Microsoft is significantly stepping up its investment in search technology, including paid models, in a move that could eventually supplant its relationship with Overture Services, according to a new research report.
Rise in paid placements
diminishes the role
of human editors.
The report, written by SoundView Technology Group analyst Jordan Rohan, said that after an extensive investigation, the research team was able to "confirm definitively" that Microsoft is increasing its focus on search.
The report asserts that Microsoft plans to triple its search staffing to 200 employees and that CEO Steve Ballmer discussed search plans at a "town hall" meeting last week. It also said that an internal memo confirmed the new focus.
"We believe Microsoft will be developing its own paid search platform," the report said. SoundView said the company could launch the technology by the end of next year.
A Microsoft source familiar with the company's plans confirmed that it is making a greater investment in Web search, but emphatically denied that the company would devote resources to paid search or a service to undermine its relationship with Overture.
"We're at the initial stages of significantly expanding our investment in search. At the heart of that investment is the Web search business," the source said. "This doesn't equal any change in Microsoft's relationship with Overture."
Microsoft licenses pay-for-performance, or commercial, search results from Overture for its MSN sites in the United States, Canada, United Kingdom, Japan, France and Germany. Those paid listings, which have proven lucrative for MSN and Overture, appear alongside general search results, which are provided by Inktomi.
Since Yahoo's recent acquisition of Inktomi, that partnership has been in flux, despite its terms that extend through 2005. Either Microsoft or Inktomi can terminate the agreement at will, and with its latest investment, Microsoft has decided that it will build out its own Web search technology. Microsoft said that there may be room to partner with a third-party provider as well.
The Microsoft source said that the company's investment involves adding people devoted to building a core Web search technology, but the number is yet to be determined. The company will work on developing search technology to improve the relevancy and speed of search results.
"We're responding to the phenomenon that search is an important pillar of the online experience," the source said. "We'll continue to be flexible and look at the landscape."
The SoundView report's findings are further evidence of Microsoft's plans for a strategic shift into the search market. Last month, the company launched a test site for MSN search, which promised faster results on a simplified page free of banner ads.
Rohan said Overture should be particularly worried about the move because it's so dependent on Microsoft for revenue. The software maker accounted for one-third of Overture's revenue in the fourth quarter. SoundView downgraded its rating on Overture stock to neutral "based on our concerns that its two largest affiliates (Microsoft and Yahoo) will develop their own search capability."
Overture spokesman Al Duncan called the report "simply wrong" based on the company's ongoing communication with Microsoft.
"We have a strong and growing relationship with Microsoft which was demonstrated by a new search agreement for Korea," Duncan said.
Overture shares slipped $1.74, or 11 percent, Wednesday to close at $13.49.