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The Goods on Google – A Few Facts From Their SEC Filing
By Jim Hedger, StepForth News Editor, StepForth Placement Inc. (c) 2006

When the management team at Google decided to take the company
public in August 2004, they made the decision with the knowledge
that being a publicly traded company would force them to open
their doors to public scrutiny. Before their IPO, 18-months ago,
Google was, for all intents and purposes, a shuttered shop from
which light rarely leaked.

Now that Google stock circulates on the open market, US law
requires them to file an annual report (Form 10-K) and quarterly
reports (Form 10-Q) with the Securities and Exchange Commission
(SEC). These reports are made available to the public by the SEC
and can also be found in Google's Investor Relations Center
(http://investor.google.com/). As a result of these reports,
Google is no longer able to hold a wealth of information about
it or its business as secrets.

Google's 2005 Annual Report (http://www.sec.gov/Archives/edgar/
data/1288776/000119312506056598/d10k.htm) (Form 10-K) was filed
yesterday, making it immediately available to the general public.
Weighing in at 103 pages in 10-point font, the report contains a
great deal of information about the business of being Google,
and offers a glimpse of how Google sees itself.

Some of the information contained in the report is trivial. For
instance, did you know that Google leases approximately 1.3
million square feet of office space in Mountain View California?
It owns a further 644,000 square feet of building space near its
Headquarters at 1600 Amphitheatre Parkway, Mountain View,
California 94043.

The firm also leases office and research space in; Amsterdam,
Ann Arbor, Atlanta, Bangalore, Beijing, Belo Horizonte, Boston,
Cambridge, Chapel Hill, Chicago, Copenhagen, Dallas, Denver,
Detroit, Dublin, Duesseldorf, Frankfurt, Hamburg, Hong Kong,
Hyderabad, Irvine, Istanbul, Kirkland, London, Madrid,
Melbourne, Mexico City, Milan, Montreal, Mountain View, Mumbai,
Munich, New York, Oslo, Paris, Rome, Santa Monica, Sao Paolo,
Seattle, Seoul, Shanghai, Stockholm, Sydney, Tel-Aviv, Tokyo,
Toronto, Trondheim, Warsaw, Washington D.C. and Zurich. Its
datacenters are located in the United States, the EU and Asia.

Other pieces of information in the report are already well
known. You likely already knew that Google's URL is
www.google.com and that their mission is "organize the world's
information and make it universally accessible and useful."

If you don't know this already, you should know that Google says
its "... search results will be objective and we will not accept
payment for inclusion or ranking in them." It also states,
"Advertisements should not be an annoying interruption. If any
element on a search result page is influenced by payment to us,
we will make it clear to our users." [Editors Note: Don't let
anyone tell you, (or sell you), otherwise.]

There is a fair amount of information in the report relevant to
SEOs and other search marketers. Ten pages of the report (pages
6 – 16) are dedicated to detailing how the various facets of
Google's search engine work and how its component parts
function along side each other. While it does not spell out the
exact ranking formulas, a close read of the lengthy document is
like a survey course in University. For some it will be an
education, for others a reiteration of knowledge they already
carried.

Starting with a short description of the 33 unique search
applications available from the Google Home (http://www.google.com/)
and Services (http://www.google.com/options/) pages, the report
offers details on most of the dozens of software products and
packages Google offers. The report separates various tools and
appliances into several categories, in order to coherently
present the vast array of search tools and features offered by
Google.

The specialized features included under the Google Web Search
category (pg. 6) include; Advanced Search, Spell Checker, Web
Page Translation, Stock Quotes, Street Maps, Calculator,
Currency Conversions, Word or Phrase Definitions, Phone Book,
Search by Number (phone, FedEx, Vehicle ID, etc...), Travel
Information, Cached Links, Movie Information (by US zip code),
Music Information, Weather, and Q & A. This section also notes
that, when relevant to the search query, News, Product
(Froogle), Local, Image, Book, and Groups results might appear
above, alongside or integrated with, general search results.

The Web Search category also offers a short explanation of
Google News, Local, Froogle and Desktop.

The next category in the report is noted as Web and Search
Content (pg. 7). It lists short descriptions of Google Scholar,
Book Search, Google Base, Google Video, Personalized Search, the
Personalized Homepage, Google Alerts, the Google Directory, and
Music Search.

Following search content is Communications and Collaboration
(pg. 8), under which Gmail, orkut and Blogger are noted.

The report continues with Downloadable Applications (pg. 8) and
includes detailed descriptions of Google Toolbar, Google Earth,
Picasa, and Google Pack. Google Mobile and Google Local for
Mobile are included in a short section under the header Mobile
(pg. 9).

The next section in the report covers Google Labs (pg. 9) and
offers short descriptions of some of the projects currently
underway in the Labs. The projects mentioned include; a wireless
platform for Froogle, Public Transit information (testing in
Portland, OR), a taxi location service called Ridefinder, more
Firefox extensions, and the continuing work on Google Web
Accelerator.

The majority of the next three pages, (pgs. 10, 11 & 12), of the
report are dedicated to Google AdWords and AdSense, offering
short but highly detailed explanations of the many features and
tools included in the two paid-advertising packages. This is a
must-read section for anyone interested in AdWords or AdSense,
including experienced search marketers. To see all the features
listed in one place is a good reminder of how Google's paid
advertising machine works and why it works so well.

The last section addressing specific products or services covers
Google's Enterprise search applications (pg 12), Google Search
Appliance and Google Mini.

The next four pages give greater details on how Google sorts and
ranks documents in its index, as well as a light shot at the SEO
community. Here are a few excerpts.

On Organic (free) Search Listings:
Our web search technology uses a combination of techniques to
determine the importance of a web page independent of a
particular search query and to determine the relevance of that
page to a particular search query. We do not explain how we do
ranking in great detail because some people try to manipulate
our search results for their own gain, rather than in an attempt
to provide high-quality information to users.

Ranking Technology. One element of our technology for ranking
web pages is called PageRank. While we developed much of our
ranking technology after Google was formed, PageRank was
developed at Stanford University with the involvement of our
founders, and was therefore published as research. Most of our
current ranking technology is protected as trade-secret.
PageRank is a query-independent technique for determining the
importance of web pages by looking at the link structure of the
web. PageRank treats a link from web page A to web page B as a
"vote" by page A in favor of page B. The PageRank of a page is
the sum of the PageRank of the pages that link to it. The
PageRank of a web page also depends on the importance (or
PageRank) of the other web pages casting the votes. Votes cast
by important web pages with high PageRank weigh more heavily and
are more influential in deciding the PageRank of pages on the
web.

Text-Matching Techniques. Our technology employs text-matching
techniques that compare search queries with the content of web
pages to help determine relevance. Our text-based scoring
techniques do far more than count the number of times a search
term appears on a web page. For example, our technology
determines the proximity of individual search terms to each
other on a given web page, and prioritizes results that have the
search terms near each other. Many other aspects of a page's
content are factored into the equation, as is the content of
pages that link to the page in question. By combining query
independent measures such as PageRank with our text-matching
techniques, we are able to deliver search results that are
relevant to what people are trying to find.

On AdWords:
We use the Google AdWords auction system to enable advertisers
to automatically deliver relevant, targeted advertising. Every
search query we process involves the automated execution of an
auction, resulting in our advertising system often processing
hundreds of millions of auctions per day. To determine whether
an ad is relevant to a particular query, this system weighs an
advertiser's willingness to pay for prominence in the ad
listings (the cost-per-click or cost-per-impression bid) and
interest from users in the ad as measured by the click-through
rate and other factors. Our Quality-based Bidding system also
assigns minimum bids to advertiser keywords based on the Quality
Scores of those keywords—the higher the Quality Score, the lower
the minimum bid. The Quality Score is determined by an
advertiser's keyword clickthrough rate, the relevance of the ad
text, historical keyword performance, the quality of the ad's
landing page and other relevancy factors.

On How Google Charges Advertisers per Click:
The AdWords auction system also incorporates the AdWords
Discounter, which automatically lowers the amount advertisers
actually pay to the minimum needed to maintain their ad
position. Consider a situation where there are three
advertisers - Pat, Betty and Joe - each bidding on the same
keyword for ads that will be displayed on Google.com. These
advertisers have ads with equal click-through rates and bid
$1.00 per click, $0.60 per click and $0.50 per click,
respectively. With our AdWords discounter, Pat would occupy the
first ad position and pay only $0.61 per click, Betty would
occupy the second ad position and pay only $0.51 per click, and
Joe would occupy the third ad position and pay the minimum bid
of $0.01 per click.

On AdSense:
Our AdSense technology employs techniques that consider factors
such as keyword analysis, word frequency, and the overall link
structure of the web to analyze the content of individual web
pages and to match ads to them almost instantaneously. With this
ad targeting technology, we can automatically serve contextually
relevant ads. To do this, Google Network members embed a small
amount of custom HTML code on web pages that generates a request
to Google's AdSense service whenever a user views the web page.
Upon receiving a request, our software examines the content of
web pages and performs a matching process that identifies
advertisements that we believe are relevant to the content of
the specific web page. The relevant ads are then returned to the
web pages in response to the request. We employ similar
techniques for matching advertisements to other forms of textual
content, such as email messages and Google Groups postings. For
example, our technology can serve ads offering tickets to fans
of a specific sports team on a news story about that team.

Another highly interesting section of the report highlights risk
factors related to the business (pg. 20). In it, Google
identifies Microsoft and Yahoo as "significant competition".

"We face formidable competition in every aspect of our business,
and particularly from other companies that seek to connect
people with information on the web and provide them with
relevant advertising. Currently, we consider our primary
competitors to be Microsoft Corporation and Yahoo! Inc.
Microsoft has announced plans to develop features that make web
search a more integrated part of its Windows operating system or
other desktop software products. We expect that Microsoft will
increasingly use its financial and engineering resources to
compete with us. Both Microsoft and Yahoo have more employees
than we do (in Microsoft's case, approximately 11 times as
many). Microsoft also has significantly more cash resources than
we do. Both of these companies also have longer operating
histories and more established relationships with customers and
end users. They can use their experience and resources against
us in a variety of competitive ways, including by making
acquisitions, investing more aggressively in research and
development and competing more aggressively for advertisers and
web sites. Microsoft and Yahoo also may have a greater ability
to attract and retain users than we do because they operate
Internet portals with a broad range of content products and
services. If Microsoft or Yahoo are successful in providing
similar or better web search results compared to ours or
leverage their platforms or products to make their web search
services easier to access than ours, we could experience a
significant decline in user traffic. Any such decline in traffic
could negatively affect our revenues."

The report also notes that Google is competing with the
traditional media for a share of advertising dollars noting that
Google expects the majority of ad-spending to continue to be
concentrated in the traditional media.

Lastly, the report reiterates CFO George Reyes' comments earlier
this month where he noted the unprecedented revenue growth rates
Google has experienced over the past three years are likely to
slow. The report says, "We expect that our revenue growth rate
will decline over time and anticipate that there will be
downward pressure on our operating margin. We believe our
revenue growth rate will generally decline as a result of
increasing competition and the inevitable decline in growth
rates as our revenues increase to higher levels." This does not
mean Google is going to stop making money or showing a profit
every quarter. It does demonstrate that Google recognizes its
market is maturing and serves as a gentle correction to
outrageous investor exuberance.

The remainder of the document outlines Google's business
structure, revenue figures from 2005 and other financial data.
It is a very long and detailed read but it tells a remarkable
story. Going in to 2006, Google is in excellent shape though the
report does suggest it is wary of several market and competitive
factors. As a chapter in the history of Google, the 2005 SEC
filing (http://www.sec.gov/Archives/edgar/data/1288776/
000119312506056598/d10k.htm) is a worthy weekend read.
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Jim Hedger is a writer, speaker and search engine marketing
expert based in Victoria BC. Jim writes and edits full-time for
StepForth and is also an editor for the Internet Search Engine
Database. He has worked as an SEO for over 5 years and welcomes
the opportunity to share his experience through interviews,
articles and speaking engagements. He can be reached at:
jimhedger@stepforth.com
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