NEW YORK (CNN/Money) -
Now that Google has disclosed just how lucrative Internet advertising can be, will big media companies try to buy their way in?
In the past, Viacom, Disney, News Corp. and General Electric's NBC have launched their own online entities -- but so far, big media has met with little success.
Of course, there's the most high profile example of a traditional media company experiencing problems with an Internet business, the merger of America Online and Time Warner. (Time Warner is the parent company of CNN/Money)
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Still, in the litany of risks detailed in its IPO filing, Google noted that -- in addition to Yahoo!, Microsoft and other online competitors -- it also faces competition "from companies that offer traditional media advertising opportunities."
Analysts are already speculating about whether traditional media companies will wind up buying smaller companies involved in providing search-based Internet advertising.
"Online search is an area where advertisers are moving. Big media companies need to be there," said Richard Greenfield, an analyst with Fulcrum Global Partners. "They must have a more significant presence or they risk out losing on a big growth opportunity."
Greenfield pointed out that Time Warner's (TWX: Research, Estimates) AOL unit, despite a continued decline in subscribers, experienced a healthy increase in operating profit in the first quarter -- due in large part to paid-search advertising.
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| | Company | | 2003 Revenues | | Est. 2004 Revenues | | Market Value | | Ask Jeeves | $110 million | $252 million | $1.7 billion | | InfoSpace | $160 million | $194 million | $1.0 billion | | FindWhat.com | $72 million | $165 million | $459 million | | Mamma.com | $12 million | $18 million | $79 million |
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Greenfield said media companies could get into the search business by buying second-tier search firms such as Ask Jeeves (ASKJ: Research, Estimates) or InfoSpace (INSP: Research, Estimates).
Ask Jeeves, in addition to its namesake site, owns search technology site Teoma and is in the process of buying Interactive Search Holdings, which owns Excite and iWon. InfoSpace owns search engines Dogpile, WebCrawler and MetaCrawler and is set to acquire local-search site Switchboard.
Greenfield said it would make sense for a diversified media company to buy an online search firm, since it could then pitch online advertising -- specifically through sponsored keyword searches -- as another effective way of marketing for its customers.
For Viacom (VIA.B: Research, Estimates), for example, online could be another option for its ad sales force, in addition to its portfolio of traditional media business, such as the CBS television network and Infinity network of radio stations.
Content is no longer king?
If one of the large media companies were to buy a search company, it would mark a notable change in the way the media giants view the Internet.
In the late 1990s, several media companies launched splashy portals, with the rationale being that a Web site with access to all of the media company's content would lure lots of visitors and hence, advertiser dollars. That didn't turn out to be the case.
"In the past, media companies were focusing on the wrong thing," said Matthew Berk, an independent Internet analyst based in New York. "Content is king but if you can't find it, it's a weak king. Search trumps all."
Disney, in 1999, actually bought a search-engine firm, Infoseek. But it was more interested in using Infoseek to bundle its content through the Go.com portal.
Disney launched a tracking stock for the unit, in an effort to cash in on premium valuations for Net stocks. But the tracking stock was folded back into Disney (DIS: Research, Estimates) in 2001 and the Go.com site now has search results powered by Google.
General Electric's NBC also went the tracking stock route, with a division called NBC Internet that included online properties it purchased such as Xoom.com and search engine Snap. GE (GE: Research, Estimates) bought back the shares in 2001.
Viacom didn't go the tracking-stock route, but it did acquire minority stakes in several publicly traded online content companies, including SportsLine.com (SPLN: Research, Estimates) and MarketWatch.com (MKTW: Research, Estimates). And News Corp. (NWS: Research, Estimates), which is the majority owner of Fox, had a separate online division called News Digital Media that it shut down in 2001.
So search was kind of an afterthought for big media. The prevailing notion was that if you had lots of "eyeballs" visiting your site, people would click on banner ads or pop-ups. But these types of ads have largely proved ineffective.
Google's financials, meanwhile, show just how effective search-based ads can be.
"A lot of ads that companies thought would work online aren't. Advertisers are now looking for results," said Dennis McAlpine, a media analyst with McAlpine Associates.
Still, he's skeptical about whether big media firms would be successful in the online advertising business given the cultural differences between entertainment and tech firms as well as the amount of competition.
Google and Yahoo! are seen as the clear leaders in search. Microsoft, No. 3, could move up the ranks, depending on how good the search technology it is developing for its next version of Windows, called Longhorn, is.
But Longhorn won't be out until 2006 and Greenfield thinks media companies have a chance to strike before then.
"Every media company should be thinking long and hard about whether search is just a two-horse race or if they could potentially create a third horse," said Greenfield.
Analysts quoted in this story do not own shares of companies mentioned and their firms have no investment banking relationships with the companies.
CNN.com and CNN/Money have a business relationship with Overture Services, which is owned by Yahoo!
The reporter of this story owns shares of Time Warner through his company's 401(k) plan.
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