Jon R. Hickman (510) 918-4045 Trading (866) 454-3004 Halpern Capital, Inc. RISKS/THE MSN RELATIONSHIP Apart form the normal execution risks that any enterprise faces there are two specific risks to LookSmart’s growth potential over the next 6 to 12 months.
By far the issue of most import in investor’s minds is the MSN relationship.
Currently, the company generates well over half of its annual revenues from MSN-generated traffic. The current contract defining this relationship and the revenue split ends in December of this year.
There is no question that LookSmart is willing and eager to re-sign with MSN. The issue is…does MSN need the LookSmart offering to continue to be an effective competitor in the search market? We believe the answer is yes for the following reasons:
1) We believe that the focus of MSN’s efforts surrounding search is “relevance.” We believe that MSN (along with everyone else) is aggressively trying to combat the threat from Google. To this end, teaming with LookSmart offers MSN access to a tool, the LookSmart directory, which dramatically enhances relevance due to the editorial review received by all the listings in the directory.
2) To duplicate this directory would take MSN several years and millions of dollars in resources to either build the technology themselves or purchase a directory from a LookSmart competitor. The fact that the LookSmart BT joint venture was slow getting off the ground is a testament to how difficult it is to build a quality directory service.
3) At present there is not a ready made acquisition candidate as the competitors that are still independent (Ask Jeeves and FindWhat) are primarily involved in the pay for placement market and have not built robust directories.
4) A recent report out of IDC states that MSN is in the midst of a major refocusing effort. IDC believes that MSN will move out of the Internet access business and will become strictly a portal. If this is the case, we feel it is unlikely that MSN would want to disrupt the revenue stream from LookSmart while changing its whole consumer focus.
5) Building a competing directory is an undertaking requiring contracts with millions of advertisers and is not something we believe MSN could do in secret. No word has, as yet, leaked out that MSN is working with Web sites to editorialize content for a MSN directory.
6) On top of the relevance issue, MSN would also have to develop the back-end service, reporting and tracking tools. Some of this technology, especially the click tracking tools acquired with the LookSmart’s purchase of Primary Knowledge, is highly proprietary.
We are confident (as is LookSmart) that the association the two companies have is attractive and rewarding for both parties (in 2002 MSN received about $40 million from its share of the revenues advertisers paid for the LookSmart service).
For all of the above reasons we are optimistic that MSN and LookSmart will negotiate a long term contact that will renew their current relationship with terms that are again beneficial to both companies.
Jon R. Hickman (510) 918-4045 Trading (866) 454-3004 Halpern Capital, Inc.
LOK Price at posting:
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