Introduction: 3. Google uses new business tactics

China is just one of many issues that have focused the spotlight on Google's ethical stance since the company was founded in late 1998 by these two Stanford University computer science graduate students. Google came out of a project that only a computer scientist could love: developing technology to search through large electronic databases of published research papers. Instead, they came upon a much greater solution--a better way to search through the giant morass of data that is the Internet--and ended up turning their technology into one of the biggest, most influential companies in technology today.

But technology alone does not make a successful company. Business tactics do. Larry and Sergey have created a unique company with a new kind of business model, employing tactics that fit the Internet Age like Alexandria's Great Library fit the Hellenistic Age. Google may not last three hundred years, but it still has a huge future in which its influence will continue to grow.

To say Larry and Sergey struck the right business chord would be the understatement of the twenty-first century. When they launched Google, the were entering a war that pundits were insisting they had already lost before they even got started. In mid-1998, it was Yahoo Inc. that sat on top of the world Wide Web. Yahoo had become one of the premiere Internet sites, the place where 75 percent of Web searches were begun. More than twenty-five million people visited Yahoo every month. In September 1998, it became one of the first pure Internet companies to claim a profit.

The previous March, Fortune magazine had summed up the prevalent view: "Yahoo! has won the search-engine wars and is poised for much bigger things," its editors declared. Its stock was soaring past $100 per share, on its way to a peak of $230 at the end of 1999.

Then it all fell apart. By mid-2000, Yahoo's stock was in free fall, on its way to hitting the bottom at under $5 a share. Yahoo CEO Tim Koogle, once hailed as a great Internet visionary, was a year from being fired. Nobody seemed to know what hit them. Whatever it was, it missed Google.

What happened was that the world changed, literally overnight. Before December 31, 1999, Y2K paranoia was scaring corporations worldwide into pouring billions of dollars into new computers and software, fearful that their old computers would crash when their internal clocks changed from "99" to the year "00". With all that spending, technology companies were growing fat, and their stock prices were growing fatter. A robust market for technology stocks inspired venture capitalists to pour money into dot-com companies and take them public on nothing but a business plan and a prayer. Day traders followed their lead and bid up the dot-com stocks. The stock market was soaring so high that the Federal Reserve tried to cool irrational exuberance by raising interest rates.

Every one of those moves turned out to be wrong. On January 1, the Y2K panic proved to be unfounded and the money tap that fed Silicon Valley was shut off. All at once, corporations stopped buying computers. Profits at technology companies plunged, their stock prices were sucked down with their declining earnings, and high interest rates made it worse. The unprofitable dot-com companies saw their stock prices drop to pennies a share, and venture capitalists stopped investing. The real Y2K disaster turned out not to be crashing computers, but a crashing Internet market, triggered by the end of the Y2K fear-induced spending.