Microsoft, AOL, Yahoo! Search for Answers

As the importance of search engine advertising continues to grow, the business models behind it continue to shift.

Three different stories Tuesday reminded investors of search's pre-eminent role in the business of Internet content companies. But the announcements -- involving major players Yahoo! (YHOO), AOL Time Warner (AOL) and Microsoft (MSFT) -- will only keep Wall Street guessing who will benefit most from search's growth in the coming years.

Clearly, the most dramatic news Tuesday was the performance of LookSmart (LOOK), which announced after the market closed Monday that Microsoft, responsible for nearly 70% of the company's revenue, was ceasing its relationship with LookSmart as of mid-January.

The news, which battered LookSmart's shares in after-hours trading Monday, didn't lose its impact Tuesday. Shares in LookSmart lost more than half their value, dropping $1.58 to close at $1.44 Tuesday.

LookSmart's business relies mostly on what is known as paid inclusion -- fees paid by businesses to ensure that their Web sites are mined extensively for possible, but not guaranteed, inclusion in LookSmart's Web directory.

On Tuesday, however, LookSmart issued a press release officially launching its entry into what has been a more lucrative aspect of the search business -- pay-per-click search engine advertising, in which advertisers bid for top placement in relevant search engine results, but pay only if a user clicks on their listing to visit their site.

This effort to bounce back from LookSmart's admittedly material and adverse Microsoft-related news didn't seem to impress the market, or LookSmart's rivals. The pay-per-click sponsored listings business is "more competitive than paid inclusion, which is itself a competitive space," says Phillip Thune, COO of FindWhat.com (FWHT), operator of a pay-per-click search engine.

Microsoft's decision to drop LookSmart is inspiring speculation about the software giant's long-term strategy for making money from search. Currently, Microsoft uses automatically generated search listings generated by Inktomi -- now owned by Yahoo! -- as well as pay-per-click listings supplied by Overture Services, which was slated to be officially acquired by Yahoo! following an Overture shareholder vote Tuesday.