Yahoo! Move Alters Paid Inclusion Industry

The announcement of Yahoo’s $1.6 billion deal to acquire Overture Services on Monday sent shock waves through the search industry. One effect has been to further consolidate the paid inclusion market, an area seen as up and coming within the paid search industry.

Yahoo’s acquisition solidifies its control of much of the paid inclusion market. While LookSmart remains the leading player, Yahoo will soon own what were the three major other options: Inktomi, Alta Vista and FAST. Overture, which acquired Alta Vista and FAST’s Web search unit earlier this year, plans to release a combined paid inclusion product sometime this summer.

Paid inclusion is still a small portion of the search market, representing about $200 million this year. However, the market is expected to grow quickly, as advertisers seek more real estate on the search results page and portals look for more opportunities to make money off their search results. LookSmart CEO Jason Kellerman has reckoned the paid inclusion market could grow to $3 billion in 2007.

With paid inclusion, an advertiser pays to have certain Web pages crawled. Unlike paid listings, the advertiser’s pages are not guaranteed a certain ranking on the results page, but its pages do show up in the main body of results, not cordoned off in a “sponsored listings” section.

“This is a game of musical chairs,” said Frederick Marckini, chief executive of search marketing firm iProspect. “There’s going to be someone left standing and you don’t want to be that person.”

All eyes are on MSN, which has a contract with Overture running through 2004 for paid listings. The portal began investing heavily in search in recent months, although it said its efforts were directed only to building algorithmic search capabilities. Now, the company is thought to face a buy-or-build situation with its paid search business.

“Microsoft will likely evaluate this week, then consider its next step (which we believe could potentially be the acquisition of a presence in paid search),” said Jeetil Patel, an analyst with Deutsche Bank, in a research note. “Microsoft represents one of the biggest wildcards currently.”

An obvious choice for MSN is to link up with LookSmart, which has provided MSN with paid inclusion since 1998. MSN has been LookSmart’s largest customer, accounting for about 60 percent of its revenues. The company also has distribution deals with Lycos and CNET Networks.

With MSN buffing up its search capabilities, LookSmart has emerged as an option to fill in a key piece of the puzzle. Yesterday, Wall Street drove up the company’s stock 25 percent on speculation that Microsoft might make an offer for it.

“We can’t really forecast where the industry will go, in terms of who partners with whom and who acquires whom,” said Dakota Sullivan, LookSmart’s vice president of marketing.

Sullivan estimates that LookSmart results, with paid inclusion listings, are ideal for most commercial searches, which account for 40 percent of all queries.

“Last year, they said quality in the main search results meant no paid inclusion,” he said. “Now, with a new generations of products coming out, we’re actually able to demonstrate that the results we serve will be industry-leading relevance.”