Electronic Commerce

In the late 1990s, electronic commerce was still emerging as a new way to do business; however, some
companies had established solid footholds online. Amazon.com was a rapidly growing bookseller, eBay
had taken the lead as a profitable auction site, and the business of providing Internet search was populated
by a few well-established sites, including AltaVista, HotBot, Lycos, and Yahoo!. Most industry
observers at that time believed that any new search engine Web site would find it very difficult to
compete against these established operations.





Search engines at that time provided results based on the number of times a search term appeared
on Web pages. Pages that included the user’s search term more often would be more highly ranked and
would thus appear near the top of the search results list. By 1998, two Stanford University students,
Lawrence Page and Sergey Brin, had been working on a search engine research project for two years.
Page and Brin believed that a search ranking based on the relationships between Web sites would give
users better and more useful results. They developed search algorithms based on the number of links a
particular Web page had to and from other highly relevant pages. In 1998, they started Google (Note:
This typeface indicates a corresponding link to a related Web page in the book’s Online Companion;
Google’s URL is http://www.google.com) in a friend’s garage with about $1.1 million of seed money
invested by a group of Stanford graduates and local businesspersons.


Google’s page ranking system, which has been continually improved, turned out to be much better
at providing users with relevant results than other search engines. Internet users flocked to Google, which
became one of the most popular sites on the Internet. The site’s popularity allowed Google to charge
increasingly higher rates for advertising space on its Web pages. Marketing staff at Google noticed that
another search engine, Goto.com (now owned by Yahoo! and operated as Yahoo! Search Marketing),
was selling ad space on Web sites by allowing advertisers to bid on the price of keywords and then charging
based on the number of users that clicked on the ads. For example, a car dealer could bid on the price
of the keyword “car.” If the car dealer were the high bidder at 12 cents, then the car dealer would pay
for the ad at a rate of 12 cents times the number of site visitors that clicked the ad. Google adopted this
keyword bidding model in 2000 and used it to sell small text ads that appear on search results pages.

This approach to selling advertising was extremely successful and led to Google’s continued
growth. When the company went public in 2004 (raising $1.67 billion), its market valuation was nearly
$23 billion.