IAC’s Ask.com already uses Google’s text ads, but hitherto, it’s still used its own search algorithm, which it acquired when it bought Teoma. Teoma and Wisenut were once considered to be potential Google killers, Ask Jeeves bought Teoma; Looksmart bought WiseNut.
Anyway, Ask.com already uses Google’s text ads and when Google filed to go public, it was disclosed that Google was giving Ask a 110% revenue share. That’s right, Google was essentially paying off Ask.com for market share. However, IAC always maintained that one day, it might launch its own ad platform, too. This always seemed to be a hollow threat, because Google has created the world’s most effective and valuable advertising marketplace… it did not make sense for Ask.com to do that, frankly.
Today SAI is reporting that blanketed between potential layoffs is the possibility that IAC simply drops using Teoma to power Ask.com’s search engine and instead fully turns to Google for both algorithm and paid search.
The implications are actually both trivial and important. They are trivial in that Google is getting access to Ask.com’s less-than-5% market share as is via the paid ads relationship; but in the backdrop of MSFT arguing that the market needs a strong No. 2 to fend off a Google monopoly in search, Google might also want to avoid this. Google already powers AOL. So if Ask.com is also powered by Google, in fact, Google “owns” the real estate on 3 of the Top 5 search engines (Google, AOL and Ask.com). In that context, I hate to say it, but it would make sense for YHOO and MSFT to hook up, because otherwise YHOO and MSFT will be fightning for the #2 slot instead of taking on Google for the #1 rank.
CNET paid $20.5M for FindArticles last week and bought it from Looksmart, who made it official today.
CNET has about $50M in cash and has set up a $250M credit facility to buy more assets I presume. They also just sold Webshots to American Greetings from some $45M.
I like CNET. They’re a great mid-sized web giant. With a market cap of $1.1B, there’s good room to grow. I used to own the stock but don’t now.
Anyway, I was going to email them and ask them this, but I doubt they would have answered, so here goes:
CNET owns a lot of good URLs, namely TV.com and Search.com. They’re doing a lot with TV.com, not that much with Search.com. In fact, Search.com is a meta search and their video search is powered by Truveo (disclaimer: Mojo Supreme has search products which include the MetaMojo.com vertical search and video meta search). The problem with search is you need distribution. You can have a great product but unless you have eyeballs conducting searches, no one cares.
So when CNET bought FindArticles, I asked: why not buy all of Looksmart for a dime more? A look at the numbers further reinforces this question.
Looksmart has $54.85M in revenues in 2006, but its entire market cap is $54.99M.
Wait, it gets better: it has some $38.25M in cash and a whopping $89,000 in debt.
Bottom line: its enterprise value sits at a paltry $14.31M.
Mind you, Looksmart is not going to take over the world, but if CNET is going to pay $20.5M for FindArticles.com, why not just outright buy Looksmart and use it as your search unit proxy which right now is restricted to a great URL but a largely outsourced strategy?
So short of emailing CNET about this, I decided to inquire and guesstimate the answer to that question.
Sure, as a publicly traded company, I guess the market would have wanted more, but Looksmart has undertaken a very vertical search strategy. This year Microsoft showed that vertical search has a place in the broad landscape by buying Medstory. Thus, I ask, would Search.com’s meta search nature not complimented Looksmart quite well? Or better yet, would Looksmart’s vertical focus not have fit well with Search.com’s meta search?
Furthermore, to the best of my knowledge, CNET lacks proprietary search, right? Did Looksmart not acquire Wisenut? Wisenut, just a few years ago, was being spoken of in the same vein as Teoma, bought by Ask.com. Teoma and Wisenut were actually referred to occasionally as Google killers (yes, I know, crazy now, and frankly, then, even though Google was a shadow of what it is today).
So, as I was writing in a stream of consciousness manner, I decided to actually check Wisenut.com before pressing publish. Good thing I did. Wisenut.com has ceased to exist. Or, maybe the search technology now powers Looksmart. So I went to Looksmart. Good thing I did. Nothing but 10 sponsored results. Great.
Maybe the market is being generous with Looksmart? To quote Henry Blodget: “Looksmart is frantically looking for a business.”
I think I know why CNET balked. Looksmart is no more. Here’s their business summary description:
LookSmart, Ltd. operates as an online advertising and technology company in the United States. It provides content, advertising, and technology solutions to consumers, advertisers, and publishers. The company offers advertisers pay-per-click search advertising and banners through a monitored ad distribution network. Its ad distribution network includes proprietary Web sites, syndicated publishers, other ad networks, and search partners. The company also offers a suite of tools and solutions that help publishers improve their audience, control advertiser relationships, and enhance the monetization of their sites. It operates various consumer sites, which include FindArticles.com, a Web site that enables consumers to search a database of content from various articles; vertical search sites that select appropriate resources by category and deliver relevant search results, including health, finance, entertainment, and auto; and Furl.net, an online social bookmarking service, which enables members to securely save Web pages. LookSmart was founded in 1996 and is headquartered in San Francisco, California.
The company has fully thrown in the towel on being a destination and has branched off into hundreds (thousands/millions) or really vertical search services.
Will the strategy pay off? Well, their entreprise value is $14M. I doubt the market thinks it will.
Yes, I’m speculating here, but I suspect that CNET in fact looked at buying all of Looksmart but probably passed. But this begs the question: wouldn’t you buy $54M in annual revenues for an enterprise value of $14M?
The search industry has been putting too much of a premium on paid results at the detriment of organic results.
Well, not so fast. The quintet of mass search - Google, Yahoo!, MSN, Ask.com and AOL - have focused on both organic and paid, but the laggards have not, and the market caps - and market shares - of these is a reflection. This quintet also battles for mass search supremacy, leaving a great opening for niche players.
You would think that players #6 and down would compete in this space, but these smaller players have adopted a me-too strategy of trying to be masters of monetization, and effectively hurt their organic results.
As developer of the domain-specific vertical search engine MetaMojo.com (along with a video meta search engine), that makes me very happy as it creates a demand for any way that these smaller search players can improve their organic results, assuming they actually have something in place to begin with.
MARKET SHARES
The leading five companies account for 99% of the cumulative market share, and the laggards get less than 1%. Should they even bother? Well, yes, because search remains a lucrative business.
But the problem with the laggards is that they put an emphasis on paid results at the detriment of organic results. Some, in fact, do not even have an organic search strategy.
MARKET CAPS
Google is the 600 pound gorilla, naturally, with a market cap of $150B, revenues of $10B with profits of $3.2B in 2006.
Then enter Yahoo! who let Google become what it is today by using it on its portal. Yahoo! is worth as a total business $38B. It’s the #2 in search.
Microsoft commands a market cap of $300B nearly, but I’d estimate that MSN.com (with the portal and search business) is worth $29B. See that analysis here, in “Should MSFT Spin Off MSN.com/Live into Yahoo!?”.
Ask.com is the #4 player, and sold to IAC a few years ago for $1.8B. Today it’s search business within IAC is worth more. I’ll look at a valuation of how much soon.
AOL.com is #5, and is a part of Time Warner, the largest media company in the world with a market cap north of $70B.
Let’s examine the smaller players now (not in order of value):
- Answers.com is one of my favorite players in the space, it is not a cheap company by any stretch of the imagination, and it is very vulnerable to Google one day waking up and removing their link off their results page. But once you grapple with that risk factor, you realize Answers.com is a unique company that is smart enough not to even consider itself a competitor in search. I own shares in the company, who have gone up and down since its IPO a couple of years after dropping the software subcription model for a free, ad-supported strategy. The company boasts a market cap of $122M and while it is rich in any traditional method, for what you get, it’s an intriguing place to plunk down your money.
- MIVA is one company that does not have an organic strategy at all. It has a number of paid products and last year launched an interesting contextual product, but the problem is that in an era where Google, Yahoo! and MSN can outbid you for distribution and have FAR more advertisers, I cannot see MIVA getting any traction.
Its market cap? $181M.
I own shares in MIVA as well, but mainly / solely because I view it as a cheap M&A target with a solid European presence, which I like. But ask me what I think of its stand-alone prospects, and the honest answer is: not much. I don’t own many shares so it’s not a large holding.
- Mamma.com (disclaimer: I worked for Mamma in 2000) is a drama story that has had enough storylines to merit a movie made about it. I have bought, sold, bought and sold stocks in this company over the years. I could have made a lot more, but the volatility was too much to handle so I always got out upon making a decent return. I don’t own any shares and frankly view this one more as a desktop search (after it bought Copernic) and as it stands, I view desktop search as very competitive. Mamma.com is worth some $60M on Nasdaq. Can it be an acquisition? Sure, who is not. But I see better fits than Mamma.com, who’s search technology is a meta search and a video meta search that is powered by Pixsy.
- InfoSpace is also a company I own stock in (see a trend).
It’s a drama in itself. Just yesterday, the company closed with a market cap of $640M and an enterprise value of $200M. Today the stock is up 20% (more on this below) and the company is right now worth $817M with an enterprise value around $266M.
In fact, INSP’s slike this morning is what drove me to write this post.
The stock spike was odd because yesterday was payout date for the special, one-time dividend of $6.30. INSP had over $400M of cash up to recently, and at the behest of institutional shareholder Sandell Asset Management, it recently paid out $300M in dividends.
I bought INSP way back when people got excited about search and Google was not an option (not yet public). I think Infospace is a company that will one day offer shareholders a nice payout in a sale. It’s bound to happen, but please note, I am biased in saying this since I own shares.
Today I got to work and saw INSP up $3.40. Why, I asked? According to some rumors:
Spanish newspaper reported that Spanish cell phone and Internet content company LaNetro Zed SA is working out a deal to buy the company for 800 million euros, or about $1.08 billion.
More rumors of a sale, problem is:
So InfoSpace has two businesses — online and mobile — and both of them have issues. The online business, made up of the metasearch and private-label services, is the company’s cash cow, generating more than 60% of its gross profit last year. One of the biggest difficulties facing that business is that the search service ain’t that great.
“The problem with that product is that it offers an inferior search experience,” says Mark May, an analyst with Needham. “Rather than always delivering you the most relevant results, it delivers you the most relevant advertisements, which aren’t always the same thing. From a consumer perspective, they don’t compare favorably to the bigger names like Google.”
The mobile business’s problems are more extreme. In late September InfoSpace disclosed that Cingular, its largest ringtone customer, wouldn’t renew its contract. (Carriers have moved to sign deals directly with major record labels, cutting out InfoSpace as the middleman.) Three weeks later the company decided to exit the mobile content business, which contributed the bulk of the division’s revenue.
InfoSpace, of course, got into search when it merged with Go2Net back in the day. Go2Net ran Metacrawler and Dogpile, and in many ways, InfoSpace never did much with the products. If I am wrong, please advise.
InfoSpace has essentially dropped the ball in organic search (or never dipped their toes), and the market reflects badly on them.
- Marchex is another player fully involved in paid search, I like that they focus on verticals. For full disclosure: I am unhappy (as a client) with Marchex’s unit at Goclick. Here’s the entire story.
That issue notwithstanding, I think Marchex is well positioned in the entire parked domain name business, which I do not particularly like, but many in the mainstream media and venture capital community do. Marchex weighs in at $650M in market cap. Marchex was actually founded by Go2Net founder Russ Horowitz.
- Looksmart is a company I made a nice return on as well and got out, at the right time, since the stock has stalled since. Looksmart totally repositioned a couple of years ago and dove into the vertical search business. I think it has a strong monetization rate, but Looksmart, too, is a bit all over the place. However, of all of these companies, it might be the best positioned in terms of organic results. For a while, it did not have an algorithm in place and relied on its directory, that changed with the purchase of WiseNut.
A little side story: before Powerset and others became “Google’s latest threat,” ’twas Wisenut and Teoma. Teoma was bought by Ask Jeeves, who itself got bought out by InterActive Corp. for a whopping $1.8B.
Looksmart is worth some $77M but it boasts a lot of cash on its books, about $37M, so its enterprise value is in fact a modest $40M.
Of course, this does not mean you should dive in and buy the stock, it is extremely hard to compete in this space, even though it is indeed very lucrative when you’re a market leader.
Connecting the dots…
It is interesting to note than even the #5 player Ask Jeeves (at the time, it has since moved up to #4) realized that remaining a stand alone search company was simply too hard, so it sold to Barry Diller’s IAC.
This makes me wonder why INSP, MAMA, LOOK, MIVA, ANSW even bother… but that is just the point: search compaies remains a very likely M&A target. But as the article in Smart Money suggests, some of these companies drop the ball in search result quality, so it might not be foolish for them to try to improve that component of their business before selling out.
Disclosure: at the time of writing I own shares in INSP, MIVA, ANSW, YHOO and would like to resolve my little issue with Marchex ASAP!
I guess it’s time to roll out the stock market cliches.
Back in 2000, I used to work at Mamma.com, the so-called “Mother of All Search Engines.” I worked there before the search engine industry took off, before the stock price tripled in price in one day, before Mark Cuban bought and sold his shares in the company.
Late last year, I bought a few thousands shares in the company. In January, for some odd reason, volume spiked and I sat on a nice, juicy return. I did not sell. My rationale was the company had some $25M of cash on its books, and the market cap being at $30M, it was a safe investment. Larger companies and old media firms were also looking to invest in search.
Mamma.com lost some money in the ensuing quarters and I regretted not selling th stock. Well, regret is a big word, for in the stock market, what goes up must come down (eventually, usually) and vice-versa (eventually, usually).
Indeed, I knew that there would be something in the horizon that would eventually cause the stock to pop again. Today Mamma.com announced that it had launched a video search engine using Pixsy’s media database. The stock soared 45%.
For the record, I have no idea what made the stock pop in January. But, I learned from history.
What’s that saying? Oh yes: Buy the Rumor, Sell the News.
I sold all of my shares today and made a nice profit. Don’t get me wrong, I like the company (I’m a loyal guy, usually). If the stock continues to do well, I’ll be happy as a former staffer. If the company’s stock tumbles, I’ll be glad that I cashed out.
The company’s market cap is $50 million. Sure, that’s a tiny amount compared to market leaders Google who are worth $150 billion, but, there is a reason why the former is worth $50 million and the latter $150 billion. As a side note, when I joined Mamma.com, we then had 4-5 million uniques, Google had nowhere near that.
When I bought the stock late last year, I used to think that some companies would eventually want to buy out Mamma.com, but as a meta-search engine, I am not sure many would. After all, a meta search engine lacks its own index, it parses and returns results from other, underlying search engines. It’s got its place online, but as an M&A target, I’d rather buy an index and crawler.
But increasingly, I do not think many companies will look to buy into the search market.
Why?
With Google, MSN and Yahoo! now all having a proprietary search index and paid listings databases, I believe these companies will basically pay for market share.
Case in point: News Corp. could have bought Mamma.com, Answers.com, Looksmart.com and pushed them much like InterActive Corp. bought Ask Jeeves and invested in it. Of course, that was after Barry Diller put a contract out for the butler.
But instead, News Corp. gladly accepted a $900M payment from Google to use it instead. Today I noticed the “Powered by Google” logo on MySpace.com for the first time. I think Google overpaid, but it was a defensive move against MSFT and Yahoo!.
I also bought Looksmart for that same very reason: potential target in an M&A. Of course, I liked Looksmart mainly because it was repositioning itself as a player in the rapidly growing vertical markets, which I myself have directly invested in (more on that in the disclosure). But seeing Looksmart double in price over the past few months, I decided to join my sale order for Mamma with one for Looksmart.
After all, you can’t be greedy. Looksmart is worth $110 million. It’s doing well. But at a $110 million, it was time to sell.
What’s that other saying? Oh yes, bulls make money, bears make money, but hogs get slaughtered.
Disclosure: As mentioned, I used to work for Mamma.com. At the time of writing, I just sold my positions in Looksmart and Mamma.com.
Of all of the companies mentioned: I own Answers and Yahoo! To see why I like Answers, read this.
Also, as the founder of Mojo Supreme, our company runs a vertical search network called MetaMojo.com. Like Mamma.com, we are about to launch a video search shortly; though I doubt it merits a 45% spike in our “stock price.” Well, maybe it does…
UPDATE: When the dust settled, Mamma rose 80% in one day (thank God for those small floats, valuing the company at $60M. It does make you wonder if the launch of a video search relying on another company’s database on a site with some 5M uniques - I estimate - is worthy of all of this excitement?). I will say this: it’s a great time to be in this business, and I can’t wait for when we launch our search engine shortly.
PLAY
