I own shares in Answers.com, so take everything I say with a grain of salt. But you don’t need to be long in the company to admire what the Israeli-based company has done in just a few years.
For one, let me say that Answers.com is a great resource. Sure many sites go on to accomplish great metrics but they do not exactly help the web get better. Answers.com does.
Question: What is Answers.com?
Answers.com brands itself as “the world’s greatest encyclodictionalmanapedia,” or as its description metatag states: ”the ultimate answer engine, with quick accurate dictionary, thesaurus, encyclopedia, bios, tech terms, news, sports, weather, and much more.”
Closed: Bad; Open: Good
Answers.com used to be a software known as Gurunet. I never used the downloadable software, and as you can imagine, few people did. The company developed a lot of cool applications but it was not until the company paid $57,000 for the answers.com url and relaunched as a free, ad-supported online resource that the business took off.
The concept is simple, if you want to search for a city, instead of getting a bunch of websites, you get an answer on the city in the form of history, population, etc.
A For-Profit Wikipedia?
Frankly it can be seen as Wikipedia.org should Wikipedia.org become a for profit: good information on a topic, with ads (for an examination of what Wikipedia.org could be worth as a for-profit, click here; to see why Wikipedia.org should avoid ads altogether, click here).
Better Late Than Never
Answers.com is a late entry in the search/navigation/reference industry but shows that so long as a product is good, there is always a place for it, even if Google, Yahoo!, MSN hold 90% market share in search. Answers.com is after all a $110M market cap company, more than Looksmart who weighs in at less than $100M and has been around since the days of that fat dancing animated baby.
Mind you, Answers.com only booked $2M in revenues in all of 2005. Not a quarter, the entire year! But that was up from 190K in 2004. It did however book $1.5M in Q2 2006. Looksmart (for purposed of illustration) booked $44M in 2005, but that was down from $71M in 2004. Looksmart also boasts plenty of cash on its balance sheet: $43M compared to Answers.com cash hoard of $12M. For the record, we’re not saying that Looksmart and Answers.com are direct competitors.
Back to Answers.com’s business model and late entry: in fact, it was once I saw Answers.com that I thought there was still room for improvement in search and decided to plan for, invest in and build MetaMojo.com, the domain-specific vertical search engine that was launched in March 2005 and relaunched with a proprietary search crawler and web index in Fall 2006.
But enough shameless promotion, let’s turn the focus onto Answers.com. The company went public in late 2004, and as one of the newest participant in the red hot search industry, it got off to a rapid start.
We all know that search is a high-growth industry. The problem is that it’s a wildly lucrative space for players who have been around for a while. Google owns 50% of the market and as a result books $1 out of every $4 spent on advertising in the US in 2006. If estimates for total online advertising in the US are to grow to $25 or $32 billion, and search represents 40% of the market, then search will be a $12 billion market. This is why we think that ceteris paribus, Google could overtake Microsoft in market cap by then. But, again, this is not so much about Google or Microsoft, but rather, Answers.com.
Search vs. Reference
Recently, Barry Diller’s InterActive Corp. came out and said that Ask.com continued to grow (he bought Ask Jeeves for $1.8 billion in 2004 and unloaded Expedia last year). Ask.com is #4 in the space after Google, Yahoo and MSN. It surpassed AOL for fourth spot. In fact, Ask.com is the only major player growing in market share (excluding Google, who is ripping off market share from others like Diebold steals Democratic votes). But, if Answers.com were to be ranked in the search category, its market share growth is probably outpacing everyone. Generally speaking, Answers.com, like Wikipedia.org, is included in reference categories on Nielsen NetRatings and Comscore Media Metrix.
Backtrack a bit: After its IPO in late 2004, the stock zoomed up to $25 per share, valuing the company at $200 million. Oddly enough, if I recall properly, when the site launched it was not yet monetizing its traffic. It was not long before Answers.com added Google’s Ad Sense and began to monetize its search queries. But more importantly, somehow, Google replaced the Dictionary.com link in the upper right section of its search results page with a link to Answers.com’s results page. This was a major coup. Google stated that Answers.com was not competitive and wanted to include the resource in its results page. [If that’s the case, then Google, if you’re reading, MetaMojo.com is a resource and not a search engine! Though jokes aside, I do think it would improve the user experience on any major, mass market search engine.]
After the initial euphoria, the stock fell a bit and settled in the $15 range, that’s when I got in buying a few thousand shares.
Google: Answers.com Sure Felt Lucky…
Answers.com had wisely positioned itself as a reference tool, and not search. Google had wisely seen that Answers.com would be one of the few search services that could pull traffic away from Google once the word got out. By adding Answers.com’s result on Google’s search results page, it would at least ensure that those who want Answers.com’s result need not venture away from Google. Count me in that category. I now never go to Answers.com, but knowing where it is on Google’s search results page, I know that it’s only a click away.
As a result, I probably never go to Answers.com (My brother does though all the time and swears by it). I also rarely click on Google’s link to Answers.com on the upper-right area of its search results page. But what’s interesting is that I do find myself clicking on Google’s organic result for Answers.com once in a while. Every time I do, I wonder how much that site-wide link Google gives to Answers.com helps it with organic results ranking. After all, a link from Google is the platinum link in the Pagerank universe.
Answers.com has grown rapidly, partially in part due to that magical link on Google’s search results page.
As the graph above demonstrates, Answers.com’s traffic jumped immediately and because it’s already linked off every search results’ page on Google, it becomes hard to grow in size, and thus revenue.
Revenue = Traffic x Content (duh)
Does it? Not so fast. After all, just because it’s reach is high does not mean that Answers.com is maximized as a share price.
Note that Answers.com licenses content from dictionaries, atlases and other sources. But while its content costs are somewhat fixed, once it hit a certain level of traffic, its revenues could still grow quickly if it can add more content to its site.
Financial LossesIf Answers.com is so great, you might be asking yourself why the company is not worth more, after all, a $110M market cap in reference/search is tiny compared to the huge upside. We did say that search is on pace to become a $12 billion market. The reason for the discount in market valuation has to do with the fact that Answers.com is a money-losing venture. Answers.com lost $6.6 million in 2004 and another $6.1 million in 2005. This year, it’s still bleeding money. A lot of the costs though go to R&D. While R&D is an important component of Answers.com secret sauce, over time, tech costs should level off and will not rise in tandem with traffic.
If Answers.com is so great, you might be asking yourself why the company is not worth more, after all, a $110M market cap in reference/search is tiny compared to the huge upside. We did say that search is on pace to become a $12 billion market. The reason for the discount in market valuation has to do with the fact that Answers.com is a money-losing venture. Answers.com lost $6.6 million in 2004 and another $6.1 million in 2005. This year, it’s still bleeding money. A lot of the costs though go to R&D. While R&D is an important component of Answers.com secret sauce, over time, tech costs should level off and will not rise in tandem with traffic.And since technology costs level off at some point, it could add to profits at a healthy clip, assuming it becomes profitable. At this rate, the company is not anticipating profits anytime. But if the site’s traffic growth is any indication, it might be worth looking at before it does, because Answers.com has a lot of upside over the mid to long term (in 1-5 years).
This is an important consideration, because just because its reach might be maximized (it’s not, but by virtue of being on Google, it does make it hard to come up with new, unduplicated reach), that does not mean that its revenue is too. After all, the more content it offers users, the more organic traffic it gets from search engines and the more time people spend on the site once they are on it. As this graph illustrates, pageviews have grown though they are now down from their early 2006 peak (this is from Alexa, so not necessarily 100% accurate).
In fact, if you wanted to invest in Wikipedia.org’s growth, you might as well invest in Answers.com. Answers.com indexes all of Wikipedia.org’s content and unlike Wikipedia, it includes ads in the mix, though the ads are mainly sold on a cost per click basis, by the looks of it. But Answers.com has started to sell cost per impression ads, and this means that it has begun to better monetize its traffic.
Answers.com has continued to add content sources and while some pages do seem a bit cluttered, overall it remains a great source of, well, answers.
Important Partnerships
Recently, the company’s given investors a reason to pull its share price up from $10 to $15 through partnerships.
Microsoft will include Answers.com’s 1-Click Answers (which allows a user to click on any word on the screen, in any program, for instant explanations) as an add-on in Internet Explorer 7.
Subsequently, CBSNews.com announced a partnership with Answers.com to enhance its news site with instant access to reference information.
Key Metrics
In September, 2006, the site crossed the four million query mark per day. This compared with approximately 2.7 million average daily queries during Q2 2006.
In February, 2006, it announced that it had doubled its content database with answers on some 3 million topics. Today, eight months later, it boasts answers on 4 million topics.
While I doubt it will have a 1:1 ratio between daily queries and topic answers, so far it seems that the site’s growth in content topics is almost perfectly positively correlated - and equal to - its daily queries. That might be a mere coincidence. What is no coincidence is that the stock has bounced back to $15.
Disclosure: I own shares in Answers.com but that does not mean that you should too.
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