San Francisco-based LookSmart is trying to sell a search index that bases its rankings on how much advertisers will pay for the top spots — an idea pioneered by Pasadena-based Overture Services and copied successfully by Google.
The concept — known as "pay for performance" — has been a hit among advertisers and a boon for scores of Web sites that collect commissions when visitors click on the paid results displayed on their pages.
Yahoo has been one of the biggest beneficiaries in a market expected to hit $2 billion in revenue this year. Hoping to get an even bigger piece of the pie, Yahoo decided to buy Overture, the source of the advertising links displayed in its search engine results.
The takeover eliminates one of Overture's big drawing cards. Because Overture didn't try to attract online traffic, many Web sites preferred its service to Google, which has established itself as one of the Internet's most popular destinations.
LookSmart reasons many Web sites currently using Overture's advertising service will be shopping for alternatives rather than help Yahoo make more money.
"The need has come along for someone to do what Overture did," said Dakota Sullivan, LookSmart's vice president. "We want to be the new Switzerland in this space."
Yahoo declined to comment about LookSmart's push into the pay-for-performance market. The company plans to complete the Overture takeover before the end of the year.
Mountain View-based Google also declined to comment on LookSmart's plans.
LookSmart already has signed contracts to distribute its pay-for-performance results to several popular Web sites, including Cent, Road Runner and InfoSpace.
The company hopes to lure much bigger customers, such as Microsoft's MSN.com, which relies upon Overture for its advertising results. MSN already incorporates a Web directory compiled by LookSmart in its search engine.
MSN is always on the lookout for ways to improve its search engine, but has no immediate plans to drop Overture, said Karen Redetzki, MSN product manager.
LookSmart is much smaller than Overture and less profitable, too.
Overture had 95,000 advertisers in its search index as of June 30. LookSmart boasts 30,000 advertisers who pay the company to conduct more comprehensive and frequent searches of their Web sites.
LookSmart didn't make its first profit until late last year while Overture has been profitable for nearly two years. LookSmart endured nearly $220 million in cumulative losses before recording profits totaling $37 million during its past three quarters.
Investors haven't been too impressed with LookSmart's performance, although the company's stock has rebounded from a 52-week low of 76 cents. LookSmart's shares gained a penny Wednesday to close at $3.15 on the Nasdaq Stock Exchange. The stock has traded as high as $4.80 in the past year.
By Michael Liedtke