May 3, 2002 4:00 AM PDT

Will Google, Yahoo renew their vows?

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Alliances among the major players in the Internet search business have shifted dramatically during the past few weeks, and the future of another high-profile partnership is about to be put to the test.

During the next few weeks, upstart Google and veteran Yahoo will be negotiating an extension of their two-year partnership. Under the original 2000 deal, which expires in June, Google powers the search engine for Yahoo, the leading Web portal.

The stakes are high for both companies: Google would like to retain a major client as it heads toward an initial public offering, and Yahoo hopes to reverse a steady slide in search traffic--largely due to Google's popularity.

Meanwhile, Inktomi--a former search darling that has fallen on hard times--is another contender for landing the Yahoo deal. Inktomi lost the contract two years ago to Google.

"I'm sure Yahoo is trying to play Inktomi off Google to get a better price," said Jeff Fieler, consumer Internet analyst at investment bank Bear Stearns. "Google in many ways has taken search traffic from Yahoo, and Yahoo may see Google as a competitive threat as well."

Negotiations over the Yahoo contract come on the heels of a spirited battle for a similar deal with America Online--which highlighted the value of such alliances.

On Wednesday, America Online signed a multiyear pact with Google for Web search results and accompanying ad-sponsored links, ending relationships with pay-for-performance service Overture Services and Inktomi, its algorithmic search provider of nearly three years. Loss of the AOL contract sent Overture shares down 36 percent Wednesday.

Generally, Google provides search results based on relevancy, meaning that it returns a list of pages ranked by the number of other Web pages linking to that page, as well as other mathematical algorithms. By comparison, Overture returns search results based on the amount of money an advertiser has paid. This system has made Overture one of the few profitable Net businesses.

A drama in three parts
Yahoo has already signed a three-year deal with Overture to provide paid search results. What's up for grabs next month is the complementary search function that is not based on paid placement, with Inktomi and Google as two of the contenders.

A deal with Inktomi might make it possible for Yahoo to license search service without investing much money; it could even turn a profit from the deal, industry experts say.

"That's going to be part three in a three-part drama," said Danny Sullivan, editor of industry Web site SearchEngineWatch.com. "Yahoo was the surprise first punch of Overture's long renewal. Google has come back with this big counterblow for winning AOL from Overture and Inktomi. Round three comes next month, when we find out if Google hangs out at Yahoo or Inktomi steps in."

A key component in the upcoming round could be Google's increasing strength in the search market. Google's Web site in April accounted for nearly 32 percent of all search referrals globally, its highest percentage yet after climbing from about 1 percent in June 2000, according to StatMarket, a division of Net research company WebSideStory. The April figure compared with Yahoo's roughly 36 percent share of the market through its site, down from 46 percent in June 2000. MSN's site comprised almost 13 percent last month.

Inktomi says it is in talks with Yahoo to recapture the business.

"We're currently a part of Yahoo's evaluation, and we're working hard to win them back," said Inktomi spokeswoman Julie Keslik.

Yahoo would not disclose whether the company was evaluating other potential partners, though Joanna Stevens, a company spokeswoman, acknowledged that the Google deal will be up in June.

"We're continuing to work with Google as our default search provider, and we'll continue to examine the business to decide what makes the most sense for Yahoo financially and strategically," Stevens said.

Google would not comment on any talks with Yahoo.

Second chance for Inktomi?
The stakes are high for Inktomi, whose star in the consumer Web search market has fallen as Google's has risen. Though Inktomi has a robust networking business and a foothold in enterprise search, it recently posted deep losses.

The company reported a wider net loss in the second quarter, with lower revenue. Its loss broadened to $104 million, or 72 cents a share, from $58.3 million, or 46 cents a share, a year earlier. Revenue fell to $30.8 million from $39.5 million a year earlier.

In its earnings report, Inktomi said it expected to earn more money from its consumer search service in coming quarters because of its paid-inclusion program. This trend is part of a general shift in Web search. Unlike the early days of Web navigation, many search services are discovering that they need to make money from the Web sites they list. Few provide "pure" results that are collected by crawling the Web and ranking sites based on their relevance to surfers.

When consumers search for a term on most Internet portals, results can come from a variety of sources. For example, Overture powers sponsored links on MSN, Yahoo and others, giving Web surfers listings similar to those in the Yellow Pages. Broader Web page results from Google, Inktomi or others commonly follow sponsored ads, providing options to find academic, news or personal Web pages as well as business listings. Some portals, such as Yahoo, also collect their own directory listings.

To stay healthy and competitive in consumer search, Inktomi introduced in the last year a program that generates fees from Web sites listed in its database. Inktomi charges companies such as Amazon.com and eBay to list more than 1,000 Web addresses; they might pay anywhere from 5 cents to 40 cents per click when Web surfers jump to their pages from Inktomi's database. The revenue generated from paid inclusion is shared with partners such as MSN and Overture.

"An important nuance to our service is that we don't affect the relevance or ranking of that listing, but this drives higher" response from consumers, said Vishal Makhijani, vice president and general manager of Web search services at Inktomi.

But to attract sites that want to pay for such inclusion, Inktomi needs contracts to power search for high-profile companies such as Yahoo.

Dealing for dollars
The financials of Inktomi's program could be attractive to the Web portal, which may be looking to offset licensing expenses for Web search with revenue-sharing deals like the one it inked with Overture, analysts say. Industry experts say Overture's revenue split with companies such as Yahoo ranges anywhere from 40 percent to 60 percent going to the partner.

Last year, Yahoo paid Google about $7.2 million for Web search services. In return, Google paid Yahoo approximately $1.1 million for branding, advertising and promotional services, according to a Yahoo proxy statement filed in March.

Because Yahoo signed an exclusive deal for pay-for-performance listings with Overture, it's unlikely that the company could sign a competing revenue-sharing deal to use Google's recently introduced sponsored-link service, which runs alongside its mathematically generated results.

A deal with Inktomi or another service such as Teoma, however, might not violate that exclusive contract. Unlike Overture's listings, paid-inclusion search results do not rank Web sites based on how much they paid.

Still, Yahoo may find that it would be a public relations disaster to pass over Google, hailed for the quality of its searches and for its popularity with Web surfers. Either way, SearchEngineWatch.com's Sullivan said, both Overture and Google will remain viable companies.

Overture has proved a lucrative partner for many companies through its paid-listing service. The company recently beat Wall Street expectations by reporting quarterly earnings of $29.3 million, or 48 cents per share, on revenues of $142.8 million.

Meanwhile, Google's presence has grown rapidly through major deals with Netscape, Sony and Yahoo. But by syndicating its advertising program earlier this year, Google opened itself up to greater opportunity in powering search for major portals and crowding out the likes of Overture. Encroaching even further, Google unveiled new advertising tools that let marketers bid for higher placement in its sponsored link area--a move that prompted Overture to file a patent lawsuit against Google.

Google earlier this year won a contract to provide search listings to EarthLink, beating out Overture for the deal and cementing its playing power in both commercial and algorithmic search.

"You can have the best of both worlds," Omid Kordestani, Google's senior vice president of worldwide sales and field operations, said in an interview Wednesday. "The combination of Google's unbiased and highly relevant search results with paid search make for great revenues."

A shared history
One wild card in Yahoo's upcoming decision might lie in a stake that Yahoo is said to hold in Google. According to Fieler, Yahoo held an estimated 5 percent stake in the company at the time of its search deal with Google. Yahoo's Stevens would not confirm or deny whether the company has a stake in Google, saying only that it has never publicly announced such an investment.

Still, the two dot-coms have a long history. According to Google's site, Yahoo founder David Filo is a friend of Google founders Larry Page and Sergey Brin, and in 1998 turned down an offer to acquire Google's technology. In 1999, Google raised $25 million from Sequoia Capital, Kleiner Perkins Caufield & Buyers, Stanford University, Amazon.com and others.

Yahoo's upcoming decision for Web search is "something you handicap and don't say either way," said Fieler. "The internal discussion is likely the search quality vs. competitive threat. My guess would be, all things being equal, they would more likely want to replace Google, unless they could come up with the tangible offsets to the continued expected loss of search traffic."

 

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