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The One Bit of Info Google Withholds: How It Works

Advertisers, competitors and Wall Street analysts are frustrated by the company's secrecy.

May 22, 2006|Chris Gaither | Times Staff Writer

MOUNTAIN VIEW, Calif. — Google Inc. evolved from a tiny start-up to the shining star of American enterprise in less than a decade by bringing knowledge to billions of people.

There's still one thing almost no one knows: How Google works.

"It's somewhat of a paradox," said Jordan Rohan, a financial analyst at RBC Capital Markets. "Google's whole purpose is to make information easier to access -- unless, of course, you want to know information about Google."

The Internet giant's business model sounds simple. It attracts audiences through search and other Web services, displays targeted ads and charges marketers only when their ads are clicked on.

All that depends on imponderably complex mathematical formulas, a sophisticated accounting system, an aloof corporate culture and a growth strategy secret to all but the upper echelon of the company -- making Google one of the most mysterious companies of this century or last.

Although Google playfully reveals how much chicken and coffee its engineers consume every month, as it did during Google Press Day last year, the company won't disclose much potentially helpful information about its core business, such as how many search queries it returns, how many companies advertise through Google and whether ad prices are increasing or decreasing.

Google's unwillingness to disclose little more than the legally required basics of how it does what it does -- and where it's headed -- has left advertisers puzzled, partners confused, competitors nervous and investors frustrated. Even seasoned Wall Street analysts are left scratching their heads at precisely how Google posted $6.1 billion in revenue last year.

So far, Google's secrecy doesn't appear to have put too much of a damper on the leading search engine's financial or investment prospects. Google in March performed 49% of all U.S. Web searches, up from 47% the previous year and more than double its nearest competitor, Yahoo Inc., according to research firm Nielsen/NetRatings. Marketers continue to increase their ad spending, as evidenced by Google's 93% year-over-year revenue growth in 2005. And, even after a bit of a slump in the last month, its shares have risen 53% in the last year.

But pressure is mounting on Google to be more forthcoming. The very secrecy that helped the company vault to the top of the media-industry pyramid -- its $112-billion market value is almost as much as those of Time Warner Inc. and Yahoo combined -- could backfire if advertisers and technology partners begin to support its rivals.

Google "is the big kid in the schoolyard," said Andy Beal, chief executive of Fortune Interactive, an online marketing firm that works with Google and other search engines. "It makes the rules, and it reserves the right to change the rules. But there's only so long it can continue to do that before the other kids say, 'We're not going to play with them anymore.' "

All search companies are secretive. But as the largest and most idiosyncratic, Google has drawn the most scrutiny.

Google executives say they are trying to operate more transparently.

"Google's concluded that our interests as a company are better served by being more open about what we are doing, and what we aren't," Elliot Schrage, Google's vice president of global communications and public affairs, said at the start of the company's annual meeting for media and analysts May 10.

"Of course," he quickly added, "there are limits."

He and other Google executives acknowledge that there is much internal debate over where to draw that line. How does Google shake the mantle of being so mysterious without giving an edge to competitors and those trying to game the search rankings?

"It's a very good question," Google Chief Executive Eric Schmidt said. "I don't know how to answer it."

After all, Google has some very good reasons for keeping parts of its business secret.

A top ranking in the search results has become such valuable online real estate that an entire industry has sprung up to try to boost websites. But Google's popularity depends on its ability to deliver relevant search results. Bogus results could drive away users. So Google has kept its ranking formula -- which the company says includes more than 200 signals -- more secret than the recipe for Coca-Cola.

Google also is locked in a battle with deep-pocketed competitors, including Yahoo and Microsoft Corp., which would be happy to use Google's secrets in their own favor.

It was discretion that allowed the company a few years ago to sneak up on those Internet giants, whose executives had little idea how profitable search-related ads could be until 2004, when Google's decision to go public forced it to begin revealing its finances.

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