Sitting here today, I cannot believe that a year has passed since Sergey last wrote to you. Our pace of change and growth has been remarkable. All of us at Google feel fortunate to be part of a phenomenon that continues to rapidly expand throughout the world. We work hard to use this amazing expansion and attention to do good and expand our business as best we can.

We remain an unconventional company. We are dedicated to serving our users with the best possible experience. And launching products early - involving users with “Labs” or “beta” versions - keeps us efficient at innovating.

We manage Google with a long-term focus. We’re convinced that this is the best way to run our business. We’ve been consistent in this approach.

We devote extraordinary resources to finding the smartest, most creative people we can and offering them the tools they need to change the world. Googlers know they are expected to invest time and energy on risky projects that create new opportunities to serve users and build new markets. Our mission remains central to our culture. We believe more than ever that by organizing the world’s information and making it universally accessible and useful, we can make the world a better place.

As Google grows, we touch more parts of society. This visibility means we have a responsibility to be transparent about what we do, to work in partnership with existing industries, and to explain how our moral compass - “Don’t be evil” - guides us in making hard choices.

In this letter, I’ll give you my perspective on our progress, the issues we face, and where we’re headed.

Products

Search
Web search and advertising are our main products, and we continue to target 70 percent of our resources in these areas. We work very hard on web search. In Q3 of 2005 we expanded our coverage to reach about three times as much information as any other search engine, or more than 1,000 times our original coverage. What does that mean to you? You can find a lot more information on Google than anywhere else. That kind of expansion takes hard engineering work, as well as lots of computers.

We’ve also added new ways for users to add content that other users can find. Google Sitemaps makes it easier for webmasters to ensure that Google searches find the content they create, and Google Base aims to get the world’s structured information organized and searchable through Google search. Now anyone can submit information on things with lots of attributes, such as cars, which you can search for by price, location, model, and so on. The same goes for finding recipes by their main ingredient, events by date and location, and countless other types of content. If you have any kind of information, our goal is to get it organized in Base and make it seamlessly available to all Google users.

Our search team also works very hard on relevancy - getting you exactly what you want, even when you aren’t sure what you need. For example, when Google believes you really want images, it returns them, even if you didn’t ask (try a query on sunsets).

An important aspect of relevancy is personalization. Last year, we launched personalized search, which gathers information about your interests in order to customize your search results. If you’d like personalized search results, which offer improved relevancy, all you have to do is sign in to your Google Account. Look for the link on the upper right side of the main Google homepage. You can also now personalize Google News and the Google homepage.

Currently we have at least 20 significant projects going on in web search, but I won’t be able to cover even a small fraction of them here. Search will remain a huge focus for us until Google can always tell exactly what you want and understands everything - a task that will certainly take our engineers a while. In fact, we’re excited that our list of things to do in core search seems to get longer as we learn more.

Advertising
Advertising is our other huge area of focus. Every year we’re seeing how businesses increase their advertising spending with Google because of the greater and more measurable return on their investment. This fundamental shift in the advertising industry has a powerful influence on our growth.

One area of focus for us is serving very large companies and very small companies with advertising solutions. Right now our sweet spot is more in the middle.

We have always been bullish on opportunities to improve our products and innovate in our ads solutions. In 2005 we rolled out several innovations:

• Site targeting - A new product that enables brand advertisers to bid for specific sites by impression, with a variety of text and image ad formats.
• On-site advertiser signup - A program that helps sites easily add advertisers.
• Improved AdWords API - A computer-to-computer interface into the ads system that helps drive efficiency and scale for large customers.
• Link units - A set of topical advertising links.
• Referrals - A new program that enables publishers to make money by introducing products such as AdSense or Firefox to their users.
• Quality-based bidding - A feature that helps advertisers keep keywords running while aligning incentives for high-quality ads.

Over the last year, we substantially improved quality and monetization per page of our advertising. Not bad - but we think there’s room for more improvement. Just try typing 10 commercial queries into Google and see if the ads are perfect. In my experience, we still have a ways to go - just like with search.

Google Meets the Real World
A lot of you tell me you want Google to find your keys. We’re not quite ready to announce that, but we are now able to find local businesses, and many other things in the real world, with our strong products, Google Local, Google Maps, Google Earth, and local advertising.

We added satellite photos to Maps last year, and we have tremendous and improving coverage of the whole globe, not to mention the Moon and Mars. We can even serve really nice maps, directions, and satellite photos to your cell phone using Google Local for Mobile. This product has saved me many times. The value of these products is amazing - we were able to integrate “before” and “after” aerial pictures of Hurricane Katrina into Google Earth, which the Coast Guard used to help find and rescue people.

Mobile
Speaking of mobile, we’ve also had a bunch of activity in this area. We signed a huge deal with T-Mobile for placement of Google on their phones. We’ve also released many products for mobile, including web search, Blogger, Gmail, and various SMS services.

Communications
Gmail has made tremendous progress in this area. The team has continually made a ton of enhancements, and recently integrated instant messaging right into your web browser. Our competitors haven’t been able to match Gmail’s clean interface and huge power - we currently offer about 2.7GB of searchable storage for free. We also made it easier to sign up for Gmail by using your mobile phone, while making it hard for spammers to get accounts.

Last year we also released Google Talk, which you can use to instant message or make high-quality voice calls. Talk uses open standards, and we pledged to interoperate with other providers to enable users to talk to anyone on any network, just like you can email anyone, no matter which service you use.

Other 2005 Products
I’m amazed at the quality and diversity of the video available on Google Video, with more being added every day. You can buy first-run programs, such as “Survivor” from CBS, with high picture quality, and watch them on your computer anytime. Or you can submit your own videos and let anyone in the world watch them for free.

You can even embed a video from Google Video on one of your own web pages and let us do the work of actually serving it. To view some of my favorites, search for “russian climbing” for acrobatics on tall buildings, “bsb” for amazing lip synchers, or “airbus 7” to watch an Airbus being built in seven minutes.

For companies, we released the bright blue Google Mini, which does a great job of finding all your corporate information. It’s easy to set up, and doesn’t break the bank at $1,995 with a year of support. You can also get special corporate versions of many of our software products.

For your computer, we also launched a bunch of products. The easiest way to get them all is with our new Google Pack, which automatically installs essential software from Google and third parties in a simple, painless way. Pack currently includes Earth, Picasa photo management, Desktop, Toolbar, Firefox, Norton Antivirus, Ad-Aware, Adobe Reader, and a nice screensaver. Many of these products were released or updated in the last year, including Earth, Picasa, and Desktop, which now has a sidebar that shows mail, weather, photos, related information, and other cool stuff. These products have surpassed our expectations, and I highly recommend installing them using Pack - the simplest and fastest installation process you’ve ever tried.

Continuous Innovation, Not Instant Perfection
I’m delighted that so many people expect every new product from Google to astonish them as soon as it’s released. We try hard to do brilliant things, but that isn’t really how we operate our business. We try a lot of innovative things, and many of them won’t be successful. At first it can be hard to tell the difference. Many products I thought were initially so-so have become huge successes - our ads system, for instance, took quite a while and many improvements before its achievements became clear.

An important part of our development process is our willingness to experiment publicly. Our teams are more productive once they get real users and feedback. We have learned that the best way to make something great is to actually launch it to the public. That’s why we have the Google Labs and “beta” labels - these are our experiments.

Deep Engineering Projects
I mentioned earlier how we are striving to make Google really understand your query and all the information in the world. To do that, we will have to make Google smart, and that requires artificial intelligence. We are particular believers in large-scale AI that involves both a lot of computation and a lot of data. We’re looking to build the best center for this kind of work in the world.

We have many deep infrastructure and systems projects in engineering, involving both hardware and software layers. Issues of machine allocation and sharing, data storage, access, and search and networking are all hot areas of work for us. I also believe that even our programming languages and development environments could be significantly improved. We believe our productivity can be significantly enhanced with the right investments in these areas.

Acquisitions
We have been busy buying companies opportunistically. In 2005 we purchased 15 different companies for $85 million. That number will increase to $130 million if they meet certain milestones. One of our more notable acquisitions was Urchin, a maker of web analytics that help websites understand where their visitors came from and what they are doing. We really want our customers to track conversions and the performance of their advertising, because when they do, they make more informed bids in our ads auction. So we made Urchin - renamed Google Analytics - free. There is a lot more demand for Analytics than we expected, and we’re working hard to meet it. That’s the kind of problem we like.

Already this year we have purchased the company that makes SketchUp, a very cool intuitive 3D drawing system used by architects and casual users alike. We also purchased the company that makes Writely, a very exciting web-based collaborative word processor.

We also bought dMarc, an automated advertising system for the radio industry. The initial payment totaled $102 million, with possible additional contingent payments of up to $1.136 billion over the next three years. The very substantial contingent payments are based on product, net revenue, and advertising inventory milestones that we believe will add huge value to our business if they are met. The business was started and is headed by two experienced brothers, Chad and Ryan Steelberg, who also founded AdForce, an Internet advertising company that went public and was later acquired. We’re very excited about helping our advertisers easily purchase radio ads.


Partnerships
One of the great untold stories of Google is our ability and desire to be a strong partner to many companies. We take our partnerships very seriously. The seriousness with which we meet these commitments is surpassed only by our desire to be an even stronger and more supportive partner. Early on, we actually briefly shut down the main Google web search in order to serve traffic from Netscape, a new partner that had underestimated their demand for our search service.

We have signed a deal with Time Warner and AOL to renew our partnership, through which we provide search and advertising solutions for AOL, and also agreed to invest $1 billion for 5 percent of AOL. This deal includes many valuable aspects - for example, Google and AOL’s AIM instant messaging users should soon be able to communicate directly. We’re pleased that we’ve been able to build this relationship and hope our two companies will do more together.

Ask.com has remained an important partner, with Google providing advertising solutions for them. We signed a significant partnership with Sun, which will provide an intriguing distribution channel for our products. We now have Google search boxes in a number of browsers through ongoing partnerships with Apple and Mozilla. And we even have a partnership with NASA involving scientific research and space, but in this case, unfortunately, “space” refers to the kind on the ground, and involves future expansion of our headquarters.

We have a tremendous number of relationships with publishers of books, videos, or websites to provide advertisements and revenue, or distribution and access to customers interested in their products. To help enhance communication with our partners, we held a very successful conference, Zeitgeist 2005, which brought everyone together at our headquarters. Partnerships - strategic and tactical, technical and marketing - are a huge priority for our company, and we expect to develop and cultivate more of these relationships.


Google And Our Impact On The World
Last year Google was very much in the news for our involvement in a variety of important and controversial issues. My opinion is that this is unavoidable; our business touches an enormous number of people on matters they care about deeply. We feel a tremendous responsibility to make the right decisions on behalf of our company, our users, and the world.

Privacy
This topic is particularly important at a time when technologies that can impact privacy are changing rapidly and people’s expectations of privacy are shifting and vary widely. Our users always come first, and so while we strive to offer really useful, innovative products, we also know that there might be trade-offs between privacy and functionality. But great products manage to capture a perfect balance, and that’s what we’re striving for at Google.

The good news is that the interests of our company and those of our users are well aligned. If anything bad happens to you with respect to privacy, we could lose your trust, and that would hurt our business. Recently we received a subpoena from the U.S. government that was a broad request for URLs and user queries. We resisted the request in court and ultimately were asked to return only a small number of random URLs and no user queries. We will continue to work hard to protect our users’ privacy, and think this ruling was a positive sign - a U.S. court siding with us in resisting overly broad requests for information.

Book Search
We believe one of the greatest services we can provide to users around the world is to increase people’s access to human knowledge. There has been tremendous confusion over our book scanning efforts. Part of the problem has been that we have several products, some of which are only partially launched. The product available in force is the Google Book Search Partner Program. A great variety of publishers have signed contracts legally authorizing us to show full pages of their books online in response to searches. These are most of the books you’ll see now on Google. This service is really useful, and many users follow the links to buy the books, which is good for the publishers, of course.

We also announced a groundbreaking effort to digitize several humongous university libraries. Many people falsely assume we offer the full text of library books online, like the ones you see now on books.google.com. Actually, we don’t. We don’t have permission to do all of that, and we respect copyright, of course. If a library book is in copyright, then users just get basic bibliographic information (such as the book’s title and the author’s name), usually quotations from the book, and information about which library it’s in or where it can be bought. Even just this “virtual card catalog” view will still be an amazing tool for serious research because, unlike a traditional card catalog, you’ll be able to search the full text of a book. But you won’t be able to look at full pages unless legal agreements are in place or the book is out of copyright. If publishers or authors don’t want to have their books digitized, they just have to say so, and we will exclude them. We’ll even work hard with other providers to make this process easy.

For some publishers and authors, the transition to the online world is a huge change, and one they understandably view with some trepidation. We believe this transition will help the economics of publishers and authors because the information contained in books will be more useful and accessible to the world. Books that were previously hard to access could be sold as a traditional book or as an online book, or even monetized through advertising - at the copyright holder’s choice. We will continue to talk and work with our partners in the publishing world to make Google Book Search a big win for all concerned.

China
Since our inception, Google.com has been available and popular in China. We had avoided the difficult issue of Chinese governmental restrictions on content by keeping our operations outside the country. Our competitors, including large, well-known Internet companies, chose to enter the country and comply with restrictions.

Unfortunately, access for Chinese users to the Google service outside of China was slow and unreliable, and some content was restricted by complex filtering within each Chinese ISP. Ironically, we were unable to get much public or governmental attention paid to the issue. Although we dislike altering our search results in any way, we ultimately decided that staying out of China simply meant diminishing service and influence there.

Building a real operation in China should increase our influence on market practices, and certainly will enhance our service to the Chinese people. We will continue to offer our international, and thus unfiltered, google.com. But we also built safeguards into our new google.cn offering. While we now offer search inside China, we will continue to host other, more privacy-sensitive services, such as Blogger or Gmail, from outside the country. Also, as we pioneered in other countries, whenever we are forced to restrict information by local law, regulation, or policy, we’ll disclose that fact with a message to users to make sure they understand that something is missing. To my knowledge, that disclosure is a first for China. Finally, we continue to offer the main google.com site, and we have also said we would terminate our google.cn offering if local conditions ultimately prove unacceptable for the quality of service we wish to provide.

In the end, we believe that improving access to Google through google.cn, even with some restrictions that we would not prefer, benefits Chinese users. At the same time, we have begun to work with governments and other Internet companies to develop global standards of conduct for countries that restrict access to content. We remain hopeful that these efforts will ultimately advance online users’ interests worldwide.

Net Neutrality
The Internet has been an amazing force in the world. It was designed by university scientists to move information around as efficiently as possible, with no thought of commercial gain. The openness that resulted has changed the world. For example, communication across country borders has flourished (no need for dialing long country codes and paying a lot for telephone service).

Now, however, there is a movement among companies that carry Internet traffic to shatter those freedoms and discriminate between the bits they carry. In the future, for example, they might want to exercise control over which VOIP phone provider you use. Perhaps they’ll prevent Google from serving you video, so they can have an advantage for their own service - or for anyone who pays them more.

Google will likely weather whatever happens with this issue because we have a lot of resources. But I do think there is a huge risk that consumers will not be able to access everything freely on the Internet, and that future innovation will be harmed if these changes are adopted. We are working hard to protect the open Internet and keep it from being balkanized solely for the financial benefit of a few companies that are already collecting very substantial revenue from consumers.

Workforce

Huge Growth and We’re Still Behind
From the beginning, we’ve tried to grow headcount fast enough to meet opportunities. We nearly doubled our headcount in 2005, and in fact have grown at roughly that rate on a percentage basis throughout our history. Surprisingly, in many areas we still feel like a startup - many employees stretched thin and trying to keep up. I also believe that we have plenty of good business opportunities for all these new people.

Google is perceived as a large company, but we are still a medium-size one in headcount, with only 7,000 employees to deal with all the global responsibilities and opportunities of a large multinational corporation. Wal-Mart, for example, has 1.7 million employees (we probably have more computers, though). We have substantially fewer employees than our main competitors. We are not even quite at startup stage in many countries, with few or no employees and many people using our services.

So hiring remains one of our most important priorities. I normally take the time to review every offer we make.

The quality of the new Googlers we are able to attract is amazing (Sergey and I are certain we would not meet the quality bar to be hired as engineers at Google today, as our programming skills are kind of weak by current standards). We see many areas and opportunities that would benefit from more employees, and we’re working hard to get the best people hired and organized.

Nurturing Startup Culture within a Bigger Google
One of the amazing things about Google is the number of innovative startup-like projects that have been developed inside the company. We love it when we get a Gmail or an AdSense business, or save an unexpected few million dollars as a result of the hard work and dedication of employees who have really gone far beyond the call of duty. As shareholders, you love it, too, because these projects add to the company’s value. We think it is important that employees get rewarded fairly and are encouraged to achieve amazing results within Google.

Last year Sergey wrote about our Founders’ Awards program. In 2005, we awarded approximately $45 million in restricted stock to 11 different projects after an extensive nomination and review process. We believe the people who received these awards have created tremendous value for the company.

Of course, not all outstanding contributions will result in Founders’ Awards, so we have implemented compensation programs to provide similar rewards for high performers anywhere in the company. With careful consideration of tax and other complexities, we award options, restricted stock, and cash as appropriate for every Googler. We have had many outstanding achievements, and we hope to have many more.

Globetrotting
Google is available in 116 languages, and lots of people use our services in places Sergey or I haven’t been to yet. We have Googlers all over the world working hard on setting up new facilities. We now have a total of 62 offices, 19 of which have opened outside the United States since the beginning of 2005. Every time we travel to a new Google office we see amazing, smart, excited people and lava lamps. Twenty-five percent of our employees now work outside the United States, compared with 15 percent at the end of 2004. This distribution makes good business sense, since 39 percent of our revenue and much more of our traffic comes from outside the United States. For example, Nikesh Arora runs our amazing European operations, and with his team has grown UK revenues to 14 percent of our total revenue. Google is a global company, and we are becoming more so.

Growing Our Leadership
Our existing managers are on fire. Over the last year, our executives have done a tremendous job growing the business, working together well and keeping their cool with a lot going on. Sergey, Eric and I have also been working well together, and sharing responsibilities just as the original Founders’ Letter specified.

We doubled the size of our senior leadership team over the last year and are delighted that about half of our new leaders have come from internal promotions. We are counting on Google to grow more leadership that will take us to the next level.

We added two new amazing board members. Besides keeping all of us on good behavior, they have tremendous insight and backgrounds for our business. Shirley Tilghman is the president of Princeton University and an accomplished professor of molecular biology. She taught secondary school for two years in Sierra Leone, and is also renowned for her leadership on behalf of women in science, an area of particular interest to Google. Ann Mather also joined our board as chairperson of the Audit Committee. She was previously chief financial officer of Pixar, and before that a senior executive at Disney. I can’t imagine two directors more qualified or a better fit for us.

We’ve been hard at work adding a number of superstar executives to help us do the heavy lifting of running such a fast-growing business. Vint Cerf, our new vice president and chief Internet evangelist, is widely known as the “father of the Internet” for co-authoring the TCP/IP protocol, which enables all the computers on the Internet to talk to one another. He published this work in 1974, when Sergey was not even two years old. The recipient of the Turing Award (the Nobel Prize of computing), Vint has worked tirelessly to make the Internet what it is today.

Udi Manber, vice president of engineering, is a former computer science professor who has been working on search much longer than we have; we got to know him well as he negotiated on the other side of the table on the first major deal we did with Yahoo. After a stint running Amazon’s A9 search operation, Udi is finally joining us, and we’re delighted.

In China, we have the dual leadership team of Kai-Fu Lee as president of engineering, product, and public affairs, and Johnny Chou as president of sales and business development. Kai-Fu is an accomplished computer scientist and has been an executive at Microsoft, Apple, and SGI. Johnny is an operating executive experienced at running large organizations, most recently as president of UT Starcom China.

You might have noticed Google in the news a lot recently. Elliot Schrage, our new vice president of global communications and public affairs, is a man worthy of the task. He comes to us with extensive public policy experience and was a senior executive at Gap, Inc.



Google.org
In previous Founders’ Letters, we’ve spoken about our commitment to developing Google’s philanthropic efforts, known as Google.org, which we hope will eventually eclipse even Google in changing the world for the better. We want Google.org to think big, to tackle the gravest and the greatest of the world’s problems.

We searched far and wide for the unique leader who we thought embodies this goal in spirit and accomplishments, and we’ve found that person in Dr. Larry Brilliant. Larry was one of the key leaders in the global eradication of smallpox, living in India for many years. He was also chief executive officer of two public companies, was a professor at the University of Michigan, is a medical doctor, and cofounded both the early legendary online community the Well and the Seva Foundation for global development and health.

While we were searching for Larry, we set up and funded the Google Foundation and refined its focus areas to providing sustainable development for the world’s poorest citizens and harnessing people, money, and scientific resources to combat climate change. We have already provided funding of $7 million to Acumen Fund and TechnoServe, organizations that are taking unique approaches to solving these tough issues.



Conclusion
After writing all this down, I’m amazed by all we accomplished last year and excited by all we still have to do. The trust that you - our users and investors - place in us every day is something we take very seriously. We wouldn’t be here without our users, shareholders, partners, employees, advertisers, publishers, authors, families, and everybody else I forgot to mention. Thank you all for joining us on this amazing journey.
















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