The search industry has been putting too much of a premium on paid results at the detriment of organic results.
Well, not so fast. The quintet of mass search - Google, Yahoo!, MSN, Ask.com and AOL - have focused on both organic and paid, but the laggards have not, and the market caps - and market shares - of these is a reflection. This quintet also battles for mass search supremacy, leaving a great opening for niche players.
You would think that players #6 and down would compete in this space, but these smaller players have adopted a me-too strategy of trying to be masters of monetization, and effectively hurt their organic results.
As developer of the domain-specific vertical search engine MetaMojo.com (along with a video meta search engine), that makes me very happy as it creates a demand for any way that these smaller search players can improve their organic results, assuming they actually have something in place to begin with.
MARKET SHARES
The leading five companies account for 99% of the cumulative market share, and the laggards get less than 1%. Should they even bother? Well, yes, because search remains a lucrative business.
But the problem with the laggards is that they put an emphasis on paid results at the detriment of organic results. Some, in fact, do not even have an organic search strategy.
MARKET CAPS
Google is the 600 pound gorilla, naturally, with a market cap of $150B, revenues of $10B with profits of $3.2B in 2006.
Then enter Yahoo! who let Google become what it is today by using it on its portal. Yahoo! is worth as a total business $38B. It’s the #2 in search.
Microsoft commands a market cap of $300B nearly, but I’d estimate that MSN.com (with the portal and search business) is worth $29B. See that analysis here, in “Should MSFT Spin Off MSN.com/Live into Yahoo!?”.
Ask.com is the #4 player, and sold to IAC a few years ago for $1.8B. Today it’s search business within IAC is worth more. I’ll look at a valuation of how much soon.
AOL.com is #5, and is a part of Time Warner, the largest media company in the world with a market cap north of $70B.
Let’s examine the smaller players now (not in order of value):
- Answers.com is one of my favorite players in the space, it is not a cheap company by any stretch of the imagination, and it is very vulnerable to Google one day waking up and removing their link off their results page. But once you grapple with that risk factor, you realize Answers.com is a unique company that is smart enough not to even consider itself a competitor in search. I own shares in the company, who have gone up and down since its IPO a couple of years after dropping the software subcription model for a free, ad-supported strategy. The company boasts a market cap of $122M and while it is rich in any traditional method, for what you get, it’s an intriguing place to plunk down your money.
- MIVA is one company that does not have an organic strategy at all. It has a number of paid products and last year launched an interesting contextual product, but the problem is that in an era where Google, Yahoo! and MSN can outbid you for distribution and have FAR more advertisers, I cannot see MIVA getting any traction.
Its market cap? $181M.
I own shares in MIVA as well, but mainly / solely because I view it as a cheap M&A target with a solid European presence, which I like. But ask me what I think of its stand-alone prospects, and the honest answer is: not much. I don’t own many shares so it’s not a large holding.
- Mamma.com (disclaimer: I worked for Mamma in 2000) is a drama story that has had enough storylines to merit a movie made about it. I have bought, sold, bought and sold stocks in this company over the years. I could have made a lot more, but the volatility was too much to handle so I always got out upon making a decent return. I don’t own any shares and frankly view this one more as a desktop search (after it bought Copernic) and as it stands, I view desktop search as very competitive. Mamma.com is worth some $60M on Nasdaq. Can it be an acquisition? Sure, who is not. But I see better fits than Mamma.com, who’s search technology is a meta search and a video meta search that is powered by Pixsy.
- InfoSpace is also a company I own stock in (see a trend).
It’s a drama in itself. Just yesterday, the company closed with a market cap of $640M and an enterprise value of $200M. Today the stock is up 20% (more on this below) and the company is right now worth $817M with an enterprise value around $266M.
In fact, INSP’s slike this morning is what drove me to write this post.
The stock spike was odd because yesterday was payout date for the special, one-time dividend of $6.30. INSP had over $400M of cash up to recently, and at the behest of institutional shareholder Sandell Asset Management, it recently paid out $300M in dividends.
I bought INSP way back when people got excited about search and Google was not an option (not yet public). I think Infospace is a company that will one day offer shareholders a nice payout in a sale. It’s bound to happen, but please note, I am biased in saying this since I own shares.
Today I got to work and saw INSP up $3.40. Why, I asked? According to some rumors:
Spanish newspaper reported that Spanish cell phone and Internet content company LaNetro Zed SA is working out a deal to buy the company for 800 million euros, or about $1.08 billion.
More rumors of a sale, problem is:
So InfoSpace has two businesses — online and mobile — and both of them have issues. The online business, made up of the metasearch and private-label services, is the company’s cash cow, generating more than 60% of its gross profit last year. One of the biggest difficulties facing that business is that the search service ain’t that great.
“The problem with that product is that it offers an inferior search experience,” says Mark May, an analyst with Needham. “Rather than always delivering you the most relevant results, it delivers you the most relevant advertisements, which aren’t always the same thing. From a consumer perspective, they don’t compare favorably to the bigger names like Google.”
The mobile business’s problems are more extreme. In late September InfoSpace disclosed that Cingular, its largest ringtone customer, wouldn’t renew its contract. (Carriers have moved to sign deals directly with major record labels, cutting out InfoSpace as the middleman.) Three weeks later the company decided to exit the mobile content business, which contributed the bulk of the division’s revenue.
InfoSpace, of course, got into search when it merged with Go2Net back in the day. Go2Net ran Metacrawler and Dogpile, and in many ways, InfoSpace never did much with the products. If I am wrong, please advise.
InfoSpace has essentially dropped the ball in organic search (or never dipped their toes), and the market reflects badly on them.
- Marchex is another player fully involved in paid search, I like that they focus on verticals. For full disclosure: I am unhappy (as a client) with Marchex’s unit at Goclick. Here’s the entire story.
That issue notwithstanding, I think Marchex is well positioned in the entire parked domain name business, which I do not particularly like, but many in the mainstream media and venture capital community do. Marchex weighs in at $650M in market cap. Marchex was actually founded by Go2Net founder Russ Horowitz.
- Looksmart is a company I made a nice return on as well and got out, at the right time, since the stock has stalled since. Looksmart totally repositioned a couple of years ago and dove into the vertical search business. I think it has a strong monetization rate, but Looksmart, too, is a bit all over the place. However, of all of these companies, it might be the best positioned in terms of organic results. For a while, it did not have an algorithm in place and relied on its directory, that changed with the purchase of WiseNut.
A little side story: before Powerset and others became “Google’s latest threat,” ’twas Wisenut and Teoma. Teoma was bought by Ask Jeeves, who itself got bought out by InterActive Corp. for a whopping $1.8B.
Looksmart is worth some $77M but it boasts a lot of cash on its books, about $37M, so its enterprise value is in fact a modest $40M.
Of course, this does not mean you should dive in and buy the stock, it is extremely hard to compete in this space, even though it is indeed very lucrative when you’re a market leader.
Connecting the dots…
It is interesting to note than even the #5 player Ask Jeeves (at the time, it has since moved up to #4) realized that remaining a stand alone search company was simply too hard, so it sold to Barry Diller’s IAC.
This makes me wonder why INSP, MAMA, LOOK, MIVA, ANSW even bother… but that is just the point: search compaies remains a very likely M&A target. But as the article in Smart Money suggests, some of these companies drop the ball in search result quality, so it might not be foolish for them to try to improve that component of their business before selling out.
Disclosure: at the time of writing I own shares in INSP, MIVA, ANSW, YHOO and would like to resolve my little issue with Marchex ASAP!
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