IAC/InterActive Firing The Butler?

UPDATED: Analysts are pondering whether Ask Jeeves may have an asking price after weak earnings results by its parent company, IAC/Interactive Corp. , which also semi-announced a name change for the search engine.

IAC reported strong fourth quarter results, but the search engine component of the business is lagging behind other segments, such as retail and ticketing.

IAC said it intends to turn that segment around, however, with fresh investments in technology and branding, including a name change that it hopes will help improve customer retention and increase market share.

On the surface, things look peachy for Ask Jeeves, the search company acquired by IAC last year.

IAC noted in its earnings release that Ask Jeeves, “increased its share of U.S. search queries by 20 percent over the prior year period to 6.3 percent in December.”

As of the end of December, Ask Jeeves had 2.2 percent of the search engine market, firmly entrenched in fifth place behind Google (48.8 percent), Yahoo (21.4 percent), MSN (10.9 percent), and AOL (6.6 percent).

But while total revenue grew by 45 percent for the period ending Dec. 31, 2005, spearheaded by the Retailing (+42 percent) and Services (+46 percent) sectors, the all-important revenue line for Ask Jeeves rose by just 9 percent, a fact that did not go unnoticed by industry observers.

Merrill Lynch analysts Justin Post and Han Pham, for instance, noted that this figure was well below their expectations of 17 percent growth.

In a research note, the analysts commented that revenue growth for Media & Advertising (of which the search engine business is the main component) was not only disappointing but “well below search industry peers.”

According to the company’s press release accompanying the filing, IAC intends to “make increased investments in 2006 to help drive higher market share over the long-term.”

And while Ask Jeeves refused to confirm any details of the change, analysts said the search engine will be ditching its name — and the spiffy butler logo that epitomized it — in favor of the simpler Ask.com.

Ask Jeeves itself is keeping mum on the details of its “investment” in the site, although Darcy Cobb, a media relations officer at Ask Jeeves, did confirm that the site is being re-launched on Feb. 27.

Merrill Lynch is already referring to the search engine by its new name, Ask.com, and notes that the company will spend heavily to promote the new brand. The analysts wrote that they expect the company to engage in “heavy marketing” spending later in the month, as the re-launch date approaches.

Chris Sherman, executive editor of SearchEngineWatch.com, sees the change in name as a good portent in more ways than one.

Changing the name makes sense, Sherman told internetnews.com, because the Ask Jeeves name is associated with poor service in the minds of many Internet users. The site has improved its performance dramatically since the late nineties, Sherman continued, thus justifying a name change. “It makes sense for them to streamline the name.”

Far from spinning the site off, Sherman believes that the Barry Diller-run IAC is positioning Ask.com to make major inroads in terms of market share, much as Diller did when he ran a fledgling TV station called Fox.

“You have to remember that Diller turned Fox into the country’s fourth-largest network,” said Sherman. “I think he’s going to do something similar with Ask.com.”

And while Ask.com is clearly a laggard, with just 2.2 percent of the market, Sherman believes the search engine’s users are a good source of repeat business.

“There’s a small user base, but it’s very loyal,” said Sherman. “They’re like the Apple of the Internet in that regard.”

Sherman thinks that ultimately, Ask.com could add another 5 or 6 basis points, which would certainly be enough to leapfrog it over its close competitors and put it in fourth place — not unlike a certain television network known for its searchlights.

Given the fledgling revenues generated by Media & Advertising ($110 million for Q4 2005), compared with its larger in-house brethren ($941 million for Retailing, $476 million for Services, and $262 million for Membership & Subscriptions), it’s worth wondering if IAC will stay in the search engine business for the long haul.

But the search engine business model has proven itself robust, and is still growing. Carl Steidtmann, chief economist at Deloitte & Touche LP, notes that the search engine business is still in the early stages of its lifecycle.

“It hasn’t exhausted its different potential applications,” he said. “It’s only going to grow.”

Branding, of course, is critical in the search-engine business, which is why IAC will be spending heavily in this area. But the value of the brand is only as high as the site’s ability to deliver a consistent experience.

In other words, look and feel and a cute logo will not be enough to sustain the business. The site will have to deliver a more satisfactory user experience.

“The quality of the brand is based on performance and consistency,” Steidtmann cautioned. “Any Internet-based business is [based on] customer traffic and repeat business. You can’t grow the business if you have to get new people all the time.”

The Merrill analysts are convinced that IAC will indeed focus on the harder-core issue of customer retention. “InterActive plans to leverage the search technology across all its platforms, improve the user experience and increase conversions.”

And despite a lingering feeling of disappointment in this sector, the Merrill Lynch analysts maintained their target price and buy rating on IAC.

Another analyst following IAC, Safa Rashtchy of Piper Jaffray, even raised his target price from $32 to $34. (The stock is currently trading at around $28.)

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