• by Ross Fadner , January 6, 2004

In a move that could dramatically alter the relationship between two of the industry's biggest search players, Yahoo! plans to implement a controversial paid-inclusion strategy, MediaDailyNews has learned. The move, which is still in its early stages, is likely to force a divorce between Yahoo! and Google, which currently serves as Yahoo!'s underlying search technology and has its own stringent policy against paid inclusion.

Yahoo! executives declined to elaborate, but a spokesperson confirmed that paid inclusion figures prominently in the portal's search marketing plans. The move is likely to drive a wedge between Yahoo! and Google, which eschews paid-inclusion schemes in which companies pay search engines to index their pages for a specified period of time.

That Yahoo! might be planning to drop Google as its search partner may be no surprise. Recent reports have speculated that Yahoo! plans to do so as early as the first quarter of this year, although Yahoo! also declined to comment on that possibility.

The developments, meanwhile, underscore the divergent strategies of the Big 3 search players - MSN, Google, and Yahoo!. Together, they comprise nearly three-quarters of all searches, according to comScore Media Metrix estimates, but when it comes to the nascent field of paid inclusion, each has a different attitude regarding its future in their search marketing business models.

Google has its policy against paid inclusion. Microsoft is dropping its LookSmart paid-inclusion program as of Jan. 15, and has not made it clear whether or not it will look for another third-party licensee or turn its search strategy in-house.

But Yahoo! now appears to be the most likely candidate to adopt paid inclusion - particularly because its recent acquisitions include the paid-inclusion programs of AltaVista, Inktomi, and FAST.

Meanwhile, the loss of Yahoo! could eventually cost Google its majority share of the search market. According to a comScore qSearch compilation, Google's Yahoo! business represented a 25.9 percent market share of the search market in October 2003.

Google's own web site and its AOL partnership accounted for a 35.2 percent and a 16.3 percent share, respectively, which means that along with its Yahoo! partnership, Google accounted for a 77.4 percent share of the search market; its Yahoo! account comprises one-third of that share.

Jupiter Research, meanwhile, has predicted a tough year for the paid-inclusion industry, specifically citing MSN's decision to drop LookSmart on Jan. 15 as a major factor.

For LookSmart, the loss of its MSN business will cost the San Francisco-based company nearly two-thirds of its revenue. As a result, the company plans to shut down its UK operations and let nearly half of its staff go. To make matters worse, LookSmart also lost its distribution deal with Sprinks, and its deal with Inktomi ends on February 24.

According to Jupiter Research, Microsoft's decision to stop displaying paid-inclusion listings in its search directory will cost the industry $150 million in sales in 2004. One researcher expects the overall market to fall from $167 million this year to $110 million by the end of next year.

However, despite LookSmart's problems and the grim forecast for 2004, Jupiter claims that paid inclusion could grow to a $500 million market by 2006 if Yahoo! and MSN fully embrace it; if neither do, Jupiter predicts that paid inclusion will be a $180 million market. Should Yahoo! drop Google and adopt a new paid-inclusion program, Jupiter Research's modified prediction for paid inclusion will be a $293 million industry by 2006.

A paid-inclusion deal between a search engine and its advertisers involves an advertiser paying the search engine each time a user clicks on a paid-inclusion advertiser's listing in the search results page. Paid-inclusion ads appear in exactly the same place as organic search results.

Some industry critics believe the service hinders search relevancy because a search engine obviously stands to make more money by including paid-search partners as often as possible. Jupiter says that paid inclusion should be offered on a flat-rate basis in order to quell such suspicions, as a PPC model tends to heighten the perception that paid-inclusion rankings get preferential ranking against regular results. Perhaps a flat annual fee would ease conflict-of-interest concerns.