MSN Search Tests Worrisome for LookSmart

Paid inclusion provider LookSmart believes the re-jiggering of search by key partner Microsoft’s MSN might result in the search company losing significant revenues, according to a regulatory filing.

In its quarterly filing with the Securities and Exchange Commission on Thursday, LookSmart said MSN recently tested a new search results layout in the United Kingdom that eliminated the directory layer of listings provided by LookSmart. LookSmart said MSN plans a similar test for the United States in October.

The peek into MSN’s search plans comes as the portal decides how to catch up to Google and Yahoo. In the past year, Yahoo has made deals for two key components of MSN’s search services, agreeing to buy algorithmic search provider Inktomi in December 2002 and paid search company Overture Services a month ago.

After the Inktomi deal, Microsoft began investing heavily in its own algorithmic search capabilities, tripling its staff and looking to integrate search deeper into the operating system, while it alsorenewed its Inktomi partnership until December 2005. Meanwhile, MSN said it was quite happy with its Overture partnership. However, once Yahoo inked the Overture deal, Microsoft was put in the position of relying on a rival for two key components of its search services at MSN.

LookSmart would be crippled by the loss of its Microsoft business, which accounted for 68 percent of its revenues in the last quarter. Their contract expires on Dec. 3, 2003.

LookSmart provides MSN with directory listings, which appear on its search results page below Overture’s paid listings and index listings. The listings are from LookSmart advertisers who pay to have their Web pages crawled. According to LookSmart, MSN is mulling combining the directory and index listings, which could hurt the performance of LookSmart’s listings.

“If Microsoft does elect to combine these layers, any renewed distribution agreement would likely result in significantly lower paid clicks and listings revenues,” the company warned in its filing.

While LookSmart said it does not believe the small-scale tests will affect its paid clicks through this year, it warned that Microsoft could chose to implement a new search display system after the contract expires, possibly excluding LookSmart listings altogether.

“The test results will affect Microsoft’s decision to renew the distribution agreement, and whether to continue to distribute some or all of our paid listings after the agreement expires,” LookSmart said.

In addition to its listings agreement, LookSmart licenses its database content to Microsoft, bringing in $7.7 million in the first half of the year. LookSmart said it expects this portion of the agreement to be renewed, but for less money.