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Paid Inclusion Hot, LookSmart Not

LookSmart became the latest paid search company to warn of tough times ahead thanks to cutthroat competition in the industry.

The San Francisco-based paid inclusion provider said its earnings for the year, before interest, taxes, depreciation and amortization, would be $13 million, down considerably from the $22 to $25 million it had forecast. LookSmart said it still expects revenue in the $140 to $150 million range. The company said the lower earnings would result from increased spending on product development, in the hopes of maintaining its lead in the paid-inclusion sector.

CEO Jason Kellerman said the revision was "based on our belief that a deeper level of strategic investment is required to support continued growth in the years to come."

LookSmart is the latest search company to warn of lower earnings this year due to the fierce competition in the industry. Both Overture Services and FindWhat recently said they would feel the effects of increased competition in the crowded search industry. Overture cut its earnings outlook in half, citing the need to invest in new business areas to keep up with Google. FindWhat, meanwhile, said it expected to lose a key partner, Applied Semantics, which was acquired by Google last month.

In order to stay competitive, LookSmart said it would continue to invest in its search offerings, including WiseNut, the search engine it bought for $9.25 million in stock last April. In January, the company purchase Grub, a distributed-computing company that is meant to improve LookSmart's search technology.

The first quarter was LookSmart's second straight profitable quarter, earning $1.1 million, or 1 cent per share. However, the profits were much lower than the 4 cents a share analysts expected.

LookSmart reported that it continued to lead in the paid inclusion space, adding both large and small customers, including Carnival, Hot Jobs and Intuit. Its small-business segment grew 13 percent to 38,000 advertisers.

With search now rivaling e-mail as a key Internet utility, the industry has sought ways to maximize the money it makes from the millions of searches performed every day. Overture estimates about 40 percent of the 210 million daily Web searches generate revenue. Paid inclusion is one way to increase revenue. Unlike paid listings, where a client is guaranteed placement on the results page, paid inclusion advertisers pay to have their Web pages crawled during a search.

Investment bank First Albany pegs the paid inclusion market at $200 million today; Kellerman has said he expects it could be worth as much as $3 billion in 2007.

The potential for the market has not escaped the big search players. Yahoo! plans to unveil its own paid inclusion product from its Inktomi acquisition. Overture also has plans to roll out paid inclusion this year.

The idea is still somewhat controversial, however, since paid inclusion results are not set apart from those results generated by non-customers. LookSmart, for example, offers its paid inclusion customers consulting services to help their results move up the search results page. On top of that, paid inclusion has suffered from not being as simple a value proposition as paid listings. Search industry leader Google has held off from paid inclusion, saying it does not believe paid inclusion improves the relevancy of search results.