SAN FRANCISCO (CNN/Money) -
Last week LookSmart investors were rather brutally reminded of that old saw about the risks of putting all your eggs in one basket.
The company disclosed that a key relationship with Microsoft is showing signs of strain -- less than four months before the contract is set to expire.
LookSmart's stock price, which has languished below $5 for more than a year, fell off a cliff after the announcement, dropping 30 percent before rebounding slightly midweek. With its viability tied so tightly to this one relationship, the company now finds itself at a crossroads: If Microsoft (MSFT: Research, Estimates) renews, LookSmart's future appears bright. If it doesn't, you might not be reading much more about the company.
Here's the story: LookSmart's angle in the search world is that it relies not on sophisticated algorithms, but on human editors (how quaint!) who provide contextual relevance in search returns.
In December 1998, LookSmart signed a five-year contract with Microsoft to supply its directory listings to the company, allowing MSN users to see LookSmart-tailored search results. LookSmart generates licensing revenue from the deal, and also makes money by selling its editorial content to Web sites.
| Recently in Tech Biz
|
|
|
|
|
But as often happens when a contract nears its expiration date, Microsoft is exploring new options. It is running tests in its U.K. MSN division that circumvent LookSmart search results altogether, and has announced its intention to expand these tests to the United States.
The potentially catastrophic problem for LookSmart: The company derives all its licensing revenue and 65 percent of its total revenues from its Microsoft relationship.
Obviously, if Microsoft decides it can do without LookSmart's service or can do a better job in-house, LookSmart will wind up looking mighty dumb.
"It's looking shaky for them," says Charlene Li, an analyst with Forrester Research (FORR). "They've tried to diversify their [partner] base but haven't done it fast enough." (LookSmart and Microsoft representatives didn't respond to inquiries by press time.)
LookSmart has two possible escape routes. The first is that Microsoft could decide to renew its contract. But as the drop in LookSmart's stock price illustrates, Microsoft would enter into those contract renegotiations with a decidedly upper hand.
The second scenario: Microsoft acquires the company instead of trying to build its own directory program. As Li explains, "Having an editorial service is important for MSN, which is more of a portal than a Google."
Sign up to receive the Tech Biz column by e-mail.
Plus, see more tech commentary and get the latest tech news.
|
