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.


The idea that made Google the world’s greatest search engine was all Larry Page and Sergey Brin. But the idea that set it on the path to becoming the world’s greatest company wasn’t theirs originally. It was borrowed, with some key modifications, from their biggest early rival.

In September 1998, Page and Brin founded Google based on an algorithm called PageRank that they had developed as Stanford Ph.D. students. Other search engines ranked pages based on the relevance of the text they contained, which allowed spammers to game the system by filling their pages with commonly searched keywords. PageRank dived much deeper, evaluating sites’ authority and influence based on the number of other authoritative and influential sites that linked to them. Suddenly a search for “Honda” turned up instead of, say, a porn site that had copied the word “Honda” 50 times in invisible type at the bottom of the page.

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Within a year, it was clear to many in Silicon Valley that Google’s algorithm was superior to those of more established search engines like AltaVista and Inktomi, whose software powered HotBot, Yahoo, and several other major Web portals. The tiny upstart won $25 million in venture-capital funding, which valued the company at $100 million. But it struggled to land contracts with the big portals, which were more focused on building up their homepages than improving their search results. The conventional wisdom at the time was that there wasn’t much money in search—the real revenue came from keeping people on your own pages, where they could see your banner ads.


If Google was going to make money from, and not just as a service provider to companies like Netscape, selling banner ads on its own search-results pages seemed the obvious play. But Brin and Page hated the idea. They thought banner ads were ugly and distracting. Worse, banner ads took time to load, and Google’s founders possessed an almost religious devotion to efficiency and speed. In their seminal 1998 academic paper introducing the idea of Google, Page and Brin criticized advertising-funded search engines as “inherently biased towards the advertisers and away from the needs of consumers.”

By late 1999, though, major Google investors such as Michael Moritz had started to get antsy, as John Battelle recounted in his excellent 2005 book The Search. Google had about 50 employees at the time and was starting to catch on with Internet users, but it was bleeding cash. “We really couldn’t figure out the business model,” Moritz says in The Search. “There was a period where things were looking pretty bleak.”

That’s when Page and Brin started to take a closer look at, a rival search engine that was beginning to reap huge revenues with a novel advertising model. had been founded by a serial entrepreneur named Bill Gross in February 1998, seven months before Google. As Gross explained to me in a phone interview, was actually his attempt to solve the same problem Page and Brin had been working on—how to build a search engine whose results wouldn’t be overrun by spam. But where Page and Brin tackled the problem with algorithms, Gross approached it from the business end.

Rather than build his own search engine from scratch, Gross took Inktomi’s engine and introduced a twist: paid search. Like the way companies bought ads in the Yellow Pages, websites could pay for top placement on the results page for a given keyword. This would push down spam results, Gross reasoned, because companies would have an incentive to buy ads for search terms that were actually relevant to their products. Better yet, search ads would be far more cost-efficient than other types of online ads, because advertisers would be paying to reach only those people who were already searching for their products.

To drive home just how efficient these ads could be, Gross came up with an audacious pricing scheme. Instead of paying for page-views—an old-media model that had come to dominate the Web—advertisers would pay only when people actually clicked on their ads. And their placement on the results page would be determined through an auction, so that more desirable keywords would command higher prices, while less common keywords could be had for as little as a penny per click. As a search engine, had nothing on Google. But as a way of making money on searches, it was ingenious.

“The whole point of Internet advertising, I thought, was accountability,” Gross says. “You could measure it, unlike with print ads. But here was everyone still selling ads the old way: buy a bunch of impressions, cross your fingers, and hope it turns out well.”

Google followed the old model when it first dipped its toe into text-based search ads in January 2000. It didn’t work particularly well, admits Jeff Levick, who joined Google’s ad team a year later. (He’s now chief of sales and marketing for Spotify.) “For the first two years of Google we were cold-calling people, trying to get them to buy keywords,” Levick recalls.

Meanwhile, was taking off. It went public in June 1999, and in September 2000 it landed a coveted deal to syndicate its paid search results on AOL. But as Battelle recounts in The Search, such deals seemed to put GoTo’s own homepage in competition with its syndication partners. GoTo’s executives eventually convinced Gross to give up on his vision of making a destination portal in its own right; the company changed its name to Overture in 2001 and focused exclusively on running its ad network.