Internet search firm Google can do no wrong. It is Amazon, eBay, Reuters, and Britannica all in one. It has low-end disruptive technology, a popular primary-color brand, an advertising model that works, and profits — nine quarters in a row. It entered a cluttered space late and still cleaned up. It even writes better modern poetry than humans. For these and other virtues, columnist Thomas Friedman asked, “Is Google God?”
The world’s expectations of Google , however, are grander still. In an IPO wasteland, where offerings this year hit a 29-year low, some in Silicon Valley view Google’s suspected 2004 public debut as a second coming. A $20 billion IPO could reinvigorate the Valley and part the waters for a new round of Internet capital. (Not to mention single-handedly salvage a nearly wiped-out $2 billion venture fund for top-flight Kleiner Perkins.) Still not satisfied, some are hoping Google uses its exalted platform to transform the entire hierarchy of the closed and clubby IPO system.
Why has Google been so successful where other dot-coms failed? In an “information economy” filled with crushing amounts of complex data, the companies that best filter the signal from the noise will earn the spoils. Google is simply the best at finding relevant needles in the data haystack.
Google also wins because of speed. It was built for narrowband Internet connections, and that’s important in narrowband America. (Thanks to our backward FCC, pro-technology South Korea now has 40 times our per-capita bandwidth.) Google’s site contains just 35 words and the corporate logo. Search results and ads are similarly all text, guaranteeing quick results, every time. The relevance of the ads — ensured by unique algorithms — more than makes up for the lack of flash and flair.
Activity in the sector both reinforces Google’s strategy and portends greater competition and even peril. Last month Amazon introduced “Search Inside the Book,” a standard feature that takes your phrase and finds and displays scanned pages from more than 120,000 books. Amazon’s entire catalog of several million books will soon be searchable online. Meanwhile, fellow Seattle giant Microsoft will embed powerful search features in its next operating system, code-named Longhorn. Even as it seeks to emulate Google’s functionality, Microsoft recently met with Google to explore a partnership or even an acquisition. Google is said to have resisted, but CEO Eric Schmidt must replay the Netscape case study in his mind every day.
Google keeps everyone on their toes, including Wall Street. All the usual banking suspects are vying to underwrite Google’s IPO, but founders Larry Page and Sergey Brin are said to be contemplating a Dutch auction of shares, rather than the traditional institutional allocation process.
The auction idea first surfaced in 1999 as the brainchild of Hambrecht & Quist founder Bill Hambrecht. He saw tens of billions of IPO dollars being “left on the table,” Wall Street insiders pocketing much of the capital that could have gone to upstart companies. In 1999, the average first day appreciation of IPO stocks was 71%, and the average return for the year was 276%. Bankers were setting initial prices artificially low, allocating the underpriced shares to “friends and family,” and selling after the first day price “pop,” yielding some $60 billion of extraneous cash in 1999 and 2000 alone.
Mr. Hambrecht also saw that most investors were barred from the IPO process. Under a new company, WR Hambrecht + Co., he sought to empower the masses by offering both access to shares and the ability to set the price via competitive auction, not the whim of Wall Street. By eliminating first-day flipping by disinterested Wall Streeters, volatility would be reduced.
Hambrecht was about to clean up the IPO process far better than Sarbanes, Oxley, or Spitzer ever could. In early 2000, my employer was even contemplating a Hambrecht IPO. Then the market crashed, preventing Hambrecht from testing his model. Instead of Hambrecht the entrepreneur disrupting and reforming the system with a better product, we got “scandals,” regulatory boons for accountants and lawyers, and lawsuits. IPO king Frank Quattrone was tried for a solitary, ambiguous e-mail advising coworkers to follow company policy.
What if bankers had set the initial prices of dot-com offerings “correctly,” meaning at their astronomical first day closing prices? The bankers in retrospect might have been even more reviled than they are today, charged not just with milking the bubble but creating it. The fact that the Wall Street bankers are in a lose-lose position here does not undermine the Hambrecht auction model but reinforces its validity. Hambrecht’s auctions are part of an inevitable if gradual disaggregation of many of the human functions of Wall Street, from the NYSE specialist system to that last bastion, the bond market.
Google alone cannot ignite Internet innovation and IPOs. Only the advent of real broadband can do that. But what better time to inaugurate a new populist financial architecture than with the IPO of the most popular company in the world.
Mr. Swanson is executive editor of the Gilder Technology Report and a senior fellow with the Technology and Democracy Project at the Discovery Institute.