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JONATHAN L. ZITTRAIN

Score a victory for the P in IPO

A SEARCH FOR the phrase "don't be evil" in nearly any Internet search engine yields an article about Google as the first result. The second is Google's employee recruitment page. The company's ethos for approaching problems in unusual ways -- self-consciously including the notion "don't be evil" next to ones of simplicity and technical excellence -- will be tested repeatedly as Google gains its public sea legs. In the meantime, its initial public offering represents a fascinating attempt at all three.

At first glance Google's IPO might appear a retread of those of the late 20th century Internet boom: a company becomes the darling of the media and the public; its shares hit the Street for prices that are astronomical; volatile price swings give all but the most razor-sharp investors a financially nauseating ride. But there has been an important difference: Google chose to forgo the traditional investment bank IPO placement system.

This was a bold move, but the right one, because that system is, on balance, awful. The classic IPO functions much like a private club in which underwriters and brokers parcel out pieces of the company to favored clients and friends, while almost every member of the general public wanting to trade cash for shares is left out to dry. The broad swath of "sentiment investors" -- those who would never read an SEC registration statement but who are intent on buying in nonetheless -- are stuck taking shares second-hand from the well-connected cliques moments after the public exchange opens.

Google gave the public a chance to buy shares directly, on an equal footing with banks and big traders. The response from the financial establishment was understandably sour. The result was that, during Google's so-called `'quiet period" preceding the IPO, the information vacuum was filled by the establishment, which gravely identified the company's "missteps" and "blunders."

This actually worked to everyone's benefit. On Thursday Google closed at $100 a share, a nearly 20 percent jump from its $85 IPO. The auction worked as a pricing mechanism precisely because the valuable expertise of the investment banks and institutions was naturally folded into the bidding process, lowering the cheekily high price Google was initially seeking and leaving sentimental investors for once with the chance to sell brand new shares side-by-side with the big players when the opening bell rang.

To be sure, the Dutch auction system has its quirks in both theory and practice, and Google's implementation isn't a panacea for the complex problems that arise in attempting to value a fast-growing company and orchestrate its going public. After all, Google wouldn't say with certainty just how many shares would be floated and how long the auction would run, which allowed Google to plan for a particular share price and engineer the first-day trading bounce. More fundamentally, Google's creation of two tiers of stock to prevent control of the company from devolving to the public shows an unfortunate lack of creativity in taking on the largely broken system of shareholder accountability.

Google's embrace of top-down decision making -- fiercely protecting the company against shareholder influence while accepting broad-based investment -- exposes a genuine wedge within the company's ethos that parallels the paradox of its own technology. Google's core "PageRank" search technology is bottom-up, ranking sites according to how individual websites link to one another, but Google reserves the right to tweak results top-down to account for outside pressure (such as governments demanding filtering) or whim. And unlike its Dutch auction, some of Google's most intriguing experimental new services, ranging from the Orkut social network to its controversial Gmail service, operate as elite invitation-only affairs that favor the well-connected over the merely enthused.

If Google is to lay claim to prominence not only in Web search, but also in handling the public's e-mail and indexing and unifying its hard drives -- in essence, knowing everything we know online and serving as the gatekeeper to that which we don't know -- it will want to go to extraordinary lengths to be open about how its technologies work, to be responsive to public concerns, and to ensure some approximation of that admittedly elusive level playing field for those vying to be featured in its searches and users of its services. In other words, it will not want to behave like a normal company.

This, too, demonstrates that our expectations for normal companies need an overhaul. Thanks to Google's desire to align profits with the valuation of the investing public whose imagination and loyalty it has largely captured, a Silicon Valley 6-year-old's opening roar has rattled Wall Street. But as the IPO's opening bell fades, the clash between Google's contradictory egalitarian and elitist impulses are certain to make it a volatile investment as soon as next week, not to mention for years to come.

Jonathan Zittrain is Jack N. & Lillian R. Berkman Assistant Professor for Entrepreneurial Legal Studies at Harvard Law School and a cofounder of its Berkman Center for Internet & Society. 

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