February 21, 2003 8:27 AM PST

Inktomi extends deal with MSN

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Inktomi has lengthened its arrangement to provide search results for Microsoft's MSN Web portal, quashing speculation that the software giant would scrap the deal out of competitive concerns.

Earlier in February, Microsoft extended its agreement for Inktomi to provide Web search services through December 2005, according to a Feb. 14 filing with the Securities Exchange Commission. The filing added that MSN contributed $5.6 million in revenue to Inktomi during the December quarter, $5.1 million of it indirectly through paid inclusion and $500,000 in licensing fees.

The extension surprised some Wall Street analysts, who had expected Microsoft to drop Inktomi. MSN rival Yahoo in December agreed to acquire Inktomi for $235 million as a way to strengthen its search offerings. Yahoo executives have touted the deal as a way to beef up their company's paid-inclusion business and to improve the general Web searches on its site.

"Yahoo management should be grinning at the prospect of adding its own paid- inclusion business to the small piece of inclusion (Inktomi) gets from Microsoft," said Jordan Rohan, an analyst with Soundview Technology Group, who first published a report about the deal extension.

Inktomi's paid-inclusion business, its largest growth area, charges advertisers per-click fees to appear in its search results.

Web search has become a lucrative business both for the companies powering the technology and for large portal partners getting a cut of the revenue. Companies such as Overture and Google have partnered with most Web giants and have become a revenue booster for them.

Over the past three quarters, Yahoo's relationship with Overture has helped the Web portal reach profitability. Every time a Yahoo user clicks on an Overture sponsored link, Overture pays Yahoo a percentage of the revenue it receives from advertisers. Although Yahoo does not break out how much it earns from this arrangement every quarter, the partnership has significantly boosted its profitability and cash flow.

Microsoft executives have also touted Overture's revenue contribution to MSN's quarterly revenue. Both MSN and Yahoo have been experimenting with new redesigns and feature tweaks to their respective search engines.

However, the financial success of the Web search business over the past year has created a complex mix of intertwined relationships between competitors, raising questions about future deals. Yahoo's current licensing agreement to use Google's search technology has become a closely watched relationship, given Yahoo's pending acquisition of Inktomi.

Meanwhile, Overture on Tuesday announced it plans to acquire CMGI's AltaVista search engine for $140 million in cash and stock. Overture plans to license AltaVista's technology to its partners, which include Yahoo, MSN and AOL Europe.

 

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