I'm Feeling Lucky_ The Confessions of Google Employee Number 59 - Douglas Edwards [150]
"You ain't seen nothing yet," Rashtchy crowed to investors a week later. He believed Overture's strong fourth quarter and its deal with MSN had set the table for "huge growth leverage."
Larry and Sergey played it cool. They had a stack of aces up their sleeves. Google would prevail because of the better quality of our search, the greater relevance of our ad matching, and our willingness to commit fearlessly (but prudently) to enormous partner guarantees. And because what everyone else saw as our biggest impediment was actually an enormous advantage: we maintained a site that competed directly with our potential partners. Overture didn't have such a site.
In what Larry termed "the first well thought out article I've seen about Overture," George Mannes of TheStreet.com pointed a sharp stick at Overture's Achilles' heel.* "Compared with traditional media practices," he wrote, "Overture retains an exceptionally large portion of the money it collects from advertisers." They were keeping forty-nine percent of the revenue from the ads they sold and giving only half to the sites where the ads ran. Traditional media-placement agencies kept only fifteen percent for themselves.
That's where we had them. Overture was entirely dependent on its network for revenue, and if its margins slipped, the company would be in trouble. We kept all the money for the ads we ran on Google.com, and that swelling river of cash subsidized our expansion efforts.
We could give a bigger share of our revenue to our partners. Our costs were low since we had to process the ads to run on Google anyway and additional distribution would be almost entirely added profit. Plus, running our own site gave us an edge in understanding how users responded to keyword-based advertising. Google.com was a living laboratory processing priceless data that revealed what was effective and what was not.
We could—and would—send margins into a nosedive, and that went a long way toward assuaging our partners' concerns about Google as a potential competitor. We were now the good guys, cutting costs for everyone and helping to fill the coffers of search-enabled sites across the web.
The Game Changes
Overture CEO Ted Meisel, interviewed by CNET the day the Mannes article appeared, wasn't concerned about the future of paid search. Portals that had not yet augmented their search results with Overture's paid listings, he told a reporter, had "been essentially providing the largest ad giveaway that I can think of," because they were delivering customers to businesses without monetizing the traffic. Meisel noted that Overture's forecasts for the coming year were based only on extension of the Microsoft deal and added, "We certainly regard AOL and Yahoo as important potential partners, but our business can live without them."
Meisel would have reason to be thankful he had hedged his optimism. On February 19, 2002, we posted a "NEW!" option on the web page describing Google's advertising offerings. CPC-based AdWords Select was live.
Overture's stock dropped ten percent. Safa Rashtchy tried to stem the panic by again beating the "buying opportunity" drum. "Overture has a lock on the major portals," he reiterated. Large partners would never sign with Google as long as we had our own site. Besides, Rashtchy pointed out, Google had only a thousand advertisers using its program. Overture had fifty-four times that.
Merrill Lynch analyst Justin Baldauf concurred, telling CNET, "Because Overture is much bigger than Google, Overture can afford to pay distribution partners more money." He explained that Google couldn't increase distribution without more advertisers and wouldn't get more advertisers until we increased distribution. That may have been true