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Google Prepares Very Creatively to IPO
Friday, April 30 2004 @ 08:22 PM EDT

Sometimes, when you talk about the public good and not just the bottom line, you get attacked as an idealist with no concept of the hard realities of business. In fact, I got an email yesterday from a guy who wrote the following charming message:

there is no free lunch pj ! open source is a myth . its like a recipe with no ingredients . sunw is no more guilty than red hat or novell or any one else trying to make money on their linux flavor of the month . remember when water was free just wait for the bottled oxygen because its coming . wake up its called capitalism . gotta love it and join the party . regards

It's odd, but whenever I write about Sun, I get the most unappetizing email. It's worse than when I write about Microsoft or even SCO. Open source is a myth. That's silly on its face.

But is it true, as my correspondent apparently thinks, that there is only one way to make money, to viciously sell people air? Is a corporation's highest goal to maximize shareholder value? Do I "gotta love it" and join their hard-hearted party? I don't think so, and I offer as my Exhibit A: Google.

Google has just filed their S-1 with the SEC, preparatory to going public in about six months. You can read the S-1 itself, or a breakdown of the important points here on Tristan Louis' blog. What stands out are two items on the list he made:

• The founders announced that they will continue to focus on long-term strategy instead of delivering guaranteed quarterly gains. They said that If opportunities arise that might cause us to sacrifice short term results but are in the long term interest of our shareholders, we will take those opportunities.

• Public Trust: Google wants to do good and considers "making the world a better place" and "doing good things for the world" to be part of their core values, even if it impacts short term gains. This places Google among a few companies that look at themselves as having a mission beyond return on investment.

If you think they are dewy-eyed innocents, consider that last year, "Google made almost a billion dollars in revenues in 2003, and earned about $100 million on those revenues. It looks like the technology is yielding significant returns on investments that have gotten them to the point where they are sitting on almost half a billion dollars in cash."

In order to try to stick to their core values, they intend to set up a corporate structure similar to media companies like the New York Times. The S-1 includes a letter to shareholders, a feature they say they will have every year. Here is a taste:



Google is not a conventional company. We do not intend to become one. Throughout Google’s evolution as a privately held company, we have managed Google differently. We have also emphasized an atmosphere of creativity and challenge, which has helped us provide unbiased, accurate and free access to information for those who rely on us around the world.

Now the time has come for the company to move to public ownership. This change will bring important benefits for our employees, for our present and future shareholders, for our customers, and most of all for Google users. But the standard structure of public ownership may jeopardize the independence and focused objectivity that have been most important in Google’s past success and that we consider most fundamental for its future. Therefore, we have designed a corporate structure that will protect Google’s ability to innovate and retain its most distinctive characteristics. We are confident that, in the long run, this will bring Google and its shareholders, old and new, the greatest economic returns. We want to clearly explain our plans and the reasoning and values behind them. We are delighted you are considering an investment in Google and are reading this letter. . . .


We are creating a corporate structure that is designed for stability over long time horizons. By investing in Google, you are placing an unusual long-term bet on the team, especially Sergey and me, and on our innovative approach.

We want Google to become an important and significant institution. That takes time, stability and independence. We bridge the media and technology industries, both of which have experienced considerable consolidation and attempted hostile takeovers.

In the transition to public ownership, we have set up a corporate structure that will make it harder for outside parties to take over or influence Google. This structure will also make it easier for our management team to follow the long term, innovative approach emphasized earlier. This structure, called a dual class voting structure, is described elsewhere in this prospectus.

The main effect of this structure is likely to leave our team, especially Sergey and me, with significant control over the company’s decisions and fate, as Google shares change hands. New investors will fully share in Google’s long term growth but will have less influence over its strategic decisions than they would at most public companies.

While this structure is unusual for technology companies, it is common in the media business and has had a profound importance there. The New York Times Company, the Washington Post Company and Dow Jones, the publisher of The Wall Street Journal, all have similar dual class ownership structures. Media observers frequently point out that dual class ownership has allowed these companies to concentrate on their core, long-term interest in serious news coverage, despite fluctuations in quarterly results. The Berkshire Hathaway company has applied the same structure, with similar beneficial effects. From the point of view of long-term success in advancing a company’s core values, the structure has clearly been an advantage.

Academic studies have shown that from a purely economic point of view, dual class structures have not harmed the share price of companies. The shares of each of our classes have identical economic rights and differ only as to voting rights.

Google has prospered as a private company. As a public company, we believe a dual class voting structure will enable us to retain many of the positive aspects of being private. We understand some investors do not favor dual class structures. We have considered this point of view carefully, and we have not made our decision lightly. We are convinced that everyone associated with Google—including new investors—will benefit from this structure.

To help us govern, we have recently expanded our Board of Directors to include three additional members. John Hennessy is the President of Stanford and has a Doctoral degree in computer science. Art Levinson is CEO of Genentech and has a Ph.D. in biochemistry. Paul Otellini is President and COO of Intel. We could not be more excited about the caliber and experience of these directors.

We have a world class management team impassioned by Google’s mission and responsible for Google’s success. We believe the stability afforded by the dual-class structure will enable us to retain our unique culture and continue to attract and retain talented people who are Google’s life blood. Our colleagues will be able to trust that they themselves and their labors of hard work, love and creativity will be well cared for by a company focused on stability and the long term.

As an investor, you are placing a potentially risky long term bet on the team, especially Sergey and me. The two of us, Eric and the rest of the management team recognize that our individual and collective interests are deeply aligned with those of the new investors who choose to support Google. Sergey and I are committed to Google for the long term. The broader Google team has also demonstrated an extraordinary commitment to our long term success. With continued hard work and good fortune, this commitment will last and flourish.

When Sergey and I founded Google, we hoped, but did not expect, it would reach its current size and influence. Our intense and enduring interest was to objectively help people find information efficiently. We also believed that searching and organizing all the world’s information was an unusually important task that should be carried out by a company that is trustworthy and interested in the public good. We believe a well functioning society should have abundant, free and unbiased access to high quality information. Google therefore has a responsibility to the world. The dual-class structure helps ensure that this responsibility is met. We believe that fulfilling this responsibility will deliver increased value to our shareholders.

So there you are. Somebody thinks there is a choice. You don't actually have to pillage the countryside or sell air to stay in business. And, they say, maximizing shareholder value short-term can actually damage the long-term value of the company. Instead of GNU/Linux "growing up" as SCO put it once, and "joining the party", it can do a Google and stand firm on core values.

And for our geek side, the same blog tries to calculate just how many computers there are on the Google farm, using the S-1 filing's info as a jumping off point.

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