I'm Feeling Lucky_ The Confessions of Google Employee Number 59 - Douglas Edwards [149]
In January 2002, Omid let slip a hint that things were about to change. "A lot of the companies that we power searches for want us to start syndicating advertisements to them in some sort of revenue share," he told a reporter for Revolutionmagazine.com.* "We are looking at that, and it is an area where we may potentially compete with Overture. But it isn't our core business, as we aren't dependant on third-party traffic to generate income."
Omid. What a sandbagger. We already had our first syndication deal signed. Our sales team had inked a contract with Earthlink to supply our original AdWords ads a week earlier. They had been an Overture client until their contract expired, making it our first win in a head-to-head contest. We hadn't even offered them CPC ads. I doubt Overture worried—Earthlink was a trivial account compared to their major partners Yahoo and AOL. But we saw the contract as a very big deal. It proved we could syndicate our ads. Our formerly cold war with Overture began to simmer.
Omid celebrated by telling the entire company to work harder. We needed to increase the revenue per ad we generated to pressure Overture. The more we earned, the more we could offer potential partners in a bidding war for their business. We knew we could improve relevance faster than Overture, because they employed human evaluators to determine ad relevance. People couldn't possibly keep up with a good algorithm.
The Earthlink deal held only one danger for Google—the guarantee of a minimum payment, even if the advertising didn't generate sufficient revenue to cover it. It could turn out like Netscape's CPC death spiral. The exposure was small, but as deals grew bigger and competition more intense, guarantees swelled like great gas-filled dirigibles, casting shadows over our balance sheet. The threat was the "overhang"—the cumulative amount of money guaranteed to all partners. Reduced search volume or quality issues that hurt ad clickthrough rates could spark an explosive expansion of Google's debt and obliterate the company.
Even with Larry and Sergey's high tolerance for risk, no one wanted the company to die under a load of corporate IOUs, especially the new CEO, Eric Schmidt. "Don't make me bankrupt," Sheryl Sandberg recalls Eric telling Salar. "Don't run out of cash."
The guarantees would become a weapon in the battle for syndication market share, as each search superpower tried to bluff the others into spending themselves into economic oblivion.
On February 5, 2002, CNET broke the news that Google had been quietly providing Earthlink with search results and advertising for weeks. It was too late in the day for a market reaction, and the story garnered little attention.
The next morning, Overture's stock tumbled forty-one percent. A day later, Google and Earthlink issued a joint press release announcing that Google would provide search results for Earthlink's network of sites. No mention was made of our syndicating ads for the first time, the shift that changed our industry.
Meanwhile, Overture and a supporting cast of adoring stock analysts downplayed Google's new direction. Safa Rashtchy of US Bancorp Piper Jaffray called the lower stock price a "major buying opportunity" for investors considering Overture. In his view, people were overreacting. Earthlink was an aberration. Its business model didn't apply to the big portal players.
Ted Meisel, Overture's CEO, fired back at us with a press release touting raised expectations for the quarter and stating there would be no "material impact" from the loss of Earthlink as a client. He also announced that the company had extended its relationship with Yahoo to the end of the second quarter of 2002.
Overture's stock recovered over the next few days, in part buoyed by the rosy prognostications of the Wall Street analysts enamored with the company's prospects. Salomon Smith Barney predicted that Earthlink's impact would be minimal