Should Google blame Foot in Mouth disease, or Evil Bankers?

Analysis Thanks to a cocktail of junk science and blind faith, techno-utopians love to believe that markets are "self-correcting". Only this doesn't apply to the stock market this week, they now tell us. Google's admirers are determined to believe that Wall Street has somehow conspired to wreck the company's initial public offering.

But there's no mystery why Google's flotation failed to woo the public. The tactics that worked so successfully in dazzling an audience of technophiles have instead repelled ordinary investors.

Remember that Google's founders needed to convince you that buying stock would be more profitable for you than keeping the money under the mattress, or in a bank. Instead, potential investors have been exposed to nightly images of Google staff riding around at work on scooters, hearing about the founders' desires to build space elevators or chip implants, and learning about an auction process so complicated that it requires a PhD in mathematics to understand. No wonder the public stayed away. It's too clever by half.

Einstein needed: what Google told investors

There may be many exceptions. A sophomore student named Violet who appeared on BBC Radio 5 this week had never bought shares before, she said, "but when I heard their motto of Don't Be Evil I wanted to be part of something Good." Clearly she's an ideal candidate for the Google IPO, but there weren't enough like her to prevent the guidance price being reduced this week. Undoubtedly the auction mechanism must take much of the blame - and while the founders' intentions may have been noble, the execution was terrible. Almost everyone, except the algorithm-loving founders, now accepts this.

It would be nice to think that demand for shares was lower than expected because investors were wary of the widely criticized two-tier share structure, which assigns the risk but no rights to Class B shareholders. Finance professor Irv DeGraw in USA Today characterized it as "We, not you people, will have a say in how to run the company - Just give us your money." But in reality short-term investors don't care, so long as they can cash in. It was the long-term investors, the very people who Google in its prospectus said it wanted to attract, who were scared away too.

Why?

Again, the bad publicity seems absurd. GOOG is a very successful business and even the most pessimistic observers predict continuing growth for the next three or four years. The classified online market grew 40 per cent last year, and even with tough competition from Microsoft, Yahoo! and AOL, it would take a mighty stumble by Google to fail. But as one analyst noted, in order to justify even the revised valuation of $24 billion, Google would have to post 30 per cent revenue growth and 32 per cent margin for the next fifteen years.

Kooky comments, again repeated in the Playboy interview, might not have done enough damage on their own. But when set alongside a number of mishaps, it appears that the founders' minds are elsewhere.

The anecdotal impression of a company in chaos, reported last October, has been confirmed by a number of instances where Google failed to do due diligence. It neglected to register the Gmail trademark worldwide, failed to appreciate that people might find it creepy, and most tellingly, admitted that it had failed to account for thousands of shares given to employees, contractors and pals. Google might even lose the google.com domain name. Most critically, and this drew remarkably little attention, Google now depends on its main rival Yahoo! for its money-making classified ad technology, settling a lawsuit from Overture two weeks ago by taking out a license. Google was revealed to be not quite as clever as the publicity (with all those Segway-riding PhDs) has suggested. Would Yahoo! or Microsoft have committed such gaffs?

According to the conspiracy theory, Google offended institutional investors because the Dutch auction method deprived them of the payola they were used to getting from the crony capitalism days of the dot.com boom. But imputing their motives does not mean that they're wrong.

Regardless of how the stock performs today, erasing the memory of the mishaps will take some time; yesterday's boy wonders have become today's space cadets.

We'll examine Google's long-term prospects in another story, but they're simply the same problems that effect every Internet ad broker and every search engine too. A search engine, by definition, is not a destination. And in ten years time the public portions of world wide web - which Google relies on for information right now - may be unrecognizable. ®

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