After a series of mistakes and unforeseen problems, Google got its widely watched share offering back on track this week. But it has had to cut the price sharply, lopping billions off the company’s implied value. Were the internet-search firm’s founders just a bit too greedy?

AFTER months of mis-steps culminating, somewhat farcically, in a Playboy interview that appeared to violate stock-listing rules, it seemed as if Google's much-hyped initial public offering (IPO) on the Nasdaq stockmarket was back on track this week. The company refiled the offering documents, with the offending article attached, and on Monday August 16th asked for the Securities and Exchange Commission (SEC) to give the IPO the go-ahead by the following afternoon. Observers took this as a sign that Google's share auction, which started last Friday, was running as planned. Indeed, it seemed to confirm reports that most bids were within or above the suggested price range of $108-135 per share, valuing the world's biggest internet-search company at up to $36 billion.

But such confidence was premature. On Tuesday evening, it emerged that the SEC had not yet approved the offering. Then, in the early hours of Wednesday, came the dramatic news that Google had cut the size of the IPO almost in half and was telling investors to expect a price of $85-95, apparently because the offering was less popular than expected. So much for the joke that Google's share offering was not for the froogle. By the time the SEC finally approved the IPO on Wednesday afternoon, the initial giddiness had turned to nervous exhaustion. In the end, Google priced its shares at $85, valuing the entire group at just $23 billion. The shares jumped to just over $100 on the first day of trading, making up some of the lost ground. But the price is still well below the level Google's bosses had hoped for.

It is too early to judge the exact cause of this sharp fall in Google's apparent value. Was it the mishaps on the way to flotation? Was it the recent weakness of dotcom shares in general? (The Nasdaq is down by almost 15% from its high in January.) Was it that Google's innovative Dutch auction process—where investors who bid at or above the market-clearing price pay that price—was simply the wrong mechanism? (Certainly Wall Street's bankers, who earn fat fees on more traditional flotations, would like to think so.) Or was it simply that, at up to $135 a share, Google was outrageously overpriced? After all, technology giants such as Yahoo! and Microsoft are stalking Google's territory.

Google's handling of the IPO certainly hasn't helped. Even before the Playboy row, the company had fallen foul of regulators for improperly issuing shares ahead of the flotation. Nor did it look good when, earlier this month, Google agreed to give Yahoo! shares worth up to $300m to settle a dispute over technology for matching ads to web searches. And on Monday, in the midst of the bidding process, Google admitted that the SEC had launched an informal investigation into its allocation of shares.

Of course, however inept Google's handling of the IPO has been, there are many with an interest in seeing its innovative auction fail. The usual IPO process involves a group of investment banks building interest among their institutional clients (pension and mutual funds, insurance companies and the like) and setting a price that, they hope, will give those clients a decent return on their money. Google wanted to bypass this process for two reasons: so it could open its flotation from the start to a broad base of individual shareholders; and to avoid the “pop” (sudden price rise once trading starts) that often comes with bank-priced IPOs. But the strategy seems to have backfired: a policy of offering low or no sales commissions left brokers with little incentive to push the shares, and with the $15 price rise on the first day of trading the shares got a sharp pop anyway.

The lowering of the price range may have had more to do with greed than the auction process itself. After all, Google's hoped-for valuation of 187 times its latest after-tax profits was heady even by the standards of its dotcom peers—for example, eBay, the dominant internet-auction website, trades at around 83 times latest profits.

While Google is the clear leader in online searches, its profits are still modest: it made $143m after tax in the first half of the year. Even a reduced valuation of around 140 times earnings implies a future of rapid growth and high profit margins. But, while most expect Google's revenues to continue to soar, its ability to make money from such sales is in doubt.

Losing its lead

Google makes most of its money from so-called sponsored links—discreet ads that come up with any search—and can do so because of its lead in search traffic and technology. But that lead is under threat. Until this year, Yahoo! used Google to power its searches, paying a licence fee for the technology. But Yahoo! has acquired a number of other search engines, and in February cut its ties to Google. Google's share of all searches (including those on other sites using its technology) has fallen from 75% at its peak to around half, and Yahoo! is not far behind. Moreover, Yahoo! has a key advantage over Google: because of its vast base of registered users (100m people use its e-mail, travel and other services) it is in a better position to tailor searches to users' needs. Microsoft poses a threat to Google too. The software giant is developing its own search service, and plans to integrate this into its Windows operating software from 2006.

Google knows that if it is to stay ahead of Yahoo!, it will have to gather more information about users and make them more loyal to its website. To see off Microsoft requires something bolder: that Google turn its technology into a new operating system that will run over the internet rather than on a desktop, making Windows irrelevant. As a first step in implementing this vision, Google unveiled Gmail, its new e-mail service, in April, offering huge online storage capacity. The idea is to make money from sending out carefully targeted ads, based on information found in e-mails. But the service is controversial: privacy advocates have accused Google of Big Brother-style snooping.

Gmail is still being tried out, but even if Google can put the privacy row and this week's topsy-turvy IPO behind it, the prospect of a battle with Microsoft is not enticing. The company behind Windows has long been adept at copying technologies and then crushing the companies that first developed them. It is also awash with cash. The $1.7 billion that Google has raised from selling a slice of itself on the stockmarket is small change compared with Microsoft's war chest.