Wall Street’s tech analysts had been brought low as well, accused of pumping up the market to an overheated state by staying so bullish for so long. “The Age of the Analyst is dead,” announced The New Yorker in 2001, less than two years after it had published a long and adulatory profile of Mary Meeker. Although the Queen of the Net had started modulating her excitement as the millennium approached, many of her big picks plunged by more than 90 percent. As evidence of how irrational Meeker’s exuberance seemed by September 2001, her favorite “buy,” Amazon, had fallen by 94 percent and now hovered at under $6 per share. Dot-bomb blame heaped on Amazon’s other great champion, Henry Blodget, a preppy Merrill Lynch analyst launched from near-obscurity after he predicted that the online bookseller’s stock would one day hit $400.2
The pain spread all the way from the sunny flatlands of San Jose, where big chipmakers and hardware companies sheared off employees by the thousands, to the “Multimedia Gulch” of San Francisco, where smug e-commerce start-ups with cheeky names collapsed like dominoes. The confident young people who’d so recently swept into town for dot-com jobs now spent unemployed days in packed cafes and tipsy evenings at “pink-slip parties,” or cashed in their severance checks to take long surfing vacations in Bali. (Life wasn’t all that dire for the young and college-educated.)
Not even the most seasoned had escaped: David Morgenthaler saw a $500 million return on one investment evaporate into pennies on the dollar as the company’s stock price sank 96 percent in the first quarter of 2001 alone. Burt McMurtry already had stepped back from day-to-day investing in the second half of the 1990s, and the downturn seemed like a fine time to embrace retirement for good. Ann Hardy’s software contracts shrank to nothing as the bust spread across the financial technology field. Lacking the fortune of Morgenthaler or McMurtry, she moved down to Mexico, living like the hippie she never was: hopping the bus to travel at whim, wandering through the artists’ colony of Oaxaca, relaxing after decades of work.3
To the national media, the rapid descent of highly visible dot-com names made for particularly juicy cautionary tales of Californian tech excess. The splashier the brand, the greater the public relish in its fall. Exhibit A in this regard was Pets.com, online purveyor of cat food and doggie toys, which had gone public at the tail end of the boom with a valuation of close to $300 million. It threw most of its money into marketing, saturating television airwaves with ads featuring a canine sock-puppet mascot who bantered with pets and crooned Blood, Sweat & Tears to a mailman (“What goes up, must come down . . .”). And come down it did—less than a year after the Pets.com puppet appeared as a float in the 1999 Macy’s Thanksgiving Day Parade, and 268 days after its IPO, the dot-com retailer shuttered for good. The sock puppet later resurfaced from the dot-bomb murk as a spokesman for a loan company.4
The national political scene shifted dramatically too. Dogged by Bill Clinton’s second-term scandals and unable to settle on a compelling campaign message, Al Gore eked out a popular-vote victory in the 2000 presidential election, but no clear Electoral College win. The outcome hung in the balance for several agonizing weeks until the U.S. Supreme Court ruled in favor of George W. Bush. The commander-in-geek was out of a job, and the Valley’s brief love affair with Washington sometimes seemed like it never happened.
* * *
—
For entrepreneurs and investors who had ridden tech’s boom-and-bust cycle for decades, however, times were bleak, but endurable. The boom this go-round had been so long-lived, and so enormous, that the Valley remained larger and richer even after the market crashed and burned. Pets.com and its peers might have bitten the dust, but Internet retail sales continued their steady upward climb. People had gotten comfortable with buying things online, and they weren’t turning back.
Four years of fevered deal-making had made rich investors even richer, even if billions of dollars in paper wealth had evaporated overnight. Santa Clara County had 200,000 more jobs than it had at the start of the Internet era—and software and semiconductor firms were actually adding employees by mid-2001. And new talent kept coming to town—hungry young people like Chamath Palihapitiya, who sensed that the worlds of tech and finance and media were now intertwined so tightly that no bear market could untangle them.5
If you looked a little closer in those twilight days of 2001, past the armies of résumé-wielding MBAs and the acres of empty cubicles, you could see a next generation of Valley companies confidently gaining their footing—and the pop of the market bubble was the best thing that could have happened to them. Silicon Valley not only didn’t die, it became wealthier and more influential than ever in the first two decades of the twenty-first century, propelled on overlapping waves of software-powered businesses: search, social, mobile, and cloud computing.
The mercenary bankers and MBAs-who-would-be-millionaires left town; the missionaries stayed. The post-dot-com era was the revenge of the nerds, as smart software engineers built the tools that finally turned the Internet into a money machine. The Web enterprises of the 1990s already had been edging away from the business model guiding capitalism since the Industrial Revolution (make something; sell it for a certain price; pocket the profit). Those free Netscape browsers and Yahoo directories generated revenue from advertising, but the interface was clumsy, annoying, and often missed its target.
The companies of what became known as Web 2.0 engineered a more elegant, less intrusive, and far more lucrative approach. Building on sixty years of discoveries in AI and human-computer interaction, they built giant user bases, then drew on data about these users to precisely deliver the information they wanted to see—and to send carefully targeted ads alongside that information. It was what one reporter called “the Holy Grail of web commerce”: you could reach potential customers at the exact moment they wanted to buy what you were selling. “You’re not the customer,” quipped one coder, using a turn of phrase bandied about with increasing frequency in the early ’00s. “You’re the commodity.” And the company that did this first and best of all was Google.6
THE GOOGLEPLEX
By the time the NASDAQ crested in March of 2000, Google’s employee base had grown from six to sixty. It performed more than seven million searches a day, a figure that doubled in June, when Yahoo! stepped away from trying to run its own algorithmic search and made Google the featured engine on its portal.
AltaVista, a comparably sophisticated engine nurtured within the research operation of the now-enfeebled Digital, remained Google’s most serious competition in the search game, but Brin and Page’s company was catching up fast. By September, the founders announced that Google now indexed 560 million Web pages and would run a version of its portal in ten languages. By the following January, encouraged by John Doerr, a curious Al Gore made a visit to Google during his first trip out to Silicon Valley after the election debacle. Gore declined an offer to join Doerr on Google’s board—he hadn’t yet decided whether another presidential run was in his future—but he agreed to sign on as an advisor, taking a hefty chunk of stock options in exchange.7
As the market plummeted and venture investors closed up their wallets in the early days of 2001, Google kept growing. It was still a private company, mostly unruffled by the walloping of the NASDAQ. Instead, the market crash worked to its advantage. Prices dropped for the considerable amount of computer hardware that Google required to power its searches. Silicon Valley office space became easier to find and relatively cheaper to rent; Google soon moved down to Mountain View into a luxe campus vacated by the now-faded Valley superstar Silicon Graphics. Most important of all, the mass layoffs of the dot-com bust gave Google access to top-notch engineering talent that it otherwise might not have been able to afford. Now the small company had its pick of engineers, who were so eager for good work that they’d take stock options over a hefty salary.
In-the-know Valley people clamored to work for Google for other reasons too. Amid scornful chatter abou
t silly dot-coms and corporate Internet profiteers, the clean and uncluttered Google interface became the cool kids’ search engine, a soothing escape from the pop-ups and strobe-flashing ads that swamped the late-’90s Web. The portal’s disdain for raw commerce extended to the corporate culture: Page and Brin still exhibited the earnest idealism of the Stanford graduate students they so recently were, determined to keep information free, the Internet transparent, and avoid suits and ties—and all they stood for—as long as possible. They hired by referral to keep that ethos intact. So distinctive was Google’s sense of itself that employee number 50 had the title “Chief Cultural Officer.”8
The two co-founders turned the Googleplex into a Stanford graduate student’s dreamland, filled with ping-pong tables and comfy office furniture, where the sun was always shining and you never needed to wear a bike helmet. To entice PhDs and faculty wannabes, they mirrored the faculty consulting model Fred Terman had introduced at Stanford: you did your day job 80 percent of the time, and the other 20 percent was yours to play around with new ideas and innovations. The floor plates were large, the office spaces were shared, the people were packed in; it was just like the Gates Building, except the restrooms had $3,000 Japanese toilets with heated seats. The chef cooking up free food in Google’s employee cafeteria had previously worked for the Grateful Dead. The quirks and perks were typical Silicon Valley style, an update of HP’s back-patio horseshoes and Tandem’s swimming pool, but the primary-colored playfulness of the Google campus topped anything the tech world had seen before.9
Lest Googlers become distracted by all the increasingly luxe bells and whistles around the Plex, the founders continually emphasized the boundary-defying significance of what they were trying to do. Earlier self-actualizing Valley generations had Esalen; the post-2000 crowd had Burning Man. The annual festival of art and drugs and free expression in Nevada’s Black Rock Desert—a self-described “catalyst for creative culture in the world” that the co-founders attended faithfully each year—became metaphor and motif for all things Googley. An homage to the Man adorned the foyer of one of the buildings on Google’s campus. The company sponsored shuttle buses to take Googlers to Black Rock each year. In 2001, a key factor in Brin and Page agreeing to bring in Valley veteran Eric Schmidt as CEO was the fact that Schmidt was already a Burner.10
Schmidt’s hire was a long-fought victory for John Doerr and Michael Moritz, who had insisted the two founders bring on an experienced chief executive as a condition of their first investment and watched in frustration as Page and Brin rejected close to fifty candidates before they settled on Schmidt. The new CEO brought more Valley DNA into the Googleplex, forging connections between the new-era company and the people and firms that had come before. In his mid-forties at the time of his arrival, Schmidt sported a gold-plated résumé featuring a PhD from Berkeley and stints at Bell Labs and Xerox PARC. Then came fourteen years at Sun Microsystems, where he was one of the first employees, rising high enough on the org chart to be a target of the staff’s famous April Fools’ Day pranks. He moved from there to lead networking software company Novell. Schmidt hadn’t been the VCs’ first choice, but his technical smarts and management credentials made him the perfect fit for a company that venerated engineering above all else.
With Schmidt came others from beyond the intimate, Stanford-centric world of early Google. One notable hire came from Washington: Sheryl Sandberg, former chief of staff to the U.S. Treasury Secretary, whom Schmidt brought in to grow Google’s advertising operations. Then there was Bill Campbell, the Kodak executive who had come to Apple at the start of the Sculley years and had gone on to helm the business software powerhouse Intuit. Campbell was now Silicon Valley’s beloved “Coach,” often brought in by VCs to give encouragement and enlarge the worldview of boy-wonder founders.
Coming on as an advisor to Brin and Page, Campbell became a familiar fatherly presence in Google’s conference rooms as 2001 turned into 2002. The Coach had formed tight bonds with many Valley legends. Like his fellow Pittsburgh native and dear friend Regis McKenna, Campbell was very close to Steve Jobs. But his feelings for the Google guys were particularly heartfelt. “This is family for me,” he told author Ken Auletta, with visible emotion. “There’s innovation daily. They think about changing the world.”11
THE AD ENGINE
Despite the hockey-stick growth and feverish media coverage, Google entered its fourth year in business without having turned a measurable profit. Engineering had been prioritized over all else. The company was burning cash on those ping-pong tables and toilet seats, and new VC money wasn’t forthcoming while the dot-com crash smoldered. The founders needed a way to monetize their search engine without turning its Zen-like simplicity into an ad-choked mess.
That was already happening to AltaVista, the only Web crawler whose sophistication had rivaled that of Brin and Page’s creation, and which quickly had descended into banner-ad hell after a series of acquisitions that sent it from the research labs of Digital to the online advertising giant Overture (first known as GoTo.com). But all that Overture lacked in design purity it made up for in its new model for monetizing search, which was to integrate advertising into the search itself. Instead of traditional ad buys, which plastered a banner or pop-up and hoped that the rare someone might click through to what you were selling, companies would buy rights to a keyword, bidding to have their product show up at the top. Advertisers only paid when the searcher clicked on their link.12
The eagle-eyed Googlers saw what Overture was doing and knew that this was where the future lay. But they didn’t like the other company’s practice of selling search results out to the highest bidder, making it difficult for the user to distinguish a truly relevant site from one that paid for its spot on the list. That definitely wasn’t Googley. Instead, they produced a system (similar enough that Overture sued for patent infringement) that adopted the keyword-auction concept to generate paid results, subtly but clearly marked “ad,” that appeared atop or to the side of a regular search. The site would stay as clean as ever, with its core principles intact. “You can make money without doing evil,” proclaimed Sergey and Larry in the “Ten things we know to be true” that they posted on their corporate website around this time. The keyword technology they called AdWords—which they then sold to other websites under the brand-name AdSense—made Google a mint, and it changed the software business model for good.13
With every letter entered into a search box, Google or its customers learned a new scrap of information about their users, information that they could use to deliver ads that were targeted and relevant—and thus far more likely to result in a purchase. As visitors waited in the lobby of the Googleplex, they could see a scrolling report of the searches people were typing in at that very moment, projected on the wall like a particularly intriguing piece of panoptic video art. When Google rolled out new products—like Google News in 2002, Gmail in 2004, and YouTube, which it purchased for $1.65 billion from three PayPal mafiosi in 2006—the ad engine became even smarter.
By expanding its reach and monetizing its huge user base, Google turned the existing software ecosystem upside down. Microsoft might have come late to the Internet revolution, and it was sputtering to catch up with Google in search, but it still earned billions from selling packaged software. When Google unveiled online word processing and spreadsheet applications, however, consumers flocked to them. They were getting something a lot like Microsoft Office, but all for free! Microsoft continued to rule the business market—corporate IT managers had little interest in switching away from something so reliable and familiar—but Google’s incursion put Gates and Ballmer on notice: the PC platform wasn’t going to last forever.
“Free” software and content did have a price, of course, and some early software releases made this a little too clear to the user. Gmail initially featured small ads generated by the keywords being typed into an e-mail message. After outcry and further refinement, the
more obvious signs of surveillance disappeared. Internet users knew that they were leaving a trail of information online, but the downsides of that openness were hazy, and the upsides of the services were tremendous. Google’s founders were missionaries, not mercenaries, John Doerr would remind anyone who’d listen; all they wanted to do was make information free.14
By 2004, Google’s revenues soared, its operating income topping $320 million, comparable to online auction giant eBay and far surpassing Yahoo! and Amazon. Google went public in August of that year, “one of Wall Street’s most eagerly awaited births ever,” declared Fortune, apparently forgetting how Intel, Genentech, and Apple once had set the Street atwitter. By December, the stock had doubled in price, to $165; two years later, it neared $300. Google wasn’t going to be another dot-bomb after all, and its runaway success increased investors’ appetite for finding the next big thing.15
THE HACKER WAY
“Classes are being skipped,” marveled the Stanford Daily. “Work is being ignored. Students are spending hours in front of their computers in utter fascination. The facebook.com craze has swept through campus.” In the early spring of 2004, the Silicon Valley business scene had begun to froth once more, but the undergraduates living right at the center of it suddenly were glued to their screens, checking out prospective dates and sharing likes and dislikes with their circle of online buddies—a circle that might include people you really didn’t know in real life, but with whom you suddenly had a new, strange sort of familiarity and intimacy. “It provides a way to find out about someone without even approaching them,” marveled one Stanford sophomore, who boasted an impressively long list of 115 Facebook friends.16
The Code Page 45
