Yahoo Gets A ‘Beautiful System’

Speaking before an audience of investment analysts earlier this month, Yahoo!’s chief executive, Terry Semel, was positively giddy about the potential for deriving revenue from the search business. He called paid search “a beautiful system” that matched up advertisers with those interested in their wares.

Having long partnered with Google for algorithmic search and Overture for paid listings, Yahoo! now has a beautiful system of its own, after laying down $235 million in cash for Inktomi, a veteran search provider that had fallen on tough times. The move paves the way for Yahoo! to deeply embed pay-for-inclusion search — a type of paid search untapped by Yahoo! thus far — throughout its wildly popular network in a move to siphon more revenues from advertisers increasingly interested in targeting their marketing message to a relevant audience.

The deal also calls into question Yahoo!’s strategy regarding its partnerships with its fellow search players. Because the portal’s agreement with Overture is set to run until 2005, and because Yahoo! has not indicated it is interested in pursuing paid listings on its own, that partnership wouldn’t seem in jeopardy. The Google relationship, however, may be headed for dissolution.

Google Awaits

That’s because the acquisition could draw Yahoo! into fiercer competition with sometime-partner, sometime-rival Google, which made its name as the king of search while expanding into paid listings and building its site into a semi-portal.

“Yahoo is saying, ‘If we have to compete with Google, we need the right arsenal and the right tools,'” said Michael Gartenberg, an analyst with Jupiter Research, which is owned by the parent company of this site. “But the question is whether it’s too late already for Yahoo! to begin competing in the search space, because in many ways a Google search is more effective for individual searches than going to a directory listing.”

According to Forrester Research analyst Charlene Li, the move to acquire Inktomi will likely spell the end of Yahoo!’s relationship with Google. While Google is still signed up to provide the portal’s search functions, Li said Yahoo! would most likely eventually move it over to Inktomi’s system.

However, the analyst noted that Yahoo! left its options open by not ruling out continuing its relationship with Google. The two companies signed a “long-term” non-exclusive contract in June 2000.

More than likely, however, Yahoo! would want assurances that Google is not setting itself up as a rival before continuing the partnership. With nearly 14 million unique users last month, according to Nielsen//NetRatings, Google has one of the most recognizable brands on the Internet and a loyal cadre of users.

Lately, Google has been adding portal-like services to its search engine, moves which may have encouraged Yahoo! to divorce itself from the potential rival. In March, Google launched Google News, a compilation of news from around the Net. Just two weeks ago, it unveiled Froogle, a shopping search section.

With Google looking increasingly like a competitor, Li said Yahoo! had little choice but to hedge its bets.

More Revenue Streams

Meanwhile, Yahoo!’s doubling its money on paid search through the Inktomi buy. With the company’s pay-for-inclusion technology, Yahoo! can further diversify its revenue streams by selling index placements through Inktomi’s Index Connect service, as well as allowing sites to submit specific Web pages through its Search Submit service.

Since Semel took the reins 18 months ago, he has sought to add revenue outside of Yahoo!’s traditional reliance on online advertising.

Yahoo!’s partnership with Overture, the leader of the paid-listings space, has been one of Semel’s most successful efforts, and likely has whetted the company’s appetites for search revenues.

Before the same audience of investment analysts, Semel said revenues from marketing services — which includes advertising and paid search — would increase more than 20 percent in 2003.

“It gives them a new revenue stream and a dialogue in order to work with advertisers” for broader deals, Li said.

More Moves?

Li said that Yahoo!’s portal rivals, AOL and MSN, would take note that search is now a strategic asset and not something to be farmed out. That could make the search technologies of other companies, such as Norway-based FAST and Ask Jeeves’ Teoma, attractive purchases.

In a research note earlier this week, the analyst noted that MSN and AOL both lagged behind Yahoo! in drawing users to their sites. She said the addition of Inktomi only reinforced the strength of search as portals grow increasingly complex.

With search functionality embedded throughout its site, from classifieds to news, Li said Yahoo! could make not only content more relevant to users, but advertising as well, giving it a potential leg up over its portal rivals.

AOL uses Google as its algorithmic search provider, while MSN has developed its search technology in-house.

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