Engines of growth

The power of search as a business was confirmed by the recent $1,6-billion purchase of the search engine Overture by Yahoo!. The deal has got the banking sector talking about the potential of the dotcoms again and heated up competition among the biggest portals for the best search solutions.

Even the relatively little-known United Kingdom-built search engine e-spotting.com was gobbled up last month for $163-million by United States company FindWhat.com.

Yahoo! was willing to pay big bucks for Overture because it is one of the world’s biggest paid-for search engines and occupies one of the few areas that have emerged as a real Web business that the advertising world understands and is willing to back. Yahoo!‘s acquisition is the most significant indication so far that banks and the advertising community can put the disastrous days of overvaluations, unrealistic business models and zero profits behind them and that the Web might just be a good place to be again.

The impact of this deal on the UK’s Internet industry is just as significant, if not more so, as it is for the rest of the Web world.
The kind of acquisition that Yahoo! has just completed is probably not the last.

“The real significance of this deal is the amount of merger and acquisition activity that is kicking-off and the valuations that are being attached,’’ says Andrew Walmsley, founding director of i-level, the biggest buyer of online media in the UK. “These are big valuations whereas, a year ago, nobody would spit at these companies.’‘

During the boom years there was capital market growth based on expectations, but now the market demands real numbers, real business models and real income from the Internet. Paid-for search is one of the areas that meets the criteria.

Paid-for search — known as sponsored links in Web speak — already accounts for 30% of the online advertising market in the UK and could be as high as 35% by the end of the year. This compares with the entire UK online advertising business, which i-level forecasts is on track for a 46% rise this year and could reach an estimated $500-million. This means online will still only be 2% of the total UK advertising spend, but at least it’s on the way up.

Searching the Web is a fundamental part of the online communications revolution and the earliest leaders in the field were exuberant young companies, such as Yahoo!, which came up with the big idea to create a listings directory.

As Web fever grew the early search engines began wanting to transform themselves into portals or destinations for Internet users to visit. The next phase was when these portals added content so as to become “sticky’’ and entice users to stay there for all kinds of revenue-generating reasons. Then the trend moved to providing subscription services inside the portal. Now the business appears to have come full circle with search engines back in vogue.

“One of the most popular things to do on the Web is [to visit] directories,’’ says Paul Zwillenberg, associate director of OC&C Strategy Consultants. “Just as TV guides are the highest circulation magazines for the television business, what’s on the Internet is one of the most popular surfing activities.

“Internet advertising is one of the only growth stories in the UK advertising market and paid-for search is growing like gangbusters,’’ Zwillenberg continues. “While the portals are making progress in selling value-added services, advertising and access are still key components of revenue. So it’s logical to focus on the fastest growing and highest margin part of your revenue streams.’‘

Yahoo!‘s return to its roots with its latest purchase has complicated the UK’s search engine market, which has been dominated by Google over the past few years. Google gained popularity because users enjoy a pure search experience uncluttered by offers of news or sports or other home page content typical of the home pages of AOL, MSN or Yahoo!.

In the early days the Web was supposed to be a freewheeling information hub and those that tried to charge for search listings, notably Opentext in the mid-1990s, were criticised. The initial Web advocates dreamed of an Internet free of blatant commercialism. But by the time Overture tried this idea again in 1998, with the launch of GoTo.com, the market was more ready to accept the idea of paying to use listings that had been hoisted to the top of search results and highlighted as “sponsored links’‘.

“Consumers are now in favour of the sponsored listing,’’ says Walmsley.

“The reason is that when you do a search, you expect the big brands to be at the top of the results and you’re disappointed if they’re not there.’‘

The Yahoo!/Overture deal — which comes only six months after Yahoo! bought another search engine, Inktomi, for $235-million — has raised the question of what will happen to Google and the other search engine businesses, especially those hosted in the UK. Some analysts say Google will feel the pressure now that Yahoo! has acquired two big search companies to increase its search traffic and revenue. However, other industry observers counter that the price paid for Overture is an expensive sign that Yahoo! is still playing catch-up in the search stakes.

“It’s wrong to assume that Google is in trouble from this [Yahoo!/ Overture] deal,’’ says Danny Sullivan, the editor of online newsletter searchenginewatch.com. “It’s going to make Yahoo! much more competitive, but Google still very much occupies the high ground.’‘

In the UK, Google leads the search-engine league table, according to Nielsen NetRatings’s figures for April 2003, with 10,35-million unique users a month. Yahoo! is second with about 6,5-million unique users while AskJeeves has about 4,5-million and MSN 4,04-million.

Perhaps the bigger pressure is on the likes of AOL and MSN, which don’t have their own in-house search engines or paid-for listings providers.

AOL UK has been happy buying in the services of Google and Overtune up to now, while MSN has been using both Overture and Inktomi to power its search business. Freeserve uses Overture. Now, of course, their biggest portal rival has snapped up two of these three companies.

As the biggest UK portal by page-views, MSN is the company attracting most comment in the wake of Yahoo!‘s latest moves.

“I’m sure they’re saying at MSN that they need to come up with an in-house solution or think about buying Google because it has the best search technology and it has a robust paid-search engine as well,’’ says Sullivan. “It’s got to be all hands on deck at MSN.’‘

For its part, MSN says that Yahoo!‘s acquisition of Overture has “no near-term impact on its search business’‘, while AOL UK says it’s “business as usual’’ and that its deal with Overture “should remain beneficial to both companies’‘. Freeserve did not return calls.

The cost of buying Google would probably be exorbitant, as much as $2-billion according to analysts, and the search engine has no need to sell anyway because of its size and success. The UK-originated search engine AskJeeves could be a cheaper buy for anyone who wanted to adopt Yahoo!‘s strategy of owning search companies.

Will consumers in the UK feel any effects of all this search engine consolidation? The analysts say this is mostly a business-to-business deal, but there might be an increase in advertising including pop-ups, that have to be clicked closed or moved through before you can get to your search results.

“This might happen,’’ says Tom Ewing, European market analyst for Nielsen NetRatings, but warns that, “given that the success of Google has been built on the speed and cleanness of the search for the consumer, an in-your-face strategy of pop-ups and extra advertising might be very risky.’’ — Â

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