LookSmart reeling after MSN bombshell News

LookSmart reeling after MSN bombshell

London, October 7 2003,

by Chris Lake

LookSmart shares halved in value yesterday after MSN said it would stop licensing the US company's search tools due to lack of performance; the portal accounts for about two-thirds of LookSmart's revenues.

The search company was left stunned after MSN said tests in the UK found that its own search tools and those provided by Overture gave better results than LookSmart. Its use of LookSmart listings will end in mid-January next year.

LookSmart CEO Jason Kellerman was forced to remark: "We're going to need to make some changes around here."

He added: "We are very disappointed with the outcome of our efforts not to renew our agreement with Microsoft." MSN and LookSmart have worked together for five years.

MSN made the decision to ditch LookSmart after tests in the UK showed that results delivered by its own software - or Overture's, which it also uses - were better than those provided by LookSmart, according to MSN group product manager Lisa Gurry.

The MSN account generated approximately two-thirds of LookSmart's revenues and during the second quarter, all of its licensing revenue. LookSmart has been under pressure recently to reduce its reliance on MSN and launched a new pay-per-click search service last week to help it diversify sales streams.

LookSmart is expected to post revenues of about $150m for 2003 and has not yet revised expectations, since the MSN agreement will not end until January, but the loss of its biggest client will leave a massive dent in the company's balance sheet in 2004.

The blow is a serious one, but with $60m in cash in the bank, LookSmart is not in a critical position, though cost cuts are inevitable. LookSmart has about 30,000 advertisers, compared to Google's 150,000.

While the news has immediately damaged LookSmart, the announcement is in line with MSN's long-term strategy to develop its own search tools in a bid to compete with Google and Yahoo, which will be wary of the company's efforts to take control of its search activities.

The relationships within the search industry are as entangled as ever, as MSN currently works with Overture and Inktomi, which are both part of Yahoo. MSN accounts for about one third of Overture's revenues (about $350m).