Google Trusts Vision And Reaps Big Payoff

Investor's Business Daily

Google (GOOGL) has made its mark by trusting its founders' instincts to bet big on long-shot products. That trust has propelled the company to the top in several fields — and propelled its stock.

Google's Internet search engine, like many Google products since, entered a crowded field but quickly rose to the top. It went up against popular search sites such as Yahoo (YHOO), AltaVista, Ask Jeeves and Lycos.

But from the start, Google offered up better search results, says Greg Sterling, contributing editor at Search Engine Land. "It was a better version of what had existed before, and they were faster without any visual clutter or advertising.

Sergey Brin and Larry Page founded the search engine in 1998, when they were Ph.D. candidates at Stanford University. Three years later, they brought aboard the company's first CEO (and later chairman), Eric Schmidt, a tech veteran who had held top spots at Sun Microsystems (SUNW) and Novell.

A New Way To Search

Google relied on a new type of search algorithm that ranked websites based on popularity, not just search terms. Google's PageRank took note of how many outside pages linked to a website, weighting certain sites as influential because of how many other sites linked to them.

But it wasn't just the technology that fueled growth, says Sterling. Google also offered a simple, easy-to-navigate interface.

Google launched paid search ads in 2000. Two years later, Google's search-ad platform came into maturity when the company switched all of its advertisers to one of the first cost-per-click (also called pay-per-click) models. Advertisers paid only when a user clicked on an ad, and Google was adept at targeting ads on its search-results pages and other Web pages.

Google's sales soared by 408% that year, 2002, and per-click ads have driven the company's revenue growth ever since.

When Brin, Page and Schmidt took the Mountain View, Calif., company public in 2004, they ushered in the second wave of Internet-company IPOs. They also created two classes of stock to ensure that they kept a majority of shareholder votes. The Class B shares, roughly 92% of which are held by the three men — 84% by Brin and Page — are not listed, and they have 10 times the voting power of traded Class A shares, under the new GOOGL ticker. New Class C shares, which got the old GOOG ticker, have no voting power.

While Google was far from being the first company to use two classes of stock, the idea caught on with other Internet company founders seeking the benefits of the public market without the loss of control. Most notably, Facebook (FB) took the same tack.

The Google IPO priced at 85, the low end of a lowered expected range, and closed day one up just 18%, at 100.33.

But the shaky start "didn't scare off investors," as IBD reported in 2004.

Within a month, the stock began an ascent that has continued pretty much unabated, with the exception of 2008 during the Great Recession, making it one of the top 30 stocks of the past 30 years.

Last October, Google stock broke 1,000 for the first time, after its Q3 earnings beat expectations. After its two-for-one stock split earlier this month, Google shares traded near 540. With its initial price at a split-adjusted 42.50, Google's stock has soared 1,171% since its 2004 debut.

The dual-class stock ownership, which lets the founders retain control, has helped the company champion initiatives such as Gmail and Android that have fueled growth, according to some observers as well as Page and Brin.

"The decision to maintain power has allowed them to focus on their product — a decision that has continued to pay off since their stock market launch," says Ken Wisnefski, CEO of marketing and SEO firm WebiMax.

The World's Top Email Service

Gmail is the most popular email service in the world, with about 435 million users, helping the company sell ads and promote its other services. When it launched in beta testing in 2004, however, many wondered why Google would want to take on leaders Yahoo Mail, AOL (AOL) Mail and Microsoft 's (MSFT) Hotmail and Outlook.

Larry Page thought that Google could do better. As Page said in a statement at the time: "Gmail solves all of my communication needs. It's fast and easy, and has all the storage I need.

Yahoo then offered just 4 megabytes of free storage. Google swooped in with 1,000 megabytes, which it has since boosted to 15 gigabytes.

Android, meanwhile, is the No. 1 mobile operating software. This year, Android is expected to notch its 1 billionth customer activation, says tech-research firm Gartner.

Yet many viewed Gmail and Android at launch as long shots for an online search-services provider.

Google launched Android as an open-source platform on Nov. 5, 2007, about four months after Apple (AAPL) released the iPhone. Some pundits weren't shy about wondering why Google would switch lanes into something so different from its core search business.

"Android seems to be the perfect example of something that looks great on paper," wrote Sascha Segan of PC Magazine in April 2009, noting at the time that there were a grand total of two Android phones available.

But Google's free Android platform upped the ante for Apple and vastly expanded the number of people using smartphones and tablets to access news, games, movies and other kinds of information and services.

The key to Android and Gmail is the same as with Google's search — the free services drive traffic so that Google can serve up more advertising.

Google continues to develop products that it hopes will drive ads now and later. Most of its newest products are focused on mobile — the present — and on wearable products, which some see as the future.

And Google made a big move into the Internet of Things field with January's announcement that it would acquire Nest Labs for $3.2 billion. Nest makes smart home appliances such as thermostats and smoke detectors.

Brin is in charge of developing Google Glass, the futuristic-looking eyewear device with a built-in computer that makes it easy to get texts and emails, and to shoot photos or video. Like Gmail and Android in their early days, Glass too has had its detractors.

And Google announced on March 18 that it is releasing a version of its open-source software for watches and other wearable devices, which it calls Android Wear.

"I think in the long term, the mobile monetization is going to be a multiple of desktop monetization, not a fraction," Nikesh Arora, Google's chief business officer, told analysts at a tech conference last month.

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