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Yahoo sheds Inktomi for new search technology

Inktomi's stock price and its reputation as the leading Internet search provider take major hits when Yahoo says it will switch to rival Google.

Inktomi's stock price and its reputation as the leading Internet search provider took major hits today when Yahoo said it will switch to a rival search service, but the company's bottom line may not suffer the same fate.

Inktomi's shares plunged as low as $113 this morning when Yahoo said it will begin using start-up search provider Google for its primary search engine. By the close of regular trading, Inktomi was down $25.31, or 18 percent, to $115.06. Yahoo fell $6 to $119.31.

Analysts agreed that the announcement may have hurt Inktomi's pride, but they said the implications for its revenues and profitability are mild. While the company is well known for its search technology, that side of its business is a money loser that has increasingly played second fiddle to its exploding networking services division. The search market in general, meanwhile, remains a low-margin, commodity business even as it has been swarmed by hungry competitors like Google.

Dick Pierce, Inktomi's chief operating officer, said Yahoo represents less than 2 percent of Inktomi's overall revenues. Losing the portal as a search licensing partner, he said, will have "little impact with respect to profitability."

Inktomi develops Web search technology that companies can license for their sites, with clients including America Online, Excite@Home, RealNetworks, Microsoft Network and NBC Internet (NBCi). The company divides its revenues and operating results primarily into two buckets. Portal services such as search account for 40 percent of its revenues. Networking services, which help make content delivery over the Internet more efficient, make up 60 percent of revenues.

In the last quarter, the company posted its first profits of a penny a share, largely on the strength of its networking services, which posted operating income of about $2.8 million. Portal services, by contrast, posted an operating loss of about $5.6 million, according to a Securities and Exchange Commission filing.

Yahoo's announcement underscores the shifting competitive landscape among search providers and marks a significant coup for Google. Since its founding in 1998, the Silicon Valley company has lured many early Web adopters to its service and has garnered attention from its competition. Just last month, Web search veteran AltaVista launched Raging Search, a slimmed-down search engine aiming to lure back sophisticated Web users who have migrated to Google.

"Yahoo selected Google because they share our strong consumer focus," Jeff Mallett, Yahoo's chief operating officer, said in a statement.

The portal attracts one of the largest audiences on the Web, and searching remains one of the most popular functions on its site. Like Inktomi, Google will provide search results to queries that span beyond Yahoo's human-edited directory.

Yahoo will begin using Google's technology within the next 30 days.

To soften the blow of its decision, Yahoo said it will use Inktomi's search technology in its new Corporate Yahoo. Launched today, Corporate Yahoo is the company's attempt to sell customized versions of its service to corporations for internal use.

Inktomi's Pierce said the company has an "opportunity" to recoup its search revenues with the Corporate Yahoo arrangement.

Although the revenue shortfall will not significantly drag down Inktomi's earnings, losing a high-profile client such as Yahoo may hurt the company's image as the search technology of choice among Net heavyweights.

"Clearly this is a blow to their prestige," said Peter Ausnit, an equity analyst at Prudential Securities.

Despite Inktomi's lead in licensing search technology to Web sites, more players such as Google and Direct Hit have emerged in its rearview mirror. Many of these new competitors are offering more relevant search results and licensing their technologies to major sites.

Google is backed by some of Silicon Valley's most influential venture capitalists, including Sequoia Capital and Kleiner Perkins Caufield & Byers. Founded by Stanford University graduates, its technology ranks results based on the popularity of a site; a site's popularity is measured by how many other sites link to it.

Danny Sullivan
Editor of SearchEngineWatch.com
Yahoo's selection of Google is probably just a business decision that gives the portal a better deal.
Sequoia Capital's Michael Moritz serves on the boards of both Yahoo and Google. Silicon Valley power broker John Doerr, of Kleiner Perkins, is also a Google board member.

Despite Moritz's board role in both companies, Google CEO Larry Page said the link between the companies did not play a significant role in today's announcement.

"It's good for both companies in terms of comfort to have a shared board member," Page said. "But companies tend to do what they want to."

Direct Hit has also taken market share from Inktomi. Last year, Lycos' HotBot search engine dropped its longtime relationship with Inktomi to make Direct Hit's technology its default. In January, Ask Jeeves, a search engine that lets people ask questions online, acquired Direct Hit to provide a broader set of answers to customers.

Web sites such as Yahoo primarily use search technologies as a backup for queries that go beyond their own directories. For many Yahoo users, the deal shuffling will barely be noticeable.

"I think this will be (as) completely transparent to users as Inktomi's relationship (with Yahoo) had been," said Patrick Keane, an analyst at market research firm Jupiter Communications.