MSN Drops LookSmart

  |  October 6, 2003   |  Comments

UPDATE: The paid inclusion provider loses the source of two thirds of its revenues as MSN overhauls its search strategy.

LookSmart said on Monday it is losing its critical distribution deal with MSN, cutting out the source of more than two thirds of its revenues and casting its future into uncertainty.

The paid inclusion provider said that MSN would cease carrying its paid inclusion listings in mid-January 2004, as part of MSN's overhaul of its search strategy. The agreement was set to terminate on Dec. 3; Microsoft agreed to a brief extension. Microsoft will also cease to license LookSmart's database. In total, the two deals accounted for 68 percent of LookSmart's revenues.

"No one at LookSmart could have worked any harder to renew this agreement," Jason Kellerman, LookSmart's chief executive, said in a conference call. "And I will say we were surprised by the decision."

The move comes after MSN began experimenting this month with a revamped search results page that eliminates the directory listings provided by LookSmart. Without MSN, LookSmart's distribution is crippled. The company's paid-inclusion listings, in which an advertiser pays to have Web pages crawled but is not guaranteed placement, will now be carried only on Lycos, About.com, CNET, and other smaller search sites.

In a move that may partly cushion the blow from losing such a key partner, LookSmart last week launched a paid listings service that it hopes will become a rival to those offered by Google and Overture Services -- and offer a new line of business. In a statement, LookSmart CEO Jason Kellerman said the company would focus on providing all three key search services for partners: paid inclusion, paid listings, and algorithmic search.

LookSmart has more than 30,000 advertisers signed up for its paid inclusion product, LookListings. The company has $60 million in cash on its books.

"There's no doubt that given Microsoft's decision we'll have to re-scope the business in some ways," Kellerman said.

He said the company had contingency plans for revamping its cost structure, although he did not offer details.

Microsoft's decision could have reverberations in the search industry. The paid inclusion industry has already undergone a bout of consolidation in the past year, as Yahoo's search buying spree netted it three of the top paid inclusion providers: Inktomi, the Web search division of FAST and AltaVista. Without MSN as a distribution partner, LookSmart will be an attractive acquisition target as its valuation drops following the news.

In the aftermath of Yahoo's acquisitions of Inktomi and Overture Services, which MSN relied on for algorithmic and paid search respectively, MSN has invested heavily in its own search capacity, with an eye toward developing better algorithmic search capabilities. The future of its deal with Overture remains uncertain. That agreement expires at the end of 2004.

"It was our understanding that Microsoft made the decision to implement a purely algorithmic search," Kellerman said. He declined to speculate further on Microsoft's search plans.

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