For months now, it’s been hard to avoid hearing about Google. Not just about Google’s wildly popular Web-searching technology, or the upcoming IPO that bucks Wall Street conventions, or the charming young founders and their righteous motto, “Don’t Be Evil.” But also about Google as a symbol of Silicon Valley’s resilience, Google as the spark that could ignite yet another technology boom.
The glowing media coverage is a sure sign that at least one part of the valley’s modus operandi survived the tech downturn in fine shape: the hype machine. Run by savvy financiers, clever marketing executives, story-hungry journalists and quote-producing pundits, the hype machine functions as a cheerleading squad that helps generate a frenzy of, yes, irrational exuberance. Over-the-top promotion is now as much a part of the fabric of the valley as technology itself — and yet, as Google is all too likely to demonstrate, it’s also a dangerous phenomenon that creates expectations that are almost always left unfulfilled.
With news last week that Google’s IPO is imminent, the hype machine is in overdrive.
Hype has its roots in the Janus-faced nature of Silicon Valley ideology. The valley is a place of great idealism, driven by the belief that innovation and great engineering can make the world a better place. Yet it is also a place of dispiriting greed, motivated mainly by the prospect of the “big score.”
When these two threads come together — the Google founders insist their company is all about doing the right thing, even as they prepare to pocket more than $100 million apiece in the IPO — it’s hard for even the most sober-minded observers to avoid being swept up in the enthusiasm. And the fact that so many in the valley have an interest in the success of new technology companies helps turn people into believers.
The ideological foundation of hype — engineering idealism combined with entrepreneurial capitalism — is in some ways simply an expression of America’s secular religion. In this age of fundamentalism and a president who values theology over science, it’s sometimes hard to remember that America was born of the Enlightenment belief in better living through technological progress.
Silicon Valley is what it is today, both literally and symbolically, because its denizens have learned how to tap the dimension of the American psyche that worships both innovation and the wealth it can bring.
In Silicon Valley’s early days, selling the valley was not entirely a conscious process: Bill Hewlett and David Packard were not exactly self-promoters. Still, as early as the late 1960s, the idea that a bunch of clever engineers and freewheeling entrepreneurs were turning California orchards into citadels of world-beating technology was beginning to capture the public imagination.
Apple of valley’s eye
But it was Apple Computer, with its appealing whiz kids and a machine that would bring computers to the masses, that ushered in the notion of Silicon Valley as a story. With Apple, there were magazine covers, TV appearances and a lionization of the young entrepreneurs. There was PR guru Regis McKenna, honing techniques that would become staples for a generation of publicists: the strategic leak (give an exclusive interview in the hopes of getting a long story) and the “embargoed” product review (you can see the computer early but only if you promise not to report about it until we say you can).
And most important, with Apple came a realisation on the part of Wall Street that there was money to be made in selling the promise of technology to the people. The December 1980 Apple offering was co-managed by Morgan Stanley – the first IPO deal in many years, noted the New York Times, for “a prestige house that deals only with such blue-chip clients as American Telephone and Telegraph, J.P. Morgan and Standard Oil.”
The hype machine really found its audience in the 1980s, when large numbers of individual investors moved into the stock market. By the early 1990s, the business pages were the biggest growth areas in newspapers, and the tech beat – long a dreaded backwater – had become sexy. Old-line technology trade publications were joined by a rash of new titles aimed at the burgeoning audience of tech enthusiasts.
While some might say it’s the media themselves that are responsible for hyping the latest and greatest from Silicon Valley, the reality is much more nuanced. Journalists and news organisations certainly reap psychic and financial rewards from being first – or best – in getting information to their audiences. When it comes to covering business, the press tends to get excited about transactions with multi-billion-dollar figures attached. Quotable and photogenic CEOs – think Steve Jobs, or Marc Andreessen – make good copy, too.
But the media are as much a mirror as anything else, and they reflect the careful effort – and considerable amount of money – that companies often spend in hopes of establishing their importance.
When Jobs’ second company, the ill-fated Next Computer, was ready to roll out its product in the late 1980s, it rented Davies Symphony Hall in San Francisco as part of its effort to ensure that the machine was greeted with sufficient grandeur. A few years later, start-ups General Magic and 3DO waged carefully orchestrated public-relations campaigns, hinting that they had revolutionary technology behind the curtain but saying little about it – until they were able to reveal the much-anticipated details via front-page stories in the Wall Street Journal. Both companies later went public, but ultimately failed.
Highs of dot-com era
Hype reached its apogee during the dot-com era, when no claim about the revolutionary importance of a company or product seemed too extravagant. An outfit like Webvan could promise to change fundamentally the way people buy their groceries. Sporting the right backers, it could translate that promise into hundreds of millions of dollars in investment, which in turn gave credibility to its claims and enabled it to generate the favourable publicity that would help raise even more money.
Even small-time dot-coms readily spent tens of thousands of dollars per month for public-relations agencies that might help them get their stories heard — and thus attract the money, the talent and the business partners they would need to succeed. (Unfortunately, the hype couldn’t deliver the one thing every business really needs: customers. Webvan went bankrupt.)
As editor in chief of the now-defunct Industry Standard – a print and online publication launched in 1998 to cover what we called the “Internet economy” – I learned from experience how hype can generate its own momentum. We sought from the beginning to take a tough, critical stance toward the inflating Internet bubble, and to point out that expectations were getting way ahead of themselves.
Even so, the Standard was also part of the hype. The very fact that we had a lot of advertising and a large staff reporting on the Internet economy validated the importance of the phenomenon, no matter what we were actually saying in the stories. Our weekly staff beer bashes grew into elaborate corporate-sponsored parties. At our conferences, companies paid as much as $150,000 for the privilege of wining and dining the assembled executives and, in one case, entertaining them with a private fireworks display.
While the ugly end of the dot-com boom was an object lesson in the dangers of hype, the Google phenomenon shows that surprisingly little has changed. Google is ripe for hype. It’s a highly profitable paragon of engineering excellence whose product is used by tens of millions of people. Its founders, one an immigrant no less, are in their very early 30s. It has two of the shrewdest VCs in the valley behind it: John Doerr of Kleiner Perkins and Mike Moritz of Sequoia Capital. And it’s managed to infuse even the IPO itself with higher principles by insisting on an auction format that diminishes the role of investment bankers.
Google would say that, as a company, it is not deliberately feeding the frenzy. Yet one of the paradoxes of the hype dynamic is that even actions ostensibly meant to dampen enthusiasm end up adding to it. Journalists consider Google a highly secretive company, and yet its reluctance to share information only makes people more curious. Its bold statements about managing without regard for quarterly profits and stock price serve only to increase investor interest in the shares. Its founders’ self-consciously idealistic stance plays perfectly to valley true-believers who want to do good even as they’re doing well.
But with veteran spin meisters like Doerr and CEO Eric Schmidt on board, it’s hard to believe there isn’t more than a little calculation behind Google’s flawless public positioning. No matter how good your technology or how fat today’s profits, pulling off an IPO that values your company at $30 billion is not a simple feat. Hype is part of the recipe.
The media, including this newspaper, have played to the script. The Mercury News devoted two-thirds of its April 30 front page to Google’s announcement that it would go public. There were six stories that day, replete with elaborate graphics and photos, three more stories the following day and two more the day after that. BusinessWeek, Fortune and Newsweek all featured Google on their covers over the past year. The sheer volume and prominence of the coverage has often overshadowed cautionary notes sounded in the stories.
And of course the Net itself is now a medium that feeds hype, providing a megaphone for anyone who might want to add to the buzz about a product or company. My friend and former Industry Standard CEO John Battelle is writing a book about Internet search, and his Searchblog has become a must-read for those interested in next-generation Internet technologies. John’s writing is sharp and sophisticated, and he isn’t setting out to stoke the hype. Yet the very existence of his blog can have the effect.
So what’s the harm in all this? If hype spurs investment in technology and innovation, isn’t that a good thing? Yes and no. Hype can help a company attain the momentum it needs to succeed. But it also drives expectations far beyond what can usually be fulfilled, and that sets the stage for an inevitable and painful reversal – as many a dot-com veteran and money-losing tech investor can testify.
In the case of Google, expectations are already way out of hand. The valuation being mooted for the company – $29 billion to $36 billion – basically assumes that it will remain the dominant search service, that its core business will remain highly profitable, and that a wide range of unproven new services will soon contribute substantially to the bottom line. Those are brave assumptions in a market where Microsoft, Yahoo and many other large rivals are just gearing up.
Banking on Hope
Further, even though Google is making itself look good with its IPO auction, it is also defying all good-corporate-governance wisdom by establishing separate share classes to keep control in the hands of the founders. It’s possible they will prove to be as brilliant at building and running a large public company as they have been at developing an effective search engine. But market leadership, technological innovation, ideological purity and huge profits all at the same time?
The notion that Google will somehow “re-ignite the boom” also has more to do with hope and belief than economic reality. The valley’s cycles are driven by a complicated set of factors; boom times happen when new technologies, consumer demand, inexpensive capital and other forces are all aligned. If a strong Google IPO encourages other IPOs, and thus encourages VC investments that are premised on the possibility of an IPO, all that has been “ignited” is another speculative bubble.
Silicon Valley ideology can be self-reinforcing: As long as everyone has faith, all the dreams can come true, at least for a little while. But surely, when it comes to Google, the singular lesson of the recent past applies: Don’t believe the hype.