By the summer of 2000, Google had a magnificent problem. Its search engine was the best on the web, users adored it, and it was serving hundreds of millions of queries. It also had almost no way to turn any of that into money. Investors had handed the company $25 million the year before on little more than faith, and that faith was starting to look expensive. The founders needed a business model — and they needed one that wouldn’t ruin the very thing people loved.
The Founders Who Hated Ads
The irony is hard to overstate. In their 1998 Stanford paper describing Google, Larry Page and Sergey Brin had included a now-famous appendix warning that “advertising-funded search engines will be inherently biased towards the advertisers and away from the needs of consumers.” They believed a search engine that made money from ads would inevitably be tempted to sell out its results. So when Google finally turned to advertising, it did so warily, with a set of rules designed to keep the disease from spreading to the search results themselves.
The first attempt, launched on October 23, 2000, was called AdWords. It debuted with roughly 350 advertisers. But this early version was clumsy by later standards. Ads were sold the old-fashioned way — priced by CPM, or cost per thousand impressions, the same model magazines and TV had used for decades. Google’s own staff helped set up campaigns. Advertisers paid to be seen, whether or not anyone clicked. It made some money, but it wasn’t the machine that would one day fund the entire company.
A Better Idea Was Already Out There
The breakthrough concept didn’t originate at Google. It came from a company called GoTo.com, an Idealab spin-off founded by Bill Gross. Back in February 1998, GoTo had done something radical: it let advertisers bid in an auction for placement on search results, and charged them only when a user actually clicked — pay-per-click. By July 1998, some advertisers were paying up to a dollar a click. GoTo (soon renamed Overture) had proven that paid search could work.
But GoTo had a flaw. Because slots simply went to whoever bid the most, the top results were often the ads with the deepest pockets, not the ones most useful to the searcher. Google looked at this model, admired the auction, and asked a sharper question: what if relevance were built directly into the price?
AdWords Select: Where Money Met Merit
In February 2002, Google unveiled a completely reworked, self-service system: AdWords Select. It kept the auction and the pay-per-click billing, but added one deceptively simple twist. An ad’s position wasn’t determined by its bid alone. Instead, Google ranked ads by the bid multiplied by the ad’s click-through rate — a rough measure of how relevant real users found it.
The consequences were profound. An advertiser bidding $2.00 whose ad almost nobody clicked could be beaten by an advertiser bidding just $1.00 whose ad users actually wanted. Relevance now literally paid. And because Google charged per click, a more relevant ad — one that got clicked more often — generated more revenue per impression than an irrelevant one ever could. The company had found the rarest thing in business: an incentive structure where doing right by the user and making money pointed in the same direction.
Google also borrowed the elegant logic of a second-price auction: winners generally paid just one cent more than the bid below them, rather than their full bid. That reduced the incentive to game the system and made advertisers comfortable bidding what a click was truly worth. The whole thing ran itself — a small business in Ohio could sign up, type in a credit card, and be running keyword ads within minutes, with no salesperson involved.
The Money Finally Arrived
The results were staggering. Google’s revenue climbed from about $86 million in 2001 to roughly $440 million in 2002, and then to nearly $1.5 billion in 2003 — the overwhelming majority of it flowing through AdWords. A company that two years earlier had no real business model was now not just profitable but a cash machine, and it had gotten there without cluttering its clean search page or corrupting its results. The ads sat off to the side, clearly labeled, sold by a self-running auction.
There would be a price of a different kind. Overture, watching Google adopt an auction it had pioneered, sued for patent infringement. The dispute was settled in August 2004, on the eve of Google’s IPO, when Google issued 2.7 million shares to Yahoo, which by then owned Overture. It was a small toll for the invention that would underwrite everything Google built next.
AdWords didn’t just save Google. It quietly rewrote the economics of the entire internet, proving that attention could be auctioned, measured, and sold at planetary scale. The founders who once feared advertising had built the most profitable advertising engine in history.
Next time: with money finally pouring in, Google goes on a hiring spree and builds a headquarters unlike any the corporate world had seen. Welcome to the Googleplex.
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