There was a telling moment for Google (GOOG) - Get Report when CEO Eric Schmidt spoke at theBear Stearns Media Conference Wednesday. AnalystAlexia Quadrani lobbed a softball to get thediscussion going: "Where do you see advertisingdollars coming from?"
Without missing a beat, Schmidt responded, "Wedon't really know."
Really? Google is the information company, thehouse of genius engineers who have boldly vowed tobring order to the gray goo of information on theInternet -- and who have done an astonishingly goodjob of delivering on that promise so far. Yet Schmidtwas asking investors to accept the notion that Googledidn't even know how many of its ads were coming fromlongtime Internet advertisers vs. offline advertisers.
Schmidt, who along with founders Larry Page andSergey Brin makes up Google's so-called triumvirate,then launched into a soft-shoe routine about how"people think of Google as an advertising company, butwe're really about return on sales." It was at oncemeaningless -- which company isn't about return onsales? -- and emblematic of Google's insistence ongreeting Wall Street with a shrug.
For now, Wall Street isn't objecting. After all,who is going to complain about a company whose revenuemore than doubled and whose profit grew sevenfold inits most recent quarter?
Google has explicitly encouraged investors to takea long-term view. Yet its tendency to withholdinformation relevant to shareholders is a long-termconcern. When a crisis hits Google -- as it has everyother tech giant, from
--investors who have endured Google's silence in goodtimes will find it hard to shake off the feelingthey're not getting the full story.
"It's not an issue right now because they'reblowing through their numbers.
But Wall Street willclamor for transparency when there's a negative," saysan institutional investor who asked not to be namedand whose fund bought Google shares in the IPO. "If Ihad a company with similar financials that gave moretransparency, would I pay a premium for it? Yes, Iwould."
There's nothing wrong with Google challenging whatmany startups regard as the tyranny of investmentbanks in the underwriting process. The shareholder"Owner's Manual" that Google inserted at the start ofits prospectus was the stuff of legend -- an inspiringblow for tech companies that, although profitable,find the yoke of quarterly earnings and operatingmargins hurt their ability to invest in innovation andplan for long-term growth. It was the first
Securities and Exchange Commission
filingto include the words "Don't Be Evil" -- Google'srallying cry. "We will not shy away from high-risk,high-reward projects because of short-term earningspressure," the S-1 read, causing a thousandentrepreneurs' hearts to skip a beat.
But in playing Blutarsky to Wall Street's DeanWormer, Google has gone too far. Many of the investorsthe company looks down on are also loyal users of thesearch engine. They are the same investors Googlestood up for when it insisted on a Dutch auction IPO.Do they suddenly become evil once they log on to their
accounts? Should they be denied the degreeof fundamental information they are used to receiving from theother companies in which they invest?
Google refuses to offer any guidance on itsearnings numbers, although it's easy to understandwhy: Guiding investors to profit estimates is like theboard game Go -- the rules sound simple enough butturn out to be devilishly complex. Google's response,though, is to address the right problem with the wrongsolution. Withholding guidance makes a stock morevolatile ahead of an earnings report.
"It's not that people need to be spoon-fedguidance, but getting those numbers allows for fullerexpectations of the company," says Mark Mahaney, ananalyst at American Technology Research, which does nounderwriting for companies. "If you don't havevisibility, it generally makes you a little morecautious about the stock."
To see how loath Google is to share information,consider a story that appeared recently in
.Written by longtime Silicon Valley journalist JohnHeilemann, the piece began with an amusing anecdoteabout Page sitting in a plate of creme fraiche beforeoffering new evidence that Google doesn't quite get what itmeans to be a public company.
Heilemann took a tidbit that appeared in
TheNew York Times
a year ago -- that
board member BillCampbell was hired as a Google consultant -- and putit in perspective. Several people quoted, includingGoogle backer Michael Moritz, considered CampbellGoogle's hero and savior -- a mentor to thetriumvirate through a period of rapid growth. CEO Schmidt told the magazine, "Our basic strategy is toinvite him to everything."
A Google spokesman confirmed that Campbell is aconsultant, but declined further comment for therecord.
Securities laws require companies to disclose anyperson who performs policymaking functions, whether aformal officer or not. Campbell was only an adviser onmanaging Google's growth, albeit a powerful one. So hewas likely not making any policy decisions at thecompany. Securities attorneys interviewed said such anarrangement would probably be legal, although veryunusual.
Google investors, of course, welcomed the newsabout Campbell's role -- he is one of the most admiredtech executives around. Which raises a question forGoogle's triumvirate: What's so bad about fulldisclosure? Not as in proprietary technology or futurebusiness strategies, but as in responding to suchbasic investor-type questions about who's mentoringits leaders, what its financial expectations are, howindividual initiatives are faring, and where it'sinvesting the money it raised in its IPO.
Sadly, those weren't the kinds of things Googlewanted to talk about at its first-ever analysts' daylast month, when the company once again took glee inblowing dirt up Wall Street's nose. The CFO, GeorgeReyes, did appear, but only as a sort of emcee for theday. Google's CFO would make no presentation, but in aclever sleight of hand, Google's chef did. Get it?That one was so funny I almost fell over into mycreme fraiche. Still, a company is opening the door tosome dangerous puns when it delivers a cook instead ofan accountant.
In other ways, Google delivered an unconventionalpresentation for analysts: Lots of stuff on thehistory of tech companies and the Internet asextension of the brain, not too much on all that hardmath. To be fair, Reyes discussed some financials onan earnings call a week earlier, but companiescustomarily use analysts' days to give more numbers, notfewer. Instead, investors heard vague comments fromSchmidt like, "We are moving to a Google that knowsmore about you." Great, what about the other wayaround?
Google's silence encourages the kind offaith-based investing that proved deadly in the lastfew years, an arguably reckless approach then and now.But unlike those greedy dot-coms, Google's logicimplies that it's Wall Street that is evil -- all silksuits and slumped shoulders, tittering as they robwidows and step on kittens for fun. But let's say itsinvestors awoke to their shame and gave their sharesback to Google. Would the world be any better off?
Probably not. Beneath Google's attitude towardWall Street lies petulance that Google had to gopublic -- not just to pay off venture investors butbecause private companies need to disclose financialsonce they have more than 500 investors (which Googledid in 2004, thanks to employee options). If Page andBrin were really serious about not playing theguidance game, they could have stayed private. Butthat would have meant all the transparency of a publiccompany without any of the financial perks.
In other words, Page, Brin and Schmidt have noproblem holding a collective $17 billion stake thanksto Google's public status, but they will do everythingthey can to keep other shareholders from seeing howthe sausage is made. And yet on Wall Street, aselsewhere, increased transparency has proven a virtuetime and again.
It's Google's fabulous joke on the rest of us: Thecompany making the world's information "universallyaccessible" won't allow you to have much informationabout itself. So let's name Google's holy trinity forwhat it is: a bunch of hypocrites. Genius hypocrites.Unconventional hypocrites. Revolutionary hypocrites.But hypocrites all the same.
For Google, if for nobody else, hypocrisy isn'tnecessarily evil.