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
AOL Time Warner
-- 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
, 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
, 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
, which was slated to be officially acquired by Yahoo! following an Overture shareholder vote Tuesday.
With competitor Yahoo! acquiring its suppliers, outsiders have understood that Microsoft would be developing its own search infrastructure.
Meanwhile, a separate announcement indicated that major portals aren't necessarily averse to employing technology used by potential rivals. AOL Time Warner's America Online said Tuesday it was expanding its relationship with the privately held
-- operator of both a search engine prized for the relevancy of its results and a pay-per-click advertising service. Though Google doesn't disclose its financial results, Google is clearly Overture's biggest competitor in the pay-per-click listings business.
Google -- which operates beta versions of a shopping search engine and a news service -- could conceivably build upon these services to become a full-featured portal, just the way Yahoo! once did. But that potential threat doesn't seem to have driven AOL away.
Danny Sullivan, editor of SearchEngineWatch.com, sees the AOL decision as part of what the company has always done: partnering with outsiders. Microsoft's decision, which appears to be based on the company's concerns about relevant search results, appears to indicate a long-term interest in providing the best experience for the user over a short-term focus on making as much money as possible from its search.
Others speculated, however, that Microsoft could end up acquiring LookSmart on the cheap, or hiring LookSmart staff to beef up its own search engine efforts.
Finally, Yahoo!'s acquisition of Overture illustrates how the uncertainty of the search engine business continues. Overture had long prided itself on its independence, but now that it's under Yahoo!'s wing, Microsoft is expected to eventually cut its relationship with Overture. Yahoo! and Overture say they've planned for such an eventuality, but Overture's new status makes its ultimate business model unclear.