looking smarter - dave hills

Looking Smarter

Under the guidance of new CEO David Hills, LookSmart redefines its mission from one to hundreds
By Lauri Giesen

Dave Hills’ history in the television broadcast industry becomes apparent when he describes the direction he sees for Internet search company LookSmart.com. “I see Google, Yahoo and AOL being like the three major networks in television, while we’re like the Turner Broadcast Network,” says Hills, who took the helm of the faltering LookSmart.com 18 months ago. “They offer broad content to the broadest consumer range possible while we’re vertical in nature and are trying to appeal to specific niches.”

If the 21 years Hills spent with Cox Enterprises taught him anything, it’s that the trend among the cable television networks today is to appeal to niches rather than trying to be all things to all people—as evidenced by the number of channels dedicated solely to topics like entertainment news, cartoons, shopping, old movies and travel. And that is the same strategy Hills is applying at LookSmart, a once high-flying Internet search company that was nearly destroyed in 2004 when Microsoft took in-house the job it had been outsourcing to LookSmart.

Complete makeover

Until 2004, LookSmart produced the results that consumers saw when they searched the Internet from MSN.com. In addition, LookSmart sold the advertising that consumers viewed on the MSN search results page. But when Microsoft decided it could search the web on its own—and sell the ads as well—LookSmart lost 70% of its revenue.

The remaining 30% was the result of LookSmart syndicating its search results to other web sites. In the meantime, Yahoo, Google and AOL had come to dominate the Internet search business. Attempting to compete with those three from its newly reduced base was too daunting a challenge.

And so, few disputed that LookSmart needed a complete makeover when Hills accepted the CEO job in October 2004. For starters, LookSmart had to come up with its own look and feel. And it had to attract the eyeballs of consumers who may have used LookSmart’s search engine before, say, at MSN.com, but didn’t even know it because the search engine had someone else’s brand on it.

Because of its former strategy, LookSmart had no customer loyalty or even any consumer recognition. And while LookSmart had controlled the advertising relationships under the old MSN arrangement, without any unique content to offer, those contact lists became simply names and phone numbers, not advertising customers loyal to LookSmart or its product. LookSmart had to find new reasons for those advertisers to stick around.

At that point, rather than try to be everything to everyone, Hills decided LookSmart wasn’t going to even try to take on the big three search engines. Instead, he took a year to come up with an entirely new strategy that utilized the search technology already in house and that would retain as many of the old advertising relationships as possible, but with a fresh approach.

Attack the specialty market

His plan? Attack the specialty markets. Hills and his staff spent a year creating a new concept that they introduced last October—a new LookSmart that consisted of 13 niches or “clusters,” as Hills calls them (see box, p. 65). Each cluster appeals to a specific niche market—such as students, personal investors, fashion etc. Then within each cluster, there are nine to 18 additional web sites with more specific information.

Hills recognizes that even within a given niche, there are smaller more specific niches. “Take our education site for students. We know that the homework needs of a 12-year-old are going to be different from those of a college student so we can’t have just one site that tries to appeal to both. Instead of having one education site, we have three, one for junior high students, one for high school students and one for college students,” Hills explains.

Actually, a check of the education site shows the range is even more extensive—and finely honed—than that, with a section for graduate students and a section for parents looking to help their children study. Even then, users who click on the high school section find selections broken down further into science and math, writing and literature, social studies, lifestyles, educational publications and other topics. The advertising links in this group refer to companies that offer career training, student loans, asset management, concert tickets and computer peripherals, among other things.

Indeed, LookSmart’s advertising strategy is similar to its approach to search. “Take Kaplan, the provider of SAT preparation and other educational services. They run ads on our high school site about preparing for the SATs and run ads on our college site about preparing for the GMATs and run nothing on the junior high site. Our strategy lets advertisers focus on the specific niches they want to appeal to,” Hills says.

Similarly with the personal investor site, LookSmart breaks the market into beginning savers or younger adults, baby boomers who are planning for retirement, and retirees.

Not just stuff to wear

And the style section is not just for researching fashion items such as accessories, clothing, jewelry, makeup and watches, which of course are included. But there are also sections on spas, hair styles and weddings.

The idea is to give individuals “essential” information that helps them in their everyday lives, Hills says, but not “exhaustive” information that is more likely to confuse them.

That strategy of pursuing niches just might work, says Eric Matinuzzi, senior research analyst with Craig Hallum Capital Group, a Minneapolis-based investment company that follows LookSmart. “About 90% of the general search market is controlled by four companies—Yahoo, MSN, AOL and Google. If you want to play in that market, you have to look at the development money those companies are spending. LookSmart did not have the horsepower to play in that league.”

An alternative strategy would be to compete in the “mega search” market, where companies aggregate relevant information from the major search engines. “That would have been a possibility, but there are companies, such as Infospace.com, that have already gained strength in that space and it would have been difficult to take them on,” Matinuzzi says. “Plan C would be to specialize, and given LookSmart’s size, that approach made the most sense.”

In choosing LookSmart’s niches, Hills maintains that he and his team took a mathematical approach to determining what consumers were looking for when they went online. “We looked at the findings of all the major rating services to break out not only which sites consumers are using, but what they are looking for when they go to those sites,” Hills says. “We needed a mathematical underpinning to what we were doing so we could justify our decisions based on scientific evidence.”

Hills and his staff also looked at LookSmart’s existing advertising sources to find areas of concentration.

Flexibility

While LookSmart is pretty much wedded to the 13 original clusters, Hills admits the company is willing to make changes if needed. “Part of any good turnaround requires that you be flexible,” he says. “If we find some of these areas are not working out, we need the flexibility to change our orientation.”

And as part of being a provider of search services to niche audiences, LookSmart knows it needs to offer customers extra features. One such special feature is that when a user finds valuable information, the user can download that information to the LookSmart server and retrieve it as needed. “We realize with so many documents available, it gets to be unwieldy for individuals to save all the pertinent information on their own. We want to help them by keeping valuable information for them,” Hills says.

The strategy Hills devised was in keeping with the direction that had previously been set out by its board. “We knew we wanted to develop a set of vertical web sites with the LookSmart brand that could build upon the advertising base that we had,” says Ted West, chairman of the LookSmart board. “But as a board, we only had a fuzzy idea of what we wanted. It took Dave, who had built web sites in the past, to crystallize the ideas that we had.”

Analyst Matinuzzi agrees that Hills may just be the person to lead LookSmart back into profitability. “I think highly of Dave Hills and he is an Internet industry veteran,” Matinuzzi says. “If anyone can bring this company around, I think he is the one.”

While it is still early, Hills’ strategy seems to be paying off, at least in site visitors. When the new site debuted in October, LookSmart had an aggregate audience of 4 million visitors, including visitors to affiliate sites. By December, that number had more than doubled to 9 million.

Another year of development

And while Hills won’t divulge information about advertising revenue, he notes that the site just began selling advertising in the fourth quarter and “there has been good feedback from the advertising community.”

According to the company’s latest quarterly report released in February, LookSmart’s revenue was $10 million in the fourth quarter of 2005, up 9% from the previous quarter. The report shows the company is anticipating 3% to 5% sequential growth for the first quarter of 2006.

Still, Hills knows it will be a long road back to where the company once was. “We know it will take all of this year to develop a base of regular users, but we’re seeing progress and think we’re going in the right direction,” he says.

Those are somber words for a company whose stock soared for a brief period after it went public in 1999. “We were a high flying dot-com-er for about 25 minutes until reality set in,” Hills laughs. Indeed, LookSmart shares were trading at over $350 a share in early 2000; today, they’re at about $5 a share.

Because of its relationship with Microsoft and as a result of guaranteed income, LookSmart didn’t face the same disastrous scenarios that the other Internet companies faced in the early part of this decade—but only because its day of reckoning was delayed. “What other dot-com companies went through in 2001 and 2002, we face now,” Hills says. For example, in 2002, at its peak, LookSmart had 500 employees. Today it is pared down to about 130.

And in coming to LookSmart, Hills had to do more than just develop a successful strategy, he had to deal with a demoralized company. “After Microsoft was out of the picture, the company lost not only most of its revenue, but much of its energy,” says board chairman West. “Dave Hills breathed new life into the company and took an aggressive posture that we needed.”

On the way back

West has seen the good times and the bad at LookSmart, having become acquainted with the company when it started in the mid 1990s. He himself has 25 years of experience as an entrepreneur and advisor to emerging companies. He currently is a managing director of Sage Partners, a strategic advisory company.

Today, Hills spends much of his day talking to Wall Street analysts and investors and persuading them to be patient. “We’ve been clean with Wall Street for the past year. We don’t put up any false hopes or projections. They know it will be a while before we can break even, but they understand we have a new plan and we’re on our way back to profitability,” Hills says.

LookSmart had a net loss of $17.8 million on revenue of $41.4 million for fiscal year 2005. That compares to a net loss of $9.6 million on revenues of $77 million in 2004. Still, to get back to profitability, analyst Matinuzzi estimates the company’s quarterly revenue of $10 million need to get to get closer to $18 million.

Hills has been around the media business long enough to know there are ups and downs in the business. He spent 21 years with Cox Enterprises, mostly in advertising and sales. In 1994, he moved over to the Internet side of the business working on Cox’s online subsidiary as vice president of sales for interactive media. That latter experience was enough for him to become excited about the Internet world.

From Cox, he moved over to About.com as COO and president of sales. That was where he became part of a team that created 500-plus web sites—a valuable experience for what he would encounter at LookSmart. “It was at About.com where I became enamored with this business and I patterned much of the LookSmart strategy on what I learned at About.com,” Hills says.

Getting the word out

From About.com, Hills moved to marketing company 24/7 Real Media in August 2003 where he was president of media solutions before joining LookSmart in the fall of 2004.

Now one of his biggest challenges is to get the word out to a consumer audience about a site most have never have heard of. To do that, LookSmart is taking a multi-pronged approach. First it is paying the general engines, such as Google and Yahoo, to refer niche users to LookSmart. Then, it is identifying specialists who are considered leaders in their fields and trying to get them to make referrals.

“We have a good site on Italian cooking and we need to get the word out to people who like to cook Italian food,” Hills says. “The first thing we did was to identify some of the top Italian chefs and make them aware of our site so that they can refer people to us who need tips on this topic.”

The question now is whether LookSmart can indeed get consumers to use its search capabilities and as a result bring the eyeballs demanded by the advertisers. “It’s hard to say yet if Hills can pull this off,” says Matinuzzi. “So far, they’ve only made baby steps, but they have made progress. Every quarter, revenues are up, so at least they’re moving in the right direction.” l

Lauri Giesen is a Libertyville, Ill.-based freelance business writer.

The clusters

LookSmart breaks its site into:

Auto

Cities

Education

Food

Health

Home Living

Money

Music

Recreation

Sports

Style

Technology & Games

TravelEnd of Content

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:)
LC