With Google at gates, Yahoo arms itself

Don't feed the hand that bites you.

That appears to be the philosophy behind Web giant Yahoo's decision to buy search technology also-ran Inktomi in the face of a growing competitive threat by search standard-bearer Google.

The impending acquisition represents a humbling return for Inktomi, which provided search technology to Yahoo between 1998 and 2000. Before losing the Yahoo account to Google in June, Inktomi shares spiked in March to $234.

But the Inktomi acquisition may also represent an admission by Yahoo that it faces only difficult and unpalatable choices when it comes to dealing with Google.

While reports of Yahoo's attempts to buy Google have never risen above the threshold of rumor, analysts say that from both a competitive and technological standpoint, such a purchase would have made far more sense for Yahoo than swooping in at the end of Inktomi's holiday fire sale. (Inktomi, once one of the Internet highest fliers, sold its corporate search business last month for $25 million in cash.)

"Certainly a Google acquisition would have made great sense from Yahoo's perspective, but I don't think Google wanted it," said Michael Gartenberg, analyst with Jupiter Research. "Now Yahoo is saying, 'If we have to compete with them, we need the right arsenal and the right tools.' But the question is whether it's too late already for Yahoo to begin competing in the search space, because in many ways a Google search is more effective for individual searches than going to a directory."

From friend to foe
Long misperceived by consumers as a search engine itself, Yahoo has actually never owned significant algorithmic back-end search technology of its own. The company, which made its name as an editorially produced directory of Web sites and went on to aggregate enough services and content to pioneer the concept of a "portal" site, has always outsourced its search technology.

Yahoo's first search provider was AltaVista. Inktomi took over the Yahoo account in 1998, but got aced out by Google in June of 2000--a move that sent Inktomi shares plunging to a day low of $113 (the issue now trades at about $1.50).

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But over the course of Yahoo's contract with Google, the increasingly popular search provider started behaving more and more like a competitor to Yahoo and its fellow portals. One by one, Google started adding features people normally went to Internet portals like Yahoo to find.

These included directory services of its own, white pages-style phone and address look-ups, maps, Web site translation services and newsgroup access.

More recently, Google has added further services that are sure to siphon traffic away from Yahoo and the other portals: a widely praised automated news aggregation service and a similarly automated shopping comparison service.

This creeping transformation has left Yahoo and the other portals between the rock of Google's immense popularity and the hard place of its growing competitive threat.

"When I talk to clients, they are very uneasy about Google," said one industry analyst, who asked not to be named. "They haven't even figured out how a Google relationship works with their business, knowing that Google is working on beefing up their services and looking more and more like a competitor."

The strategic conundrum Yahoo and other portals face in dealing with Google is contributing to a volatile dynamic in the search market, already destabilized by the growing momentum toward consolidation.

"I've had some really bizarre conversations with clients," said the analyst. "Google is the elephant in the middle of the room where everyone is very wary of working with or working around them. If you talk to people at MSN or Yahoo or AOL--my sense is they haven't figured out how you work this. Google is this strange force within the online universe that's making everyone move kind of funny."

To be or Inktomi
It remains to be seen whether acquiring a money-losing search company that relinquished its most significant business to Google proves an effective strategy, analysts say. A primary question is whether Yahoo will be essentially shooting itself in the foot if it abandons Google's search technology, which the market in short order rewarded with the status of virtual standard-bearer.

Yahoo declined to say what effect its acquisition of Inktomi would have on its contract with Google, which it describes as long-term and nonexclusive.

	Leading search sites
	Site				Unique visitors (000)				Avg daily unique visitors (000)				Total usage minutes (000,000)				Avg min spent per month
	MSN search*				49,686				7,315				542				10.9
	Google sites				41,328				8,348				849				20.6
	Yahoo! search				40,574				5,680				397				9.8
	AOL search**				38,112				7,187				1,078				28.3
	Ask Jeeves				14,793				1,151				176				11.9
Measured in November 2002. Includes usage from U.S. homes, workplaces and universities.   * Among the sites already powered by Inktomi. ** Refers to AOL's subscription service. Source: comScore Networks, Inc.

Instead, the company sought to portray the acquisition as the happy marriage of Inktomi's search technology and Yahoo's substantial reach.

"This acquisition is a really compelling combination of search technology and engineering expertise with Yahoo's vast audience," said a Yahoo representative. "Inktomi's engineers are really psyched because they've never had direct access to our users and (our) understanding (of) what users want. And at Yahoo, we've never had the back-end (search) technology to be able to innovate. If you license the technology, you're dependent on the provider for the next product, the next technology. Now we'll be able to innovate."

Asked whether the acquisition indicated competitive jitters about Google, Yahoo said that its chief executive, Terry Semel, had proclaimed months ago that search was a "high priority" for the company, and that the company was "committed to being a leader in this space."

Some analysts took a brighter view of Yahoo's prospects in the search space, while acknowledging the portal's interest in suppressing its increasingly troublesome rival.

"Google faces its inevitable ouster," wrote Forrester Research analyst Charlene Li in a research note published Monday. "With 23 percent of households visiting Google at least once a week, Yahoo must eventually switch its search over to Inktomi to ensure that Google doesn't gain too much power."

Forrester said the deal would benefit Yahoo by providing it with Inktomi's paid search services and current clients, which include Amazon.com, eBay, and Wal-Mart.

Google declined to answer specific questions about the Inktomi acquisition, but released a brief statement in response to the news: "We learned about Yahoo's intent to acquire Inktomi this morning. We look forward to continuing to provide Yahoo with our award-winning search technology."

Regardless of how the acquisition affects Yahoo's relationship with Google, it is likely to stimulate the ongoing wave of interest and consolidation in the search industry and perhaps beyond.

"With Inktomi, Yahoo makes search a strategic asset," Li wrote. Microsoft portal MSN and AOL Time Warner's America Online service "will consider purchases of their own, potentially going after FAST or AskJeeves/Teoma to strengthen their search."

Even apart from the Inktomi acquisition, search appears to be recapturing some of its original cachet as the Internet's killer app.

"Recently, a lot of companies have started to focus on search again as a cornerstone of the services they provide," said Stephen Kim, an analyst with comScore Networks. "The interest level has really ratcheted up with almost anyone in the space."