LookSmart: Fact or Fiction?


When it comes to LookSmart, one of the top three directories on the web and still the best way to get high placement on MSN Search, the most pressing questions on webmasters’ minds seem to be:

  • (i) will they stay in business? and
  • (ii) should I do business with them?

Many small businesses and industry consultants have already made up their mind on (ii). Since LookSmart changed their pricing model to “pay, pay more, and pay yet again some more” from the former paid inclusion (one-time-only) model, many have stated they’ll refuse to do business with LookSmart, and will warn their clients against it as well. At fifteen cents per click for targeted traffic, this means a lot of businesses are consciously making a decision to pass something up that might be advantageous to them or their clients in order to show their displeasure with LookSmart’s recent policy changes.

But is this de facto LookSmart boycott all it’s cracked up to be? This wouldn’t be the first time a boycott has failed. For some small business owners, boycotting LookSmart might be a little bit like Seinfeld’s friend Kramer failing in his campaign to boycott Kenny Rogers Roasters, or a chocoholic trying to boycott Godiva. You express the proper public sentiments (down with Kenny!), but then sneak home for just “one last taste.”

Seems like we’re smack dab in the middle of a prisoner’s dilemma game. Advertisers in general might benefit if they boycotted companies that treated them poorly. But specific advertisers have an incentive to defect from the “pact” – and once a few defect, it can snowball. End of boycott.

Most businesses love the extreme targeting that you can achieve with rankings in some sort of keyword-based search result. These rankings, and this traffic, is in short supply. If it works well for your business, you keep buying more until you eventually run out of options. Those who keep bumping their AdWords Select and Overture bids to 40 cents per click, then 50, then 90, all in the hope of generating more targeted leads, may eventually decide to give LookSmart a try.

LookSmart has a built-in advantage in the current race for market share in the pay-per-click space: its existing client list. Indeed, a recent press release boasts of 25,000 small business listing customers signing onto their new regime in the past six months. These are not all idle accounts, presumably (right LookSmart?), so this means these are the types of accounts that now have a monthly budget for LookSmart-generated clicks.

LookSmart still sends all of its “original” listing clients a monthly statement to show them that they received their allotment of free clicks for the month. After receiving seven or eight of these, some will just get annoyed, but others will decide to bump their budgets for a trial run – say, to $100 per month. That’s a drop in the bucket compared to what many are spending elsewhere.

Once that starts to happen, the billing is automatic. Inertia sets in. LookSmart knew what it was doing when it set out to revamp the terms of its agreements to go from one-time-only fees to a more predictable ongoing revenue stream. It wasn’t a nice thing to do, but it does give us some insight into the possible answer to question (ii) – will they stick around?

Increasing and more stable revenue streams from small business listings give LookSmart a very good chance to show a profit going forward. (That’s a pure guess on my part. Their financials look horrible and no doubt that’s why the stock trades for 90 cents. Still, how can you not turn a profit charging so many advertisers for all those clicks every month?) They could, indeed, soon be seen as a viable third-place contender in the pay-per-click space. (We’ll know for sure after the next couple of quarterly earnings reports.) As we’ve written before, that “space” is something of an artificial construct, since more and more of the paid inclusion options out there now also have pay-per-click components. At the risk of leaving someone out, we now seem to have six leading contenders in the pay-per-click race: Google AdWords Select, Overture, LookSmart, Inktomi, eSpotting, and FindWhat. There are lots of others, not very many of them recommendable. (I mention Inktomi because their corporate bulk inclusion program contains a pay-per-click component.) One that is also worth a mention, and more reputable than most other niche pay-per-click options, is Business.com. ah-ha.com is making some noise, as well. Regardless of who’s officially on top of this race, one thing is clear: Overture now finds itself smack dab in the middle of a dogfight.

If LookSmart is to stay afloat long enough to bite back at the competition, they’ll need more than just small business owners gritting their teeth and paying them every month. They’ll also need continued agreements with distribution partners like MSN, and big accounts with larger advertisers.

If small businesses have decided that they’ll pay a bit to get their proper placement on MSN Search via LookSmart, then you can imagine what some larger advertisers must be thinking. They want to blanket the space. This is why LookSmart initiated a corporate program that allows large companies to place thousands of their pages in the directory, billed on a pay-per-click basis. Once set up, the traffic streams and the ROI should be very trackable for any large company. And large companies want to buy media in big chunks, and they want to deal with big portals like MSN.

Case in point: Amazon.com. Word has it that they’re an active participant in the LookSmart corporate inclusion program. Depending on how their tracking goes, you can imagine a company like Amazon being willing to pay for a huge inventory of keywords. There is, after all, a book on just about every subject. Amazon sells books. It would be nice for them if topical search keywords took customers to a book for sale on Amazon, obviously. They’ll pay handsomely for the privilege if they determine that the program is working.

LookSmart could ultimately wind up as an unpopular, yet profitable, listing service for small and large businesses who want to buy targeted media. The problem is: as with most search-oriented companies, LookSmart needs to continue to convince the press and the search purists (to say nothing of Ralph Nader and the FTC) that it offers “superior relevance” and “topical expertise.” Its Zeal directory is supposed to allow good resources to find their way into the directory with the help of qualified volunteers. But in the larger scheme of things, Zeal looks like a sort of apology on LookSmart’s behalf for selling out, switching from paid inclusion to a multi-tiered pecking order based on clicks and corporate connections. It would be nice to see Zeal stick around and fulfil some of the early promise of volunteer directories, but for this to happen, the rest of LookSmart will need to be ruthless in its struggle for economic survival.

In spite of recent glaring missteps, LookSmart satisfies enough conditions for respectability in the search space that it has a good chance of beating out some other pretenders in the emerging cost-per-click keyword advertising race. Without strong editorial oversight, quality control suffers, and consumers could lose confidence in the relevance of keyword-based search and advertising results, which is why we are only lukewarm (or perhaps cautiously bullish) on the potential of second-tier players like FindWhat and ah-ha, and downright sceptical about most of the contenders further down the list. Major portals will be more inclined to make deals with companies like Overture and Google, which have large, qualified editorial staffs to enforce editorial guidelines. LookSmart, with its long history as an editorial organization and its complement of qualified editors, matches up well with the two pay-per-click leaders.

The short answer to the question of whether LookSmart is “fact or fiction,” then, can be summed up as follows:

  • (i) from a bottom line standpoint, the company may soon be more real than ever, in spite of its sub-$1 stock price;
  • (ii) no matter what they try to tell us, it isn’t really about search anymore; it’s more of an advertiser listing service. Paid-for or not, though, search results still need to be relevant. There is no reason to suggest that LookSmart can’t and won’t continue to serve relevant results for portal partners like MSN. Whether that leaves any room for growth is another question.

Your own decision as to whether LookSmart merits a second look will come down to ROI. Some advertisers, for now, are also injecting their personal sense of right and wrong into this decision-making process. That’s likely going to be a temporary phenomenon.

Postscript: LookSmart has just released quarterly earnings, which show pro forma profitability. Revenues are surging, as expected. Next quarter should show a decisive and long-overdue break into profitable territory. The power of the pay-per-click model when combined with entrenched, recurring billing relationships is enough to outweigh any localized boycotts. If the question is “will LookSmart survive,” the answer is much clearer today: yes.

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