[17 October 2007]
San Jose Mercury News, Calif. (MCT)
SAN JOSE, Calif.—After Google’s IPO in August 2004, so much money began pouring out of the Mountain View, Calif., company that people started talking about “the Google effect.”
The wealth spread far and wide as Googlers hired maids and nannies, accountants and financial planners. They bid up home prices in Silicon Valley’s most elite ZIP codes and splurged on $15,000 custom bikes and $650,000 boats.
But no one knew how big the Google gusher was - until now. A Mercury News analysis of company documents filed with the Securities and Exchange Commission provides a rough estimate of the wealth that erupted from the famous search engine, spreading throughout the Bay Area and far beyond.
From 2004 through 2006, the most recent data available, Google generated more than $19 billion as employees cashed in stock options, top management sold shares and businesses provided Google with everything from imported olive oil to information technology services.
That’s more than the gross domestic product of countries like Iceland, Panama and Bahrain.
And the total Google effect could have exceeded $50 billion, thanks to the so-called multiplier effect, in which every dollar of spending theoretically creates two or three dollars more of economic activity.
Some part of this money - it’s impossible to know how much - left the Bay Area as employees invested in various financial instruments both in the United States and abroad and the company contracted with far-flung suppliers.
Closer to home, the cash that stayed in California’s Santa Clara, San Mateo, San Francisco and Alameda counties - where the bulk of Googlers live - couldn’t have come at a better time.
Googlers began getting their loot exactly as the rest of Santa Clara County - Silicon Valley’s epicenter - hit bottom after the dot-com bust.
Santa Clara’s labor force shrank to 840,700 - its lowest post-boom level - in April 2005, the same month the lockup that had prevented Google’s executives and employees from selling their shares after the IPO expired.
Google began minting millionaires at a time when a million-dollar paycheck had become something of a rarity there. The California Franchise Tax Board counted only 4,005 tax returns for Santa Clara households earning more than $1 million in 2005 - less than half the number reported five years earlier at the height of the boom.
“It was like they were the only ones keeping the lights on around here,” said Russell Hancock, president, Joint Venture: Silicon Valley Network.
In some cases the Google money was easy to follow. Hugues de Vernou, president of Village Imports in Brisbane, Calif., said he was able to keep his specialty food business going, in part thanks to Google’s food orders. “We are very grateful to have them as a client,” he said. “They are extremely innovative in the technology world and certainly very selective as far as their food.”
Indeed, the Google effect might have been felt as far away as France, where suppliers wrapped up Bucheron and Pont l’Eveque cheese and other delicacies for de Vernou to deliver to Mountain View.
The Google effect also extended well beyond shopping. Jessica Canning, global research director for Dow Jones VentureOne, which tracks equity investments, said Google spurred venture capitalists to invest in information services after funding for the sector collapsed 62 percent from 2001 to 2003, when investment in the sector totaled $972 million. By the end of last year, that figure had risen to $2.4 billion.
In China, Google’s example helped increase the valuation given to Internet advertising company Focus Media Holding and search engine Baidu when they went public a year after Google.
“They clearly were beneficiaries of the Google effect,” said Dan Ahn, a managing director of Woodside Fund.
Privately, Googlers have tried to be their own one-man economic multipliers by funding non-profits, creating family foundations and endowing scholarships at their alma maters.
Olana Hirsch Khan, who resigned from Google in August 2006 to become chief operating officer of Kiva.org, said a number of her friends are focusing their philanthropic efforts abroad. “A dollar goes further overseas,” she said.
Kiva itself offers individuals an easy, Web-based way to make small loans to entrepreneurs in the developing world. So far it has lent $12 million.
One place where Google has had surprisingly little effect is in Mountain View itself, where its headquarters is located. “There are positive impacts; they are just difficult to quantify,” said Bob Locke, finance director of the city of Mountain View.
Google swallowed up commercial real estate, especially along Shoreline Park, helping to cut a vacancy rate of close to 30 percent to the single digits. It underwrote a free citywide wireless network, boosting business for local tech-service firms like ExpressNet and increasing the productivity of the laptop-toting lunch crowd.
But the Internet giant’s famous employee perks - it offers everything from free food to subsidized massages and medical examinations - have meant less business for local merchants and service providers.
When Googlers took a fancy to a local establishment, the effect was not always desirable. Praveen Singha, owner of Zucca, found himself running the equivalent of a culinary school for his neighbor.
“I have lost six chefs in the period of one year,” he said. “The offers from Google are so great I can’t compete.”
Anecdotal evidence suggests the Google effect could be on the wane.
While the value of the company continues to increase, the stock is no longer soaring. Sales growth, while still very strong, falls a bit each quarter, and analysts say the pace of hiring appears to be slowing as well.
After the IPO, Googlers bid up high-end houses in Atherton, one of the most exclusive addresses in California. Lately, they’ve been shopping in the mid-market, buying homes that range from $2 million to $4 million.
“From my involvement in selling homes over $10 million in Atherton in the last 10 months, the buyers in this market were actually venture capitalists, hedge fund executives, bankers and other executives from high-tech companies,” said Hanna Shacham, a real estate agent who specializes in high-end homes.
Some say that the idiosyncratic spending habits of wealthy Googlers could confound efforts to trace the Google effect. A small comic book store not far from the Google campus receives a healthy stream of Googlers on their lunch break, but their purchases at a neighboring Costco and pet supply store are lost in a sea of cash register receipts.
Meanwhile, Charlie Miles, the sales manager at Ferrari at Silicon Valley, said his Google customers have been few and far between. “Maybe they prefer a less conspicuous car,” Miles said.
Or maybe they are just holding out for Tesla Motors’ first zero-emission roadster, due out early next year. That should give economists interested in the Google effect more digits to work out: The electric-car start-up is partly funded by Google co-founders Larry Page and Sergey Brin.