August 18, 2003

Shortly after the announcement of Yahoo's plans to purchase Overture last month, industry experts agreed that while the acquisition is a step in the right direction for the online search industry as a whole, one company may end up an outsider.

Various predictions that San Francisco-based LookSmart would not fare well in the long term if MSN - the company's biggest client - decided to look elsewhere for search services, may just come true.

According to LookSmart second-quarter report last week, MSN is looking into alternatives for its search engine - news that sent LookSmart stock downward and inspired downgrades from stock analysts like Kaufman Brothers, which downgraded LookSmart stock from Buy to Hold, "based on info in the company's 10-Q that raises the probability of an unfavorable outcome with regards to renewal of the MSN contract."

Most of LookSmart's revenue comes from its Internet-listing service. LookSmart licenses its database content and earns all of its licensing revenue from its agreement with MSN, which expires on December 3. According to LookSmart's filing, last month, Microsoft conducted a test on a small percentage of searches on its site in the U.K. that eliminated the directory layer of search results in which LookSmart's listings currently appear, and plans to expand the trial shortly.

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," said LookSmart. The company added, "Based on our discussions with Microsoft, it is likely that the licensing portion of the agreement will be renewed, but that it will result in less licensing revenue than under the current agreement."

Analysts are cautious. US Bancorp Piper Jaffray analyst Safa Rashtchy said in a note Friday that MSN will likely renew the LookSmart agreement, but that "nothing can be ruled out. Rashtchy also said that "LookSmart's future clearly depends on this contract."

Source: Media Post.com

        

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