Enough already! I’ve been trying to write this column for the past month. Every time I got close to being finished, a major search engine would make an announcement and I’d have to go back and rewrite half the column. Realizing that this could become like painting the Brooklyn Bridge, a job that never ends, I’m cutting it off today. By the time you read this, I guarantee it will be out of date.

Needless to say, there have been a lot of moves in the search engine industry over the past few months. We’ve already reported on Yahoo’s plans to buy Inktomi and Overture’s recent purchases of both AltaVista and Fast. Now it looks like Yahoo’s poised to go on another shopping trip, and speculation is that Overture could be at the top of their list! The flurry of recent activity is a little confusing and unexpected even to industry insiders. To those outside the industry, well, let’s face it, they probably haven’t given it a lot of thought.

Here’s why the recent moves are important. Web search is here to stay. The industry is maturing and the major players marking their territory in anticipation of an all out turf war. Revenue models are starting to work and search engines are beginning to make money. Pay per click and paid inclusion have turned around bottom lines for the biggest players, and now that positive revenue appears possible, the competitive market is starting to consolidate. Make no mistake about it. Yahoo, Google, Overture and MSN are betting that search will turn into a multi billion dollar industry (currently, total search engine marketing revenues are about 1.5 billion).

What’s happening now is analogous to a chess match entering the end game. The pawns have been sacrificed and the power pieces are now engaged in a complicated game of attack and counter attack. When you look at it in that light, the recent moves by Overture and Yahoo make a lot more sense.

The Recap

Here’s the search engine consolidation game recap up to the present.

1998 – Lycos buys Hotbot

2000 – Ask Jeeves buys Direct Hit

2001 – Ask Jeeves buys Teoma

2002 – Looksmart buys Wisenut

2002 – Yahoo buys Inktomi

2003 – Google buys Blogging Company -

2003 – Overture buys AltaVista

2003 – Overture buys Fast

2003 – Yahoo makes $750 M bond offer

The Players

The recent search engine buying spree has whittled the industry down to three or four real players (the number seems to be in constant flux), with two more dark horses that have an outside chance to stake a claim to enough search territory to survive the shake out.

Google

Google taught the search engine business a brutal lesson when it emerged out of nowhere and quickly gobbled up a major percentage of search traffic. Largely ignored by major players including AltaVista, Yahoo and Inktomi, Google quickly and quietly built a fervently loyal user base. By the time the major search engines took notice, it was already too late. Google had established its foothold and was now direct competition. Ask Jeeves purchase of Teoma and Looksmart’s acquisition of Wisenut, two promising search technologies, are proof that the industry won’t make the same mistake again.

Google is in the enviable position of claiming 30% of search engine traffic through their own portal. Our own research indicates that Google usage tops 60% with more experienced Internet users. No single search engine has owned this big a chunk of the market since the beginning of the Internet. Unlike Overture’s current position, where traffic depends largely on partnerships, Google owns a sizable piece of the search market outright.

In the category of short term assets, Google can also boast current partnerships with Yahoo and AOL where they provide search results. This means that Google search results are now served up to over 85% of all search engine queries.

Google is bankrolling their future through the success of Adwords. These query specific text based ads appear to the right of search results on Google and advertisers pay on a pay per click basis. The recent addition of contextual Adwords gives Google another revenue stream at minimal cost for implementation. Google’s contextual ads are Adwords served on a partner’s site when the content of a specific page matches a keyphrase that has been purchased by advertisers. For more about Google’s contextual ads, read our article.

Another recent move by Google throws up some puzzling scenarios for the future. I’m speaking of Google’s recent acquisition of Blogging company, Pyra Labs. The move made little sense for many search engine industry watchers. Danny Sullivan believes it’s to give Google another market for context sensitive ad distribution. He also feels Google might be succumbing to portalitis. Our own Rob Sullivan believes that it will give Google a bit more control over run away link building on blog sites, a practice known as “Google Bombing”.

Google’s strategy for the end game? I’m guessing it’s a continuation of the Google strategy since day one: Enhancing the search experience for users. Google knows its core business depends solely on the quality of its search results. It’s the one thing they have that sets them apart. When the entire future of your business depends on one aspect, you’d better pay a lot of attention to it. Google always has, and I don’t see that changing.

Overture/Fast/AltaVista

While Google’s strategy has the odd black hole, its crystal clear compared to what lies ahead for the new Overture/Fast/AltaVista alliance. While we wait for Overture’s shareholders to approve the proposed purchased, speculation runs rampant about what this means for the future.

Overture’s biggest problem has always been its reliance on its partner network. Currently, the vast majority of Overture’s revenues come from two of its partners, Yahoo and MSN. This gives those two an exceptionally big stick to carry into any negotiations about revenue sharing with Overture. Should one of them decide to dump Overture, the blow could cripple the PPC pioneer’s bottom line. That fact has seemed to elude share holders, who have continued to invest over the past few years, keeping Overture’s share value hovering in the respectable $25 to $35 range.

Overture has always been very aware of their Achilles heel and the recent purchases of AltaVista and Fast are an attempt to put together a defensive strategy. But if you’re buying allies, you’d probably want a little stronger back up than the new Overture team.

AltaVista is literally a mere shadow of the once dominant search portal. Its market share has slipped to a negligible 4.5%.  But that market share is huge compared to Alltheweb.com, which features results from Fast. Here, the audience is so small it doesn’t even register on the tracking reports. So the question is: why, Overture, why?

I think it’s a combination of what Overture needed and what was available to buy. Next to Google, Fast probably offered the biggest index and most relevant search results. It comes out of the box as a pretty good search solution. And Altavista does offer a recognizable, although battered, brand for internet users. Perhaps by combining the two, Overture can come out of it with one viable search portal. And that’s something that Overture desperately needs, so it can supplement its CPC search offerings and provide an all in one search solution.

Also, by announcing their intentions, Overture effectively blocked a couple of potential partnership deals, including one by espotting, Overture’s major European CPC competitor. Another benefit is that the AltaVista purchase gives Overture a patent portfolio that will probably be helpful in an IP war that’s currently brewing with Google.

The wild card in this is how Overture’s major search partners will react. MSN is holding their cards close to their chest and have made no announcements about how Overture’s buying spree will affect their relationship. They have announced recently that they are paying close attention to search and are throwing significant resources at building their own solution. Yahoo’s deal with Overture still has 4 years left in it, but indications are that Yahoo is also laying the groundwork for their own CPC offering.

Yahoo/Inktomi

Yahoo’s purchase of Inktomi this January was the event that seemed to start this recent chain reaction. Suddenly, many existing partnerships seemed to be in jeopardy and there were no guarantees for the future.

The biggest question mark is what will happen with Yahoo and Google. Last year, Google’s agreement to provide search results to supplement Yahoo’s directory results was extended for an indefinite period. In January, Yahoo went to the extent of featuring the Google Results prominently and moving their own directory results out of the spotlight. With Yahoo now having access to Inktomi’s directory results, it doesn’t seem to make sense for the original search giant to continue to partner with Google.

The other partnership that is in question, as I mentioned, is Overture’s deal to provide CPC listings. The deal was renewed for an unheard of 5 years in late 2002. It’s no secret that the Overture deal brought desperately needed revenue to Yahoo’s bottom line and provided huge traffic numbers to Overture. It was a true win-win situation, which probably accounted for the generous time frame of the deal. But with Yahoo’s recent hiring of a top Overture executive, indications are that Yahoo is exploring their options for their own CPC program.

Breaking News: A recent bond offering to finance “further acquisitions” has fueled speculation that Yahoo might be preparing to purchase Overture. This twist literally redraws the entire search landscape. If there’s truth to the rumor, then the turf war just became much more interesting.

Ask Jeeves/Teoma

Ask Jeeves purchase of Teoma in 2001 was the first indication that the industry had wised up and wasn’t going to be blindsided be a new Google. Teoma was coming on strong as a new search technology that took Google’s concept of relevancy based on link structures to a new level. Teoma looked at linking between online communities of interest, using a sophisticated analysis algorithm to determine relevance based on the linking structure, popularity and content of these communities. Initial reviews were glowing and the industry buzz was that this would be the new Google.

Ask Jeeves purchased the new search star and began implementing the technology into their venerable Ask Jeeves portal. Direct Hit, another Ask Jeeves purchase that for a time shared search duty on the portal, was soon dropped and Teoma took over.

While Teoma’s technology is impressive, the integration into Ask Jeeves effectively nipped its growth in the bud. Ask Jeeves is still plugging along with less than 10% of all search traffic. While Teoma’s technology is impressive, it wasn’t given the chance to develop Google’s cult like following (largely built through the academic community) because of their incorporation into the Ask Jeeves brand. Let’s face it, a know it all butler isn’t exactly the sexy image needed to inspire usage with the college crowd.

Looksmart/Wisenut

Like Ask Jeeves, Looksmart saw Google-like promise in the new Wisenut search technology. Betting that Wisenut would give them the crawler based index and relevancy required to compete in the evolving search marketplace, Looksmart purchased the search upstart in 2001 for an undisclosed amount. Since then, Wisenut has been moved into Looksmart’s back shop for a technical tune up and additional “work”. Apparently, the job was more involved than Looksmart first anticipated, because they have yet to unveil Wisenut on their portal.

Again, like Ask Jeeves and Teoma, Looksmart’s biggest obstacle is its current lack of market share. The latest Net Ratings give Looksmart only 1.5% of all search traffic.

Up in the Air

In addition to the previous partnerships, there are search portals that rely on third partner technology for their search results, often from one of the main players involved in the recent buying sprees. As search companies buy one time rivals, the state of these previous partnerships are thrown into question.

Lycos/Hotbot

Lycos currently features paid listings from Overture and traditional search listings from Fast. Lycos partner Hotbot also features search results from Fast. To date, this partnership doesn’t seem to be affected by the current acquisitions. Lycos, with its 7% share of search traffic, appears to be a good bet to continue a consolidated partnership with the new Overture/Fast alliance.

Excite

Excite is just featuring Overture listings now, since they declared bankruptcy in late 2001. With Overture’s purchase of Fast and AltaVista, Excite may choice to supplement paid search listings with traditional search listings from the probable Fast-AltaVista combination.

MSN

MSN is the biggest question mark for the future. Currently, MSN relies on Overture for paid search listings (supplying Overture, in turn, with a big percentage of their total traffic and revenues) and on Inktomi for traditional search. MSN, who is a major search player with 23% of all search traffic, has recently indicated that they intend to pursue their own search solutions. At this point, they haven’t indicated the exact nature of this solution, but it’s a pretty safe bet that CPC search will be part of it. If they follow Overture and Google’s lead of providing an all in one search solution, they will emerge as a major search powerhouse. As Netscape learned when Microsoft finally turned its attention to the Internet, when you begin to compete against Microsoft, you’ve already lost.

AOL

Like MSN, AOL currently has no proprietary search technology. Currently, they default to Google search results, supplemented with Google AdWords for their CPC section. It seems likely that AOL, with 14% of search traffic, will continue to rely on Google as their search provided.

The Future

So, what will happen over the next few months? The recent developments introduce a slate of thought provoking questions:

What are MSN’s plans for the future?

Is Overture going to retire the Fast or AltaVista brand (or both?)

Will Overture be Yahoo’s next acquisition?

How long will Google search results show on Yahoo?

What’s in the future for Overture and Yahoo?

Will Yahoo introduce its own CPC program?

Can Ask Jeeves and Looksmart survive with their anemic market shares?

If you have even a passing interest in the search engine biz, these questions offer a veritable buffet of food for thought. At this point, only one thing seems for certain. The battle over the search marketplace has begun. Expect Yahoo, Overture and Google to come out swinging.