Thanks to Microsoft severing its relationship with LookSmart, the paid inclusion industry is in for a rough 2004, declining as much as one-third, according to a recent research report.
Jupiter Research predicts that Microsoft's decision to stop displaying LookSmart listings in its directory layer of search results will cost the paid inclusion market $150 million in sales in 2004. The researcher expects the overall market will fall from $167 million this year to $110 million in 2004.
With paid inclusion, advertisers have their Web pages periodically crawled by search engines, paying each time a user clicks on their Web pages. They are not guaranteed placement in search results, which is based on relevancy.
The service is most useful for Web pages whose content changes frequently. Despite assurances that the practice improves search results, it has raised concerns that paid links mixed with non-paid results hurt relevancy.
Microsoft's move reinforced these doubts, and search leader Google has said it would not consider using paid inclusion because it would dilute its search results. Yahoo has various paid inclusion programs thanks to its acquisitions of Inktomi, AltaVista and FAST, yet has not deployed them on its search site. Together, MSN, Google and Yahoo handle nearly three-quarters of all search queries, according to comScore Media Metrix.
LookSmart loses its MSN distribution on Jan. 15 in the United States and United Kingdom. The end of the Microsoft relationship erases two-thirds of LookSmart's business. The San Francisco search provider recently said it would cut its staff by half and close its UK operations as part of its restructuring. LookSmart also lost its distribution deal with Sprinks, which Google acquired Oct. 24; its deal with Inktomi ends Feb. 24.
Despite LookSmart's troubles, Jupiter thinks paid inclusion could grow to a $500 million market in 2006 — if Yahoo and MSN fully embrace it, as Google seems unlikely to do. If neither implement paid inclusion, the researcher predicts the market will generate $180 million.
MSN's ambivalence toward paid inclusion, however, makes Yahoo a more likely paid inclusion player, according to Jupiter. In that scenario, the researcher forecasts the market to hit $293 million in 2006.
Jupiter said the paid inclusion industry should consider changing its pricing model from a pay-per-click system to a flat rate. The researcher said a PPC model heightens the perception that paid inclusion rankings get preferential ranking against regular algorithmic results, while a flat annual fee would ease conflict-of-interest concerns.
