SILICON VALLEY, just south of San Francisco, is the most inventive strip of land on the planet. Companies such as Sun, Cisco, Hewlett-Packard and Apple lead a pack of large, medium-sized and small tech businesses which innovate for a living.
And in the middle of Silicon Valley lies a company, Google, which is not only inventing new technology but is also reinventing the way that companies do business.
When it did its initial public offering in August 2004, it eschewed the traditional methods of handing the process over to Wall Street with its massive fees and, instead, held a Dutch auction in which potential investors had to submit their details and justify their investment in the business.
It worked. The lucky ones ended up paying $85 per share. Fifteen months later, these shares have now broken through the $400 mark, valuing the company at over $112bn which is a bigger market cap than Time Warner, the world’s biggest media company.
It also introduces a problem — what to do with all this value? Most independent analysts calculate the underlying value of Google at $250 per share and so at $400 a share it finds that any significant acquisition would be in a lower-valued stock than that of Google — if it were to buy a Yahoo or an e-bay it would end up by destroying value.
The solution at Google has been to buy start-up tech businesses, invariably also located in the hothouse of Silicon Valley. Last year it bought Keyhole, a digital-mapping specialist which led to the very successful launch of Google Maps. It has also bought companies with innovative blogger and wireless technologies — companies that few people had heard of. Indeed, it is well known that the business people in the company are often subordinate to the technologists, a reversal of the normal practice.
Google has revolutionised the advertising market. When the retailer, John Wanamaker, said “half the money I spend on advertising is wasted; the trouble is I don’t know which half”, this remained true until the arrival of the internet. But since the internet deals with individuals rather than by broadcasting, it is usually possible to ensure that advertising is relevant to their needs. In fact, Google only charges a fee when the potential customer follows a link. It’s the magic solution: advertising precisely targeted at the user.
Google is quite secretive, but there are indications that it might well take Microsoft head on and attack the software giant’s dominance of the applications market. Most people already have Google on their desktop and find it very useful. Most people also have Microsoft Word, but find it quite frustrating. If Google was to provide an easy-to-use alternative to the standard Microsoft applications, then many users might well switch.
As the cost of these programmes could be supported by Google’s traditional unobtrusive adverts, they would also be free — and free is a very competitive price.
Recently, Google announced a partnership with fellow Silicon Valley company, Sun, to add development resources to Open Office, a suite of applications which competes directly with Microsoft’s. The arrival of Google a decade ago pretty much wiped out other search engines. Maybe, just maybe, they can do it again, but this time taking on Microsoft.