied to Christopher Columbus. It‘s true the explorer fell short of his original objective of finding a trade route to India, but he did not fail. Columbus still achieved a number of key results. He gathered a crew; he bought supplies; he avoided pirates; and by discovering the New World, he eventually brought fame and riches to Spain. At Google today, every employee has to propose, and then seek approval for, his or her quarterly individual OKRs, and annual OKRs. There are also OKRs at the team level, the department level, and even the company level. (Those last ones are used sparingly, for only the most important corporate initiatives.) Four times a year, everything stops at Google for individual, team and division-wide meetings to assess OKR progress. ―An outsider might wonder if this management system is actually a sign of ‗Dilbertization‘ at Google,‖ writes Levy. ―For a company known for its weird ideals and creativity, one would be tempted to think that OKR would be little more than an annoying distraction that diverts energy from real work. But Googlers don‘t seem to think so.‖ Googlers see the OKRs as data. They‘re a means of putting a number on a person, or team‘s, performance. And if there‘s one thing that every Googler knows it‘s that data is king. At Google, an employee‘s OKRs embody his ambition. They sanction the ability to take risks. This is because even worse than failing to make an OKR is exceeding the standard by a large measure. If an employee vastly overshoots an OKR, it implies that he had been playing things too safe, or thinking too small. That‘s a firing offence. Google has no place for an audacity-challenged person whose grasp exceeds his reach.

Out With the Old, in With the “New” On January 20, 2011, Google began its quarterly earnings call (trumpeting yet another record high in revenue for that quarter, making the 2010 total almost $30 billion) by announcing that in April Eric Schmidt would step down as CEO. He would assume a new title, Executive Chairman. His replacement as CEO would be Larry Page. Many were shocked by the announcement, but Steven Levy, as a long-time observer of Google, was not. Levy writes: ―An assessment of Larry Page‘s consistently ardent possessiveness over the company he co-founded (e.g. still blessing or rejecting the hiring of every single employee in a workforce that now approached 24,000) indicates that all during the Schmidt era, Page had been the once and future leader of Google.‖ No one knows Google‘s capabilities and limitations as well as Larry Page. And no one questions that he has long been the driving creative force behind the company. But still, no

Ss matter how creative Larry Page is as Google's new CEO, he still has a monumental challenge ahead of him: competing with the behemoth that is Facebook. Google is in ―Facebook panic‖ right now, because their biggest fear is that Facebook, which is going to approach a billion users eventually, will be creating and sharing information that Google cannot get a hold of in its indexes. And that has the potential to really weaken all the things that Google wants to do in the future. That‘s why Page‘s current ―super high priority‖ is to develop new products that don‘t directly compete with Facebook, per se, but give Google an opportunity to amass its own treasure trove of personal information as well. Armed with its own unique information, Google will be better positioned to try to build alliances with Facebook down the road. The Facebook threat is a real one. And what the long-term future holds for Google, particularly in the wake of the company‘s August 12, 2011 announcement that it would acquire Motorola Mobility (an important Google partner in the Android phone market) for an astonishing $12.5 billion remains uncertain. But clearly, Google will never stand still. In an interview with Levy just prior to the Motorola announcement – perhaps signalling what was about to come – Page said: ―Google is headed in the right direction. But I just feel like people aren‘t working enough on impactful things. Some people are really afraid of failure, and it‘s hard for them to do ambitious stuff. And also, they don‘t always realize the power of technological solutions to things, especially computers.‖ Now with the fusion of Google and a world-leading smart phone manufacturer, Google is jumping head-first into the hardware business, whereas its bread-and-butter to date has been software. ―Now that Larry Page is running Google, and he will finally get his chance to fulfil unbounded ambition,‖ writes Levy. Surely, the Motorola acquisition offers real evidence of that. But as Levy notes, Page will also have new responsibilities that present considerable challenges to a self-confessed computer nerd who hates meetings, doesn‘t like schedules and administrative assistants, and has little patience for schmoozing. ―Day-to-day adult supervision no longer required,‖ tweeted one cheeky California tech blogger in the wake of the announcement that Schmidt was stepping down. Of course, the veracity of that statement remains to be seen. But for Steven Levy, one thing seems indisputable: Larry Page will never be a conventional CEO, and Google‘s future will continue to court the unexpected. And maybe even the impossible.

Conclusion No one can say for sure what the future will hold for Google, but one thing is clear: Google will never be boring. With each passing day, Google continues to innovate and push technical and business boundaries. And when you break down as many barriers as Page and Brin have done, controversy will always follow. It comes with the territory. In the Plex is an exhaustive review of the many adventures already lived by this extraordinary company. No doubt there are still many more adventures to come.