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Why Google makes everyone else nervous

Firm's ad-based software is changing the media landscape

MOUNTAIN VIEW, Calif. -- Google Inc. first gained notice early in the decade, as a small and quirky start-up with a disarmingly simple Internet search engine and an idealistic slogan, ``Don't Be Evil."

Today the maverick company, adored by online shoppers and Internet surfers, has emerged as one of the most disruptive forces in the business world. Its secret sauce: a technology that lets business customers link targeted ads to search results and Web content.

By rolling out a spate of free search products, from Google Maps to Google News to Google Calendar, the company is doing more than building its consumer base. It's also building an alternative environment for software, advertising, and Internet content that is challenging the business models and eroding the revenue of everyone from publishers to software makers to Internet service providers.

``Google is causing disruption in a variety of areas," said Anthea Stratigos , co founder and chief executive of Outsell Inc., a Burlingame, Calif., research firm. ``It's pushing advertising revenue online. It's creating a model where software can be hosted by ad funding. Because of Google, things that have long been fee-based now have the potential to be free to consumers and supported by ads."

The effect can be seen in falling profits, staff cutbacks, and programming changes in the media industry, but the changes brought about by the Google model may be only beginning. ``As they go forward, you're going to see the corporate jets disappear for the executives of NBC and the Internet service providers," predicted John Katsaros , principal at the Internet Research Group in Los Altos, Calif. ``You're going to see slow, agonizing deaths or reevaluation of businesses."

At a Google press day held earlier this month at the company's Googleplex campus here, the presentations focused almost entirely on new search products and services the company is offering at no charge to consumers: Google Co-Op for specialists, Google Trends for researchers, Google Notebook for people who like to scribble notes.

Google executives avoided talking about their competitors, other than to profess that there is room for more than one company in the expanding Internet market. ``I do believe the winner, or winners if there's more than one, will be those companies that innovate most rapidly," said Eric Schmidt , the company's chief executive.

So far, Google, whose rapid-fire product releases have dazzled and dizzied computer users, has been the clearest winner. At the same time, many of its rivals -- from Microsoft Corp. to traditional print media companies -- have seen their growth rates flattening.

Shares of Google, while down from their peak, have more than quadrupled in the less than two years since its initial public offering, which was a celebrated event from Wall Street to Silicon Valley.

With its profits enjoying double-digit growth, up 26 percent in the first quarter, Google has grown into a financial juggernaut. Last year, its operating income climbed 33 percent to $2 billion, its revenue 92 percent to $6.1 billion, and its employee rolls 88 percent to 5,680.

The once cuddly image of its founders, Sergey Brin and Larry Page , the Stanford University grad students who developed their search technology in dorm rooms and incorporated Google in 1998, has been largely erased by their newfound success and assertiveness.

That assertiveness was notable at the press gathering at Google earlier this month, when Brin addressed his company's concern that Microsoft would use its operating system to unfair advantage by steering customers to Microsoft's search engine. Brin said that Google recognized it was dealing with ``a convicted monopolist" with a history of ``behaving anti competitively."

In lobbying to prevent Internet service providers from charging content companies for access and refusing to apologize for bowing to Chinese government restrictions on Internet content, Google has been demonstrating a greater willingness to throw around its weight in the political arena and put its commercial interests front and center.

Research firms are only now beginning to take the measure of the company's influence. A recent study by Outsell showed that 80 percent of advertisers now use the Internet, with the adoption rate projected to hit 90 percent by 2008. While search engine advertising is expected to increase 26 percent this year, with Google raking in the largest share, spending is projected to grow 2 percent for newspaper and magazine ads and 2.4 percent for radio and television ads.

Similarly, the Google effect has reduced Internet service companies -- who'd once hoped to be gateways to the Internet that profited from Internet services -- to ``pipe companies" that build networks and charge businesses and consumers for access.

And, Google's e-mail, calendar, and word-processing products are pioneering an ad-supported Internet delivery model that threatens the desktop licensing model of Microsoft and other proprietary software companies, and could appeal to their ``enterprise" market of businesses and other organizations. Aiding Google's efforts to deliver robust software on the Internet, and faster search results, is a worldwide network of between 300,000 and 1 million servers, according to analysts' estimates; Google itself declines to specify its number of servers.

Microsoft and Yahoo Inc. are working to counter Google, with Yahoo concentrating more on original content and Microsoft developing its own search capabilities and ad-supported Internet software. But the biggest threat to Google could be the proliferation of local and smaller vertical search engines -- in fields like travel, finance, and retail -- that could offer even more targeted advertising. Many newspapers, among others, are developing local search technology.

``If you want to attack Google, you're more likely to succeed by peeling off searches that are vertically oriented," said Fredrick Marckini , chief executive of search engine marketing firm iProspect of Watertown, a division of London-based Aegis Isobar Worldwide.

Marckini said Google is fighting back by deputizing ``contributors," specialists who can provide niche-oriented searches, and by offering advertisers more information on what people search for.

Google's newest product offerings could be especially attractive to advertisers, said Sapna Satagopan , search analyst for JupiterKagan Inc., a San Francisco research firm. ``Every one of these new releases seems to be going in that direction of creating small groups of consumers so they can offer them to advertisers," Satagopan said.

Robert Weisman can be reached at weisman@globe.com.

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