Ben's News

Thursday, June 21, 2007

At Wal-Mart, a Back Door Into Banking(NYTimes, 6/21/07)

June 21, 2007
At Wal-Mart, a Back Door Into Banking
By MICHAEL BARBARO and ERIC DASH
Wal-Mart failed to get approval for a bank. But the giant discount chain is effectively building one anyway.
Wal-Mart said yesterday that it would rapidly expand the financial services offered in its vast network of stores, extending the reach of its retailing empire into its shoppers’ wallets and the traditional turf of the American banking industry.
Over the next year, the company plans to introduce a prepaid debit card, intended for low-income consumers, and install money centers — which currently offer check cashing, bill paying and money order services — into at least 1,000 stores, up from 225 now.
The moves are seen as a precursor to even wider offerings, like mortgages and home equity loans, which could turn Wal-Mart into a significant force in the banking world. Jane J. Thompson, the president of Wal-Mart financial services, called the prepaid cards and money center services “foundational products” that the retailer would build upon. “Our concept is to go up the credit ladder of financial services,” she said in an interview.
The introduction of such services is something of an end run around the federal government, which was considering Wal-Mart’s application to open a bank last year when the retailer withdrew its bid. The new products, like the prepaid debit card, will be offered through third-party partners, allowing Wal-Mart to sell banklike services without a government license.
Given Wal-Mart’s penchant for squeezing costs out of every business it enters — from changing oil to dispensing prescription drugs — the move is expected to jolt the financial services industry.
With plans for 875 new money centers by the end of 2008, Wal-Mart’s presence would be roughly equivalent to Citibank’s in the United States, and its daily foot traffic would dwarf that of most credit unions, check-cashing outlets and convenience stores. While it may not immediately threaten those businesses, Wal-Mart’s pricing power and proximity may give it an advantage in serving the tens of millions of consumers who do not have a checking account or are unlikely to set foot in a bank.
At the same time, the moves could help bolster the retailer’s sagging sales by giving low-income customers, who represent much of its business, another reason to shop at its stores. “The logic behind a lot of these services is to increase traffic and do it in a way that puts money in people’s hands,” said Andrew Dresner, a payments industry consultant at Oliver Wyman Financial Services. “You give them a couple hundred dollars,” when they cash their paycheck, “and they will buy other things.”
But the services themselves will also aid Wal-Mart’s bottom line. Ms. Thompson said that Wal-Mart’s financial services products provide “healthy margins,” and that she expects the overall business to grow 30 to 40 percent over the next year.
Much of what Wal-Mart announced yesterday will be directed at consumers who do not use banks. Wal-Mart says, for example, that 20 percent of its customers — about 27 million people — do not have checking accounts. The so-called Wal-Mart Money Card, to be issued with GE Money, a division of General Electric, would allow customers to transfer their paychecks directly onto their cards and make purchases at any retailer that accepts Visa cards. It will also allow them to check their balances online or on mobile phone, pay certain bills or withdraw cash from A.T.M.’s.
The prepaid card will initially cost $8.95, and comes with a $4.95 monthly maintenance fee. Cash can be loaded on the card free by cashing a payroll or government check at Wal-Mart or having the money directly deposited; otherwise, cardholders must pay $4.64 to reload it.
Those without a bank account can “finally take advantage of more mainstream financial services,” Ms. Thompson said. It also could position the retailer to offer new services, like an interest-bearing savings feature that Ms. Thompson said Wal-Mart was considering.
Analysts said there was ample evidence that Wal-Mart would lower the costs of banking in the United States. The chain has already cut the cost of cashing checks by 50 percent, and its financial services saved customers $245 million last year, according to company executives.
Wal-Mart has never hidden its banking ambitions, but it has arguably masked them from time to time. In 2005, Wal-Mart said it would seek permission to open a bank in Utah that would process credit and debit card transactions for its 4,000 American stores. At the time, it vowed that it would never use the bank to enter the consumer financial services business.
Nevertheless, opposition to its plans, which required the approval of federal regulators, swelled. Dozens of banking and corporate watchdog groups testified at hearings outside Washington.
In mid-March, Wal-Mart abruptly abandoned those plans. Instead, company executives said they would begin aggressively rolling out new financial products through third-party partners. Wal-Mart already offers a Discover credit card (through a similar partnership with General Electric) and money transfer services (through a partnership with MoneyGram.) Now, many in the financial industry say that mortgages and other types of consumer loans may be next.
Although Wal-Mart would still be barred from collecting customer deposits, the new services would effectively allow the retailer to offer its customers a small suite of financial products — just like a credit union or small local bank.
Of course, opposition may well re-emerge. Ronald K. Ence, vice president for Congressional relations at the Independent Community Bankers of America, a trade group, said Wal-Mart’s intentions suggest that the company misled the public when it said repeatedly that it did not plan to enter the consumer banking business.
“Clearly this was their intention all along,” he said. “The proof is in the pudding.”

Tuesday, June 19, 2007

Online Sales Lose Steam (NYTimes, 6/17/07)

June 17, 2007
Online Sales Lose Steam
By MATT RICHTEL and BOB TEDESCHI
SAN FRANCISCO, June 16 — Has online retailing entered the Dot Calm era?
Since the inception of the Web, online commerce has enjoyed hypergrowth, with annual sales increasing more than 25 percent over all, and far more rapidly in many categories. But in the last year, growth has slowed sharply in major sectors like books, tickets and office supplies.
Growth in online sales has also dropped dramatically in diverse categories like health and beauty products, computer peripherals and pet supplies. Analysts say it is a turning point and growth will continue to slow through the decade.
The reaction to the trend is apparent at Dell, which many had regarded as having mastered the science of selling computers online, but is now putting its PCs in Wal-Mart stores. Expedia has almost tripled the number of travel ticketing kiosks it puts in hotel lobbies and other places that attract tourists.
The slowdown is a result of several forces. Sales on the Internet are expected to reach $116 billion this year, or 5 percent of all retail sales, making it harder to maintain the same high growth rates. At the same time, consumers seem to be experiencing Internet fatigue and are changing their buying habits.
John Johnson, 53, who sells medical products to drug stores and lives in San Francisco, finds that retailers have livened up their stores to be more alluring.
“They’re working a lot harder,” he said as he shopped at Book Passage in downtown San Francisco. “They’re not as stuffy. The lighting is better. You don’t get someone behind the counter who’s been there 40 years. They’re younger and hipper and much more with it.”
He and his wife, Liz Hauer, 51, a Macy’s executive, also shop online, but mostly for gifts or items that need to be shipped. They said they found that the experience could be tedious at times. “Online, it’s much more of a task,” she said. Still, Internet commerce is growing at a pace that traditional merchants would envy. But online sales are not growing as fast as they were even 18 months ago.
Forrester Research, a market research company, projects that online book sales will rise 11 percent this year, compared with nearly 40 percent last year. Apparel sales, which increased 61 percent last year, are expected to slow to 21 percent. And sales of pet supplies are on pace to rise 30 percent this year after climbing 81 percent last year.
Growth rates for online sales are slowing down in numerous other segments as well, including appliances, sporting goods, auto parts, computer peripherals, and even music and videos. Forrester says that sales growth is pulling back in 18 of the 24 categories it measures.
Jupiter Research, another market research firm, says the growth rate has peaked. It projects that overall online sales growth will slow to 9 percent a year by the end of the decade from as much as 25 percent in 2004.
Early financial results from e-commerce companies bear out the trend. EBay reported that revenue from Web site sales increased by just 1 percent in the first three months of this year compared with the same period last year. Bookings from Expedia’s North American Web sites rose by only 1 percent in the first quarter of this year. And Dell said that revenue in the Americas — United States, Canada and Latin America — for the three months ended May 4 was $8.9 billion, or nearly unchanged from the same period last year.
“There’s a recognition that some customers like a more interactive experience,” said Alex Gruzen, senior vice president for consumer products at Dell. “They like shopping and they want to go retail.”
The turning point comes as most adult Americans, and many of their children, are already shopping online.
Analysts project that by 2011, online sales will account for nearly 7 percent of overall retail sales, though categories like computer hardware and software generate more than 40 percent of their sales on the Internet.
There are other factors at work as well, including a push by companies like Apple, Starbucks and the big shopping malls to make the in-store experience more compelling.
Nancy F. Koehn, a professor at Harvard Business School who studies retailing and consumer habits, said that the leveling off of e-commerce reflected the practical and psychological limitations of shopping online. She said that as physical stores have made the in-person buying experience more pleasurable, online stores have continued to give shoppers a blasé experience. In addition, online shopping, because it involves a computer, feels like work.
“It’s not like you go onto Amazon and think: ‘I’m a little depressed. I’ll go onto this site and get transported,’ ” she said, noting that online shopping is more a chore than an escape.
But Ms. Koehn and others say that online shopping is running into practical problems, too. For one, Ms. Koehn noted, online sellers have been steadily raising their shipping fees to bolster profits or make up for their low prices.
In response, a so-called clicks-and-bricks hybrid model is emerging, said Dan Whaley, the founder of GetThere, which became one of the largest Internet travel businesses after it was acquired by Sabre Holdings.
The bookseller Borders, for example, recently revamped its Web site to allow users to reserve books online and pick them up in the store. Similar services were started by companies like Best Buy and Sears. Other retailers are working to follow suit.
“You don’t realize how powerful of a phenomenon this new strategy has become,” Mr. Whaley said. “Nearly every big box retailer is opening it up.”
Barnes & Noble recently upgraded its site to include online book clubs, reader forums and interviews with authors. The company hopes the changes will make the online world feel more like the offline one, said Marie J. Toulantis, the chief executive of BarnesandNoble.com. “We emulate the in-store experience by having a book club online,” she said.
The retailers that have started in-store pickup programs, like Sears and REI, have found that customers who choose the hybrid model are more likely to buy additional products when they pick up their items, said Patti Freeman Evans, an analyst at Jupiter Research.
Consumers are generally not committed to one form of buying over the other. Maggie Hake, 21, a recent college graduate heading to Africa in the fall to join the Peace Corps, said that when she needs to buy something for her Macintosh computer, she prefers visiting a store. “I trust it more,” she said. “I want to be sure there’s a person there if something goes wrong.”
Ms. Hake, who lives in Kentfield, Calif., just north of San Francisco, does like shopping online for certain things, particularly shoes, which are hard to find in her size. “I’ve got big feet — size 12.5 in women’s,” she said. “I also buy textbooks online. They’re cheaper.”
John Morgan, an economics professor from the Haas School of Business at the University of California, Berkeley, said he expected online commerce to continue to increase, partly because it remains less than 1 percent of the overall economy. “There’s still a lot of head room for people to grow,” he said.
Matt Richtel reported from San Francisco. Bob Tedeschi reported from Guilford, Conn.

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Online Sales Lose Steam (NYTimes, 6/17/07)

June 17, 2007
Online Sales Lose Steam
By MATT RICHTEL and BOB TEDESCHI
SAN FRANCISCO, June 16 — Has online retailing entered the Dot Calm era?
Since the inception of the Web, online commerce has enjoyed hypergrowth, with annual sales increasing more than 25 percent over all, and far more rapidly in many categories. But in the last year, growth has slowed sharply in major sectors like books, tickets and office supplies.
Growth in online sales has also dropped dramatically in diverse categories like health and beauty products, computer peripherals and pet supplies. Analysts say it is a turning point and growth will continue to slow through the decade.
The reaction to the trend is apparent at Dell, which many had regarded as having mastered the science of selling computers online, but is now putting its PCs in Wal-Mart stores. Expedia has almost tripled the number of travel ticketing kiosks it puts in hotel lobbies and other places that attract tourists.
The slowdown is a result of several forces. Sales on the Internet are expected to reach $116 billion this year, or 5 percent of all retail sales, making it harder to maintain the same high growth rates. At the same time, consumers seem to be experiencing Internet fatigue and are changing their buying habits.
John Johnson, 53, who sells medical products to drug stores and lives in San Francisco, finds that retailers have livened up their stores to be more alluring.
“They’re working a lot harder,” he said as he shopped at Book Passage in downtown San Francisco. “They’re not as stuffy. The lighting is better. You don’t get someone behind the counter who’s been there 40 years. They’re younger and hipper and much more with it.”
He and his wife, Liz Hauer, 51, a Macy’s executive, also shop online, but mostly for gifts or items that need to be shipped. They said they found that the experience could be tedious at times. “Online, it’s much more of a task,” she said. Still, Internet commerce is growing at a pace that traditional merchants would envy. But online sales are not growing as fast as they were even 18 months ago.
Forrester Research, a market research company, projects that online book sales will rise 11 percent this year, compared with nearly 40 percent last year. Apparel sales, which increased 61 percent last year, are expected to slow to 21 percent. And sales of pet supplies are on pace to rise 30 percent this year after climbing 81 percent last year.
Growth rates for online sales are slowing down in numerous other segments as well, including appliances, sporting goods, auto parts, computer peripherals, and even music and videos. Forrester says that sales growth is pulling back in 18 of the 24 categories it measures.
Jupiter Research, another market research firm, says the growth rate has peaked. It projects that overall online sales growth will slow to 9 percent a year by the end of the decade from as much as 25 percent in 2004.
Early financial results from e-commerce companies bear out the trend. EBay reported that revenue from Web site sales increased by just 1 percent in the first three months of this year compared with the same period last year. Bookings from Expedia’s North American Web sites rose by only 1 percent in the first quarter of this year. And Dell said that revenue in the Americas — United States, Canada and Latin America — for the three months ended May 4 was $8.9 billion, or nearly unchanged from the same period last year.
“There’s a recognition that some customers like a more interactive experience,” said Alex Gruzen, senior vice president for consumer products at Dell. “They like shopping and they want to go retail.”
The turning point comes as most adult Americans, and many of their children, are already shopping online.
Analysts project that by 2011, online sales will account for nearly 7 percent of overall retail sales, though categories like computer hardware and software generate more than 40 percent of their sales on the Internet.
There are other factors at work as well, including a push by companies like Apple, Starbucks and the big shopping malls to make the in-store experience more compelling.
Nancy F. Koehn, a professor at Harvard Business School who studies retailing and consumer habits, said that the leveling off of e-commerce reflected the practical and psychological limitations of shopping online. She said that as physical stores have made the in-person buying experience more pleasurable, online stores have continued to give shoppers a blasé experience. In addition, online shopping, because it involves a computer, feels like work.
“It’s not like you go onto Amazon and think: ‘I’m a little depressed. I’ll go onto this site and get transported,’ ” she said, noting that online shopping is more a chore than an escape.
But Ms. Koehn and others say that online shopping is running into practical problems, too. For one, Ms. Koehn noted, online sellers have been steadily raising their shipping fees to bolster profits or make up for their low prices.
In response, a so-called clicks-and-bricks hybrid model is emerging, said Dan Whaley, the founder of GetThere, which became one of the largest Internet travel businesses after it was acquired by Sabre Holdings.
The bookseller Borders, for example, recently revamped its Web site to allow users to reserve books online and pick them up in the store. Similar services were started by companies like Best Buy and Sears. Other retailers are working to follow suit.
“You don’t realize how powerful of a phenomenon this new strategy has become,” Mr. Whaley said. “Nearly every big box retailer is opening it up.”
Barnes & Noble recently upgraded its site to include online book clubs, reader forums and interviews with authors. The company hopes the changes will make the online world feel more like the offline one, said Marie J. Toulantis, the chief executive of BarnesandNoble.com. “We emulate the in-store experience by having a book club online,” she said.
The retailers that have started in-store pickup programs, like Sears and REI, have found that customers who choose the hybrid model are more likely to buy additional products when they pick up their items, said Patti Freeman Evans, an analyst at Jupiter Research.
Consumers are generally not committed to one form of buying over the other. Maggie Hake, 21, a recent college graduate heading to Africa in the fall to join the Peace Corps, said that when she needs to buy something for her Macintosh computer, she prefers visiting a store. “I trust it more,” she said. “I want to be sure there’s a person there if something goes wrong.”
Ms. Hake, who lives in Kentfield, Calif., just north of San Francisco, does like shopping online for certain things, particularly shoes, which are hard to find in her size. “I’ve got big feet — size 12.5 in women’s,” she said. “I also buy textbooks online. They’re cheaper.”
John Morgan, an economics professor from the Haas School of Business at the University of California, Berkeley, said he expected online commerce to continue to increase, partly because it remains less than 1 percent of the overall economy. “There’s still a lot of head room for people to grow,” he said.
Matt Richtel reported from San Francisco. Bob Tedeschi reported from Guilford, Conn.

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Sunday, June 03, 2007

Genius and Misfit Aren’t Synonyms, or Are They?(NYTimes, 6/3/07)

June 3, 2007
Ping
Genius and Misfit Aren’t Synonyms, or Are They?
By G. PASCAL ZACHARY
THE story of the college dropout who became the world’s richest man still has the power to inspire us. It affirms our deeply engrained view that rejecting the received wisdom (do my own thing!) is a path to creativity and wealth.
As Walt Whitman famously wrote 150 years ago, “I celebrate myself, and sing myself.” In our individualistic country, the strong, lone voice is often viewed as the animating force behind every kind of success.
This drive appears to power many technological innovators. In an era where one-size-fits-all solutions take hold for reasons of efficiency and winner-take-all economics, “misfits can thrive, because start-up companies are how misfits express themselves,” says Howard Rheingold, the author of “Smart Mobs,” which is about how the Internet allows strangers to act in concert.
Google, the hottest company on the planet as measured by media ink, is one of the latest examples of the power of the misfit. One co-founder, Larry Page, is enamored with the notion of “space elevators.” The other co-founder, Sergey Brin, is using $3.9 million of Google’s money to finance a genetic mapping company started by his wife. The two men are said to have outfitted a private company jet with hammocks and king-size beds. In short, these billionaires are hardly men in gray flannel suits.
I come today to praise the misfit innovator, “the loser now,” in Bob Dylan’s venerable lyric, who “will be later to win.”
Back to the dropout (from Harvard, no less), who is, of course, Bill Gates, a co-founder of Microsoft. His story is repeated again and again by weary innovators facing failure and by fresh-faced geeks just striking out for the endless frontier.
“The Gates example is so interesting because we Americans like to tell stories that remind us that establishments are close-minded,” says David A. Hollinger, a historian at the University of California, Berkeley.
The identification of technological innovators who have a rebellious streak — resenting and resisting established authority and its prejudices — took root in the 1960s counterculture. The ’60s-inspired inventors of personal computers and software, like Mr. Gates and Steven P. Jobs, co-founder of Apple (and an outright hippie in his youth), were bent on destroying a technological priesthood that stifled innovation.
At first, “I never expected to amount to anything,” says Steve Wozniak, who was languishing as a low-level engineer at Hewlett-Packard when he teamed up with Mr. Jobs to design Apple’s first computer.
Alienated by Hewlett-Packard’s emphasis on large, expensive and forbidding technical systems, Mr. Wozniak took hardware that was used to power toys and calculators and created a rival approach, personal computing, that ultimately took over the world. “All the ideas that mattered to me came from outsiders,” he recalls.
While inventive, these men did not create their sensibility out of whole cloth. They received a crucial assist from a historian of science named Thomas Kuhn, whose seminal 1962 book, “The Structure of Scientific Revolution,” neatly mapped the anti-establishment landscape of innovation.
Kuhn’s central insight, which fast became a cliché, was to identify “paradigm shifts” as the key to advances in science and technology.
Scientific world views were belief systems first and proved empirically only later. Facts had meaning only in relation to a “world view.” When world views were overthrown by rebels, new paradigms could be constructed, opening the way for new theories, new facts, new technologies.
As the London-based writer Ziauddin Sardar has noted, in the popular mind, Kuhn reduced science to “nothing more than long periods of boring conformist activity punctuated by outbreaks of irrational deviance.”
For people like Mr. Gates and Mr. Jobs, Kuhn’s attack on conformity in science and technology provided a moral and intellectual foundation that still survives.
Echoes of the Kuhnian sensibility can be heard around any corridor in Silicon Valley, any day of the week. In fact, misfits now rule Silicon Valley and its sibling, Seattle.
Sean M. Maloney, chief of sales and marketing at Intel, reminded me of this last month as he recalled a dictum that Andrew S. Grove, the company’s former chairman and chief executive, often invoked. When everyone says that something is true, be very skeptical, Mr. Grove advised. Question the obvious.
THAT is easier said than done, especially when corporations become so invested in their own “paradigm” that they grow blind to signs that “the times they are a-changin’.” How else to explain that Mr. Gates, writing in the first edition of his 1995 treatise on the future of computing, made no mention of the Internet, the very force that began to disrupt (and is still disrupting) his company’s core business from virtually the day the book appeared?
Similarly, Google must struggle to avoid falling so much in love with its wildly successful online search and advertising technologies that it misses the next inevitable and disruptive paradigm shift. “The reality is that world-changing amounts of money are earned by people who question orthodoxies,” Mr. Maloney said.
Does this mean the misfit is always worth betting on? Not really. The often-ignored side of the Kuhn theory is that for long stretches of time, the frontier of science and technology is ruled by diligent people who are quietly filling in the grand vision that spawned a new paradigm in the first place.
These people are heroes of their own sort, keeping the home fires burning until the reigning paradigm is played out. “The celebration of misfits promotes a worrisome anti-intellectualism and presents a distorted picture of the innovation process,” says Mr. Hollinger, the historian.
Indeed, technological innovation — not to mention new scientific knowledge — is increasingly a result of large teams, working in routine, predictable ways. Individuals matter, but their contributions often can no longer be measured, nor can credit be accurately apportioned — even by the people working closest with them.
Perhaps the steady rise in power by faceless teams of engineers, technicians and scientists explains the persistent romantic appeal of the lone misfit.
By any measure, successful misfits are the exception, and there is no handy tool for distinguishing the next college dropout with a bright and wealthy future from the dropout who faces a heap of woe.
G. Pascal Zachary teaches journalism at Stanford and writes about technology and economic development. E-mail: gzach@nytimes.com.

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Google Keeps Tweaking Its Search Engine (NYTimes, 6/3/07)

June 3, 2007
Google Keeps Tweaking Its Search Engine
By SAUL HANSELL
Mountain View, Calif.
THESE days, Google seems to be doing everything, everywhere. It takes pictures of your house from outer space, copies rare Sanskrit books in India, charms its way onto Madison Avenue, picks fights with Hollywood and tries to undercut Microsoft’s software dominance.
But at its core, Google remains a search engine. And its search pages, blue hyperlinks set against a bland, white background, have made it the most visited, most profitable and arguably the most powerful company on the Internet. Google is the homework helper, navigator and yellow pages for half a billion users, able to find the most improbable needles in the world’s largest haystack of information in just the blink of an eye.
Yet however easy it is to wax poetic about the modern-day miracle of Google, the site is also among the world’s biggest teases. Millions of times a day, users click away from Google, disappointed that they couldn’t find the hotel, the recipe or the background of that hot guy. Google often finds what users want, but it doesn’t always.
That’s why Amit Singhal and hundreds of other Google engineers are constantly tweaking the company’s search engine in an elusive quest to close the gap between often and always.
Mr. Singhal is the master of what Google calls its “ranking algorithm” — the formulas that decide which Web pages best answer each user’s question. It is a crucial part of Google’s inner sanctum, a department called “search quality” that the company treats like a state secret. Google rarely allows outsiders to visit the unit, and it has been cautious about allowing Mr. Singhal to speak with the news media about the magical, mathematical brew inside the millions of black boxes that power its search engine.
Google values Mr. Singhal and his team so highly for the most basic of competitive reasons. It believes that its ability to decrease the number of times it leaves searchers disappointed is crucial to fending off ever fiercer attacks from the likes of Yahoo and Microsoft and preserving the tidy advertising gold mine that search represents.
“The fundamental value created by Google is the ranking,” says John Battelle, the chief executive of Federated Media, a blog ad network, and author of “The Search,” a book about Google.
Online stores, he notes, find that a quarter to a half of their visitors, and most of their new customers, come from search engines. And media sites are discovering that many people are ignoring their home pages — where ad rates are typically highest — and using Google to jump to the specific pages they want.
“Google has become the lifeblood of the Internet,” Mr. Battelle says. “You have to be in it.”
Users, of course, don’t see the science and the artistry that makes Google’s black boxes hum, but the search-quality team makes about a half-dozen major and minor changes a week to the vast nest of mathematical formulas that power the search engine.
These formulas have grown better at reading the minds of users to interpret a very short query. Are the users looking for a job, a purchase or a fact? The formulas can tell that people who type “apples” are likely to be thinking about fruit, while those who type “Apple” are mulling computers or iPods. They can even compensate for vaguely worded queries or outright mistakes.
“Search over the last few years has moved from ‘Give me what I typed’ to ‘Give me what I want,’ ” says Mr. Singhal, a 39-year-old native of India who joined Google in 2000 and is now a Google Fellow, the designation the company reserves for its elite engineers.
Google recently allowed a reporter from The New York Times to spend a day with Mr. Singhal and others in the search-quality team, observing some internal meetings and talking to several top engineers. There were many questions that Google wouldn’t answer. But the engineers still explained more than they ever have before in the news media about how their search system works.
As Google constantly fine-tunes its search engine, one challenge it faces is sheer scale. It is now the most popular Web site in the world, offering its services in 112 languages, indexing tens of billons of Web pages and handling hundreds of millions of queries a day.
Even more daunting, many of those pages are shams created by hucksters trying to lure Web surfers to their sites filled with ads, pornography or financial scams. At the same time, users have come to expect that Google can sift through all that data and find what they are seeking, with just a few words as clues.
“Expectations are higher now,” said Udi Manber, who oversees Google’s entire search-quality group. “When search first started, if you searched for something and you found it, it was a miracle. Now, if you don’t get exactly what you want in the first three results, something is wrong.”
Google’s approach to search reflects its unconventional management practices. It has hundreds of engineers, including leading experts in search lured from academia, loosely organized and working on projects that interest them. But when it comes to the search engine — which has many thousands of interlocking equations — it has to double-check the engineers’ independent work with objective, quantitative rigor to ensure that new formulas don’t do more harm than good.
As always, tweaking and quality control involve a balancing act. “You make a change, and it affects some queries positively and others negatively,” Mr. Manber says. “You can’t only launch things that are 100 percent positive.”
THE epicenter of Google’s frantic quest for perfect links is Building 43 in the heart of the company’s headquarters here, known as the Googleplex. In a nod to the space-travel fascination of Larry Page, the Google co-founder, a full-scale replica of SpaceShipOne, the first privately financed spacecraft, dominates the building’s lobby. The spaceship is also a tangible reminder that despite its pedestrian uses — finding the dry cleaner’s address or checking out a prospective boyfriend — what Google does is akin to rocket science.
At the top of a bright chartreuse staircase in Building 43 is the office that Mr. Singhal shares with three other top engineers. It is littered with plastic light sabers, foam swords and Nerf guns. A big white board near Mr. Singhal’s desk is scrawled with graphs, queries and bits of multicolored mathematical algorithms. Complaints from users about searches gone awry are also scrawled on the board.
Any of Google’s 10,000 employees can use its “Buganizer” system to report a search problem, and about 100 times a day they do — listing Mr. Singhal as the person responsible to squash them.
“Someone brings a query that is broken to Amit, and he treasures it and cherishes it and tries to figure out how to fix the algorithm,” says Matt Cutts, one of Mr. Singhal’s officemates and the head of Google’s efforts to fight Web spam, the term for advertising-filled pages that somehow keep maneuvering to the top of search listings.
Some complaints involve simple flaws that need to be fixed right away. Recently, a search for “French Revolution” returned too many sites about the recent French presidential election campaign — in which candidates opined on various policy revolutions — rather than the ouster of King Louis XVI. A search-engine tweak gave more weight to pages with phrases like “French Revolution” rather than pages that simply had both words.
At other times, complaints highlight more complex problems. In 2005, Bill Brougher, a Google product manager, complained that typing the phrase “teak patio Palo Alto” didn’t return a local store called the Teak Patio.
So Mr. Singhal fired up one of Google’s prized and closely guarded internal programs, called Debug, which shows how its computers evaluate each query and each Web page. He discovered that Theteakpatio.com did not show up because Google’s formulas were not giving enough importance to links from other sites about Palo Alto.
It was also a clue to a bigger problem. Finding local businesses is important to users, but Google often has to rely on only a handful of sites for clues about which businesses are best. Within two months of Mr. Brougher’s complaint, Mr. Singhal’s group had written a new mathematical formula to handle queries for hometown shops.
But Mr. Singhal often doesn’t rush to fix everything he hears about, because each change can affect the rankings of many sites. “You can’t just react on the first complaint,” he says. “You let things simmer.”
So he monitors complaints on his white board, prioritizing them if they keep coming back. For much of the second half of last year, one of the recurring items was “freshness.”
Freshness, which describes how many recently created or changed pages are included in a search result, is at the center of a constant debate in search: Is it better to provide new information or to display pages that have stood the test of time and are more likely to be of higher quality? Until now, Google has preferred pages old enough to attract others to link to them.
But last year, Mr. Singhal started to worry that Google’s balance was off. When the company introduced its new stock quotation service, a search for “Google Finance” couldn’t find it. After monitoring similar problems, he assembled a team of three engineers to figure out what to do about them.
Earlier this spring, he brought his squad’s findings to Mr. Manber’s weekly gathering of top search-quality engineers who review major projects. At the meeting, a dozen people sat around a large table, another dozen sprawled on red couches, and two more beamed in from New York via video conference, their images projected on a large screen. Most were men, and many were tapping away on laptops. One of the New Yorkers munched on cake.
Mr. Singhal introduced the freshness problem, explaining that simply changing formulas to display more new pages results in lower-quality searches much of the time. He then unveiled his team’s solution: a mathematical model that tries to determine when users want new information and when they don’t. (And yes, like all Google initiatives, it had a name: QDF, for “query deserves freshness.”)
Mr. Manber’s group questioned QDF’s formula and how it could be deployed. At the end of the meeting, Mr. Singhal said he expected to begin testing it on Google users in one of the company’s data centers within two weeks. An engineer wondered whether that was too ambitious.
“What do you take us for, slackers?” Mr. Singhal responded with a rebellious smile.
THE QDF solution revolves around determining whether a topic is “hot.” If news sites or blog posts are actively writing about a topic, the model figures that it is one for which users are more likely to want current information. The model also examines Google’s own stream of billions of search queries, which Mr. Singhal believes is an even better monitor of global enthusiasm about a particular subject.
As an example, he points out what happens when cities suffer power failures. “When there is a blackout in New York, the first articles appear in 15 minutes; we get queries in two seconds,” he says.
Mr. Singhal says he tested QDF for a simple application: deciding whether to include a few news headlines among regular results when people do searches for topics with high QDF scores. Although Google already has a different system for including headlines on some search pages, QDF offered more sophisticated results, putting the headlines at the top of the page for some queries, and putting them in the middle or at the bottom for others.
GOOGLE’S breakneck pace contrasts with the more leisurely style of the universities and corporate research labs from which many of its leaders hail. Google recruited Mr. Singhal from AT&T Labs. Mr. Manber, a native of Israel, was an early examiner of Internet searches while teaching computer science at the University of Arizona. He jumped into the corporate fray early, first as Yahoo’s chief scientist and then running an Amazon.com search unit.
Google lured Mr. Manber from Amazon last year. When he arrived and began to look inside the company’s black boxes, he says, he was surprised that Google’s methods were so far ahead of those of academic researchers and corporate rivals.
“I spent the first three months saying, ‘I have an idea,’ ” he recalls. “And they’d say, ‘We’ve thought of that and it’s already in there,’ or ‘It doesn’t work.’ ”
The reticent Mr. Manber (he declines to give his age), would discuss his search-quality group only in the vaguest of terms. It operates in small teams of engineers. Some, like Mr. Singhal’s, focus on systems that process queries after users type them in. Others work on features that improve the display of results, like extracting snippets — the short, descriptive text that gives users a hint about a site’s content.
Other members of Mr. Manber’s team work on what happens before users can even start a search: maintaining a giant index of all the world’s Web pages. Google has hundreds of thousands of customized computers scouring the Web to serve that purpose. In its early years, Google built a new index every six to eight weeks. Now it rechecks many pages every few days.
And Google does more than simply build an outsized, digital table of contents for the Web. Instead, it actually makes a copy of the entire Internet — every word on every page — that it stores in each of its huge customized data centers so it can comb through the information faster. Google recently developed a new system that can hold far more data and search through it far faster than the company could before.
As Google compiles its index, it calculates a number it calls PageRank for each page it finds. This was the key invention of Google’s founders, Mr. Page and Sergey Brin. PageRank tallies how many times other sites link to a given page. Sites that are more popular, especially with sites that have high PageRanks themselves, are considered likely to be of higher quality.
Mr. Singhal has developed a far more elaborate system for ranking pages, which involves more than 200 types of information, or what Google calls “signals.” PageRank is but one signal. Some signals are on Web pages — like words, links, images and so on. Some are drawn from the history of how pages have changed over time. Some signals are data patterns uncovered in the trillions of searches that Google has handled over the years.
“The data we have is pushing the state of the art,” Mr. Singhal says. “We see all the links going to a page, how the content is changing on the page over time.”
Increasingly, Google is using signals that come from its history of what individual users have searched for in the past, in order to offer results that reflect each person’s interests. For example, a search for “dolphins” will return different results for a user who is a Miami football fan than for a user who is a marine biologist. This works only for users who sign into one of Google’s services, like Gmail.
(Google says it goes out of its way to prevent access to its growing store of individual user preferences and patterns. But the vast breadth and detail of such records is prompting lust among the nosey and fears among privacy advocates.)
Once Google corrals its myriad signals, it feeds them into formulas it calls classifiers that try to infer useful information about the type of search, in order to send the user to the most helpful pages. Classifiers can tell, for example, whether someone is searching for a product to buy, or for information about a place, a company or a person. Google recently developed a new classifier to identify names of people who aren’t famous. Another identifies brand names.
These signals and classifiers calculate several key measures of a page’s relevance, including one it calls “topicality” — a measure of how the topic of a page relates to the broad category of the user’s query. A page about President Bush’s speech about Darfur last week at the White House, for example, would rank high in topicality for “Darfur,” less so for “George Bush” and even less for “White House.” Google combines all these measures into a final relevancy score.
The sites with the 10 highest scores win the coveted spots on the first search page, unless a final check shows that there is not enough “diversity” in the results. “If you have a lot of different perspectives on one page, often that is more helpful than if the page is dominated by one perspective,” Mr. Cutts says. “If someone types a product, for example, maybe you want a blog review of it, a manufacturer’s page, a place to buy it or a comparison shopping site.”
If this wasn’t excruciating enough, Google’s engineers must compensate for users who are not only fickle, but are also vague about what they want; often, they type in ambiguous phrases or misspelled words.
Long ago, Google figured out that users who type “Brittany Speers,” for example, are really searching for “Britney Spears.” To tackle such a problem, it built a system that understands variations of words. So elegant and powerful is that model that it can look for pages when only an abbreviation or synonym is typed in.
Mr. Singhal boasts that the query “Brenda Lee bio” returns the official home page of the singer, even though the home page itself uses the term “biography” — not “bio.”
But words that seem related sometimes are not related. “We know ‘bio’ is the same as ‘biography,’ ” Mr. Singhal says. “My grandmother says: ‘Oh, come on. Isn’t that obvious?’ It’s hard to explain to her that bio means the same as biography, but ‘apples’ doesn’t mean the same as ‘Apple.’ ”
In the end, it’s hard to gauge exactly how advanced Google’s techniques are, because so much of what it and its search rivals do is veiled in secrecy. In a look at the results, the differences between the leading search engines are subtle, although Danny Sullivan, a veteran search specialist and blogger who runs Searchengineland.com, says Google continues to outpace its competitors.
Yahoo is now developing special search formulas for specific areas of knowledge, like health. Microsoft has bet on using a mathematical technique to rank pages known as neural networks that try to mimic the way human brains learn information.
Google’s use of signals and classifiers, by contrast, is more rooted in current academic literature, in part because its leaders come from academia and research labs. Still, Google has been able to refine and advance those ideas by using computer and programming resources that no university can afford.
“People still think that Google is the gold standard of search,” Mr. Battelle says. “Their secret sauce is how these guys are doing it all in aggregate. There are 1,000 little tunings they do.”

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