The Forgotten Startup That Inspired Google’s Brilliant Business Model

The origins of American success stories.
Oct. 13 2013 11:50 PM

Google’s Big Break

It was a great search engine but a money-losing business—until it borrowed an idea from its biggest rival.

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In late 2000, Google rolled out a new, self-service advertising product called AdWords that allowed businesses to purchase text ads on search-results pages. Soon after, Page and Brin met with Gross at a TED Conference, and Gross suggested a merger. No thanks, the Googlers told him. As Steven Levy recounts in his 2011 book In the Plex: How Google Thinks, Works, and Shapes Our Lives, Page and Brin “would have nothing to do with any system that mixed organic search results with ads.” Then there was talk of a partnership, with Overture placing its auction-based ads alongside Google’s own results. Overture would go on to partner successfully with Yahoo and MSN, but Page and Brin ultimately walked away. They reckoned they could build their own system to do essentially the same thing, but do it better.

And they did. In 2002 Google launched its own pay-per-click, auction-based search-advertising product, called AdWords Select. It was instant gold, and Google soon dropped the original AdWords altogether. As revenues rocketed, the company turned its first annual profit that year. Before long, AOL dropped Overture for Google, and Overture ended up being sold to Yahoo in 2003 for $1.63 billion. Meanwhile, Google was busy building on AdWords with AdSense, which allowed it to sell targeted ads on third-party websites. On Aug. 19, 2004, Google went public with a valuation of $27 billion. It’s now worth close to $300 billion.

Did Google steal Overture’s idea? Not really, says Gross. “We didn’t patent the idea. So if we don’t patent it, they can copy it.” Yet Gross is convinced the concept of a cost-per-click, auction-based search-advertising system would have been patentable, in retrospect. By the time he thought to do it, though, it was too late. Overture did file for a slew of other patents peripheral to its system, and sued Google for infringement when it came out with the revamped AdWords in 2002. The case was settled in 2004, with Yahoo getting a big chunk of Google stock in exchange for the rights to Overture’s intellectual property.

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The ex-Googlers I talked to see it a little differently. Doug Edwards, an early marketing executive and author of the insider account I’m Feeling Lucky: The Confessions of Google Employee Number 59, says that Google’s executives saw the GoTo.com model as fundamentally flawed, because advertisers could bid up keywords irrelevant to their business, knowing that they would only have to pay if people clicked. As Levy explains in his book, Google addressed this by adding a “quality score” to each ad to punish those that were spammy or off-topic. Google also improved on Overture’s auction model by replacing the standard “high-bid” auction with a variant on the Vickrey auction, which saves the winning bidder from overpaying.

“I don’t recall a great deal of consternation about, ‘Oh, this was someone else’s intellectual property, we need to come up with something different,’ ” Edwards says of AdWords. “It was a case of finding an opportunity, finding a system that was broken, and finding a way to fix it and make it work.”

Levick, the early ad-team member, agrees. “I think a lot of different companies were looking at marketplaces around that time, and Google was the one that really made it work,” he told me in a phone interview. “It’s no different from search. Google didn’t invent search, they reinvented search. They didn’t invent email, they reinvented email. You can take this all the way down to the self-driving car. Google doesn’t imagine business products, they reimagine them.”

Gross, for his part, seems comfortable, even happy, with how things turned out. And he has nothing but raves for Google. “I’m wildly proud of coming up with the paid-search model,” he told me. “I didn’t know how big it was at the time.” Besides, Gross says, if Google didn’t make billions with the pay-per-click auction model, it would have made its billions some other way. “I wish I had come up with the Google idea,” he says. “The Google idea was the idea for organizing the world’s information. Mine was just an idea for making money.”

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