• Illustration: Where MSN.com Search Results Come From

Paid search, in which advertisers pay to be listed prominently in end users' search results, was one of the few bright spots in a poor Internet advertising market in 2002. In an effort to increase MSN's appeal to partners and advertisers and bolster its drive to profitability, MSN will likely increase its investment in paid search through acquisitions of paid search companies or technology, or by developing new technology to create better results for advertisers.

Two Types of Search

Searching for a specific term is often the easiest and most useful way for users to get information from the Web. Some prominent Web sites, including Microsoft.com and Amazon.com, have built their own search engines for use within their sites. But most Web sites—particularly consumer portals that offer searches of the entire Web—outsource this function to companies that specialize in search, such as AskJeeves, Google, Inktomi, LookSmart, and Overture.

These search specialists offer two very different types of search functionality: algorithmic search and paid search.

Algorithmic search attempts to provide the most relevant results to end users. Companies that specialize in algorithmic search, notably Google and Inktomi, sell this capability to Web sites that want to increase their appeal to users—the more relevant their search results, the more likely users will return.

Paid search helps businesses advertise their wares to end users who are likely to be interested in them. In general, advertisers pay the search provider to place their Web site near the top of the search results for a particular term or to place it in a particular category in a Web site directory (for example, Computing>Internet>Internet Industry>Consultants). The search brokers then affiliate with popular Web sites, such as MSN.com and Yahoo, to have these sponsored listings appear on those sites—sometimes exclusively and sometimes intermingled with algorithmic results or editorially selected directory listings. Industry watchers estimate that the affiliates keep about 65% of the advertising dollars generated from paid search, with the brokers keeping the other 35%.

MSN uses third-party providers for both paid and algorithmic results. When users run a search on the MSN.com Web site or from the search panel in Internet Explorer (IE), the most prominent results are paid for by MSN.com advertisers or by advertisers working through Overture and LookSmart. MSN also contracts with Inktomi to provide a combination of algorithmic and paid results, and editors at MSN select some sites as well. (For a more detailed breakdown, see the illustration "Where MSN.com Search Results Come From".)

Why MSN Favors Paid Search

MSN favors paid search over algorithmic search because it needs to make money from its existing services more than it needs to attract new users.

Citing figures from ComScore Media Metrix, Microsoft claims that MSN Search is the number-one search site on the Internet, with more than 50 million unique monthly users (Nielsen/NetRatings places it third behind Google and Yahoo). Unlike most Internet-based businesses, which must attract visitors through advertising or links from other sites, MSN attracts millions of users through links in widely distributed Microsoft products, such as IE, Windows Media Player, Windows Messenger, and the MSN 8 client for MSN Internet Access users. With so many visitors already, MSN has little reason to invest in algorithmic search to attract new users.

But it does need to generate more revenue. The division’s continuing losses (US$157 million in the quarter ending Dec. 31, 2002, for instance) and increased public scrutiny have made it a target for investors unhappy about Microsoft’s languishing stock price.

Paid search looks like a promising business for MSN to be in. Paid search pioneer Overture earned about US$70 million in profit on US$668 million in sales in 2002, and Yahoo's agreement with Overture helped the portal return to profitability last year (the agreement with Overture accounted for US$177.5 million of Yahoo's total US$953.1 million in revenue). LookSmart and AskJeeves, two other paid search specialists, also achieved profitability in the fourth quarter of 2002 for the first time.

MSN does not disclose how much it earns from paid search, but recent actions suggest that it is a solid source of revenue. For example, in Feb. 2003, MSN eliminated banner advertisements on its search page so that more sponsored links would appear higher on the page. This suggests that MSN sees paid search results as a higher priority than other revenue-generation options, such as banner advertisements or promoting paid services.

Investment Likely to Increase

Given the industrywide success of the paid search model, MSN's continuing drive for profitability, and its demonstrated emphasis on paid search results, MSN is likely to increase its investment in paid search in the next year.

Microsoft might invest in or acquire a paid search specialist, or develop its own technology. By bringing some or all paid search functionality in-house, it would increase the share of revenue it gets from these paid listings. It could also connect search results with information gathered from the user, such as a ZIP code or browsing patterns, to better target paid results to users who might be most interested in those listings.

However, MSN will probably put minimum effort and investment into algorithmic search. For example, in Feb. 2003, the company signed a new contract with Inktomi to provide algorithmic results through 2005. Although this is surprising given that Inktomi was bought by MSN competitor Yahoo in Dec. 2002, it suggests that MSN is happy with the status quo on algorithmic search. After 2005, there's a possibility that algorithmic search technology developed elsewhere at Microsoft, such as for SharePoint Portal Server, could be reused on MSN.com. Given the financial condition of the division, however, this seems likely only if it would cost less than maintaining the relationship with Inktomi.

Resources

Search Engine Watch offers in-depth coverage of search technologies and the search industry; some pages require a paid subscription. See www.searchenginewatch.com.

MSN Search is at search.msn.com.