SEEKING AN EDGE.

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Author: Pethokoukis, James M.

Internet users are estimated to execute more than 550 million Web searches globally each day as they quest for information ranging from the whereabouts of old college boyfriends to the latest English premier soccer league standings or The Matrix: Revolutions "spoilers." And, of course, porn. Of those half-billion queries, about a third use Google--far more than rivals Yahoo! (21 percent), MSN (18 percent), and America Online (11 percent).

So it's no wonder that Google is in the cross hairs of some big-time Internet players who think search could be a hugely profitable business. In July, Yahoo! bought Overture for $1.6 billion in a cash and stock deal that included search outfits AltaVista and Fast (the company behind alltheweb.com, which Overture had itself purchased in February). Those moves follow Yahoo!'s purchase of specialty search-provider Inktomi in March. Then there's Microsoft, the 800-pound gorilla of tech (or whatever its $49 billion wad of cash weighs), which announced in April the creation of its own search technology for the MSN site. A prototype "MSNbot" can now be detected crawling around the Web as the company works to develop an index of sites.

Win-win? The three companies "are now all squarely competitors," says Safa Rashtschy, E-commerce analyst at US Bancorp Piper Jaffray. "And with the way the industry is growing, it may be a win-win scenario. But it might also be winner take all. And this is why everyone is concerned about Google. It could be the one."

Even so, it's not clear how big a win it will be. Just because something is popular doesn't mean it will be profitable--as buyers of Internet stocks found out to their dismay. Yet even as the overpriced issues fell to Earth, Internet usage kept going up, led by omnipresent E-mail. The next most popular online activity: Web searching.

What has changed the landscape is the realization that search, once an unexciting business and a mere loss leader to help bring in business to portals such as Yahoo! or MSN, is now making money. Overture led the way in 1998 when it figured how to make money from search by charging advertisers to be included in a directory of paid-only links.

Each time an advertiser's link is clicked, it pays a fee to the search provider. Instead of a shotgun advertising approach, businesses can laser-sight consumers who are interested in their product. "There's now a business plan in place that makes it possible for search to be profitable," says Yahoo! Chief Operating Officer Daniel Rosensweig.

Pay to play. These paid listings (which appear on the right-hand side of a Google screen) are completely separate from the index of relevant Web sites a person might be looking for. Go to Google or Overture and type in "Chicago" and "Cubs" and "failure," and you'll get added listings for various sellers of Cubbie merchandise.

A $50 million contract with AOL in 2000 gave Overture needed momentum and led to partnerships with Yahoo!, MSN, and Lycos. Overture had sales of $667 million last year, and analysts expect sales to top $1 billion this year, in part from 80,000 advertisers who receive a total of more than 500 million clicks each quarter. Overall, paid advertising on search engines is growing at an estimated 35 percent a year and may more than triple from around $2 billion this year to $7 billion by 2007, according to US Bancorp Piper Jaffray research. And while Overture is the sales leader, privately held Google is close behind with an estimated $500 million to $750 million in revenue thanks to its popular paid listings, up from $300 million last year.

"Google is the gold standard, dominant with both consumers and merchants," says Rashtschy. She notes that even though Overture has higher revenue, Google has 25 percent more advertisers because of the popularity of its search engine. Indeed, Google's effective search technology has created such a tremendously valuable brand that the term "google" is virtually synonymous with "search." "I think a lot of other players moved away from search and lost focus," says Susan Wojcicki, Google's director of product management. "We're growing the market through our innovation."

Take Google's Ad Sense program, for instance. As a way of generating more business for advertisers, Google will generate text ads targeted to the content of Web pages such as those at abc .com, switchboard.com, and usnews.com. Google then pays Web publishers every time they get a click on the ad. Try Google Labs, and you'll find Google Search By Location, which allows you to search geographically, or Google News Alerts, which let you know when relevant news articles appear online in thousands of publications that match topics you specify. Then there's Froogle, Google's version of a price-based shopping service. "They catch on really quickly over there," says Charlene Li, analyst at Forrester Research. "Now they are focused on the opportunities in advertising and are developing products faster than anybody else."

Not surprisingly, Google seems destined to be a hugely popular initial public stock offering. And when might that be? The company won't comment, but Li thinks "sooner rather than later." The company needs to pay off its investors, but it also needs cash for the upcoming fight. Microsoft, after all, has $49 billion in its piggy bank. Google has done very little marketing so far, and with Yahoo! on the offensive, Google will need to be well armed.

As usual in the world of tech, though, it all comes back to Microsoft's deep pockets. It's the fear of many Google fans that Gates & Co. will indeed crush Google or at least make it irrelevant as it did Netscape. And it's not just the giant's war chest. Consumers love "plug and play" technology; imagine turning on a PC and seeing the new MSN search engine as the default (though that might raise the hackles of antitrust regulators). But Google built its business through word of mouth, and quality performance and user loyalty could trump Microsoft, a company known more for marketing muscle than product innovation.

MSN manager Kirk Koenigsbauer insists Microsoft is ready for the fight. While Google may be the technological leader now, he says, there's plenty of room for the bar to be raised. "We see tremendous opportunity ahead due to the fact that approximately half of consumers believe that sites don't return relevant results," Koenigsbauer says.

With Microsoft building, Yahoo! buying, and Google innovating, the battle is joined. How will it play out? Danny Sullivan, editor of SearchEngineWatch.com, thinks these new efforts by MSN and Yahoo! may be more of a holding action than progress in taking back market share. "To make massive gains from Google, they'll need to be demonstrably better than Google is," he says.

Google's Wojcicki seems eager for a showdown: "We were born in a competitive environment, and it will always be competitive since it's so easy to switch search engines."

Yet analyst Rashtschy thinks the Yellow Pages model of one-stop searching might take hold in the consolidating industry. "In New York, for instance, if you've got a Yellow Pages that covers all the boroughs, why would you want to have another one?" With billions of dollars at stake, everyone would surely love to be the one.

What the leading Internet firms are doing in the battle to win search-engine dollars.

Microsoft: Building its own search engine for the MSN portal.

Yahoo!: Paid $1.6 billion for rival Overture in July, a deal that included search firms AltaVista and Fast.

Google: Targeting ads to content of Web pages; providing Froogle price-based shopping service; alerting users by E-mail when news of interest appears online.

PHOTO (COLOR): PLAY TIME. Google execs have a little fun at company headquarters.

PHOTO (COLOR): Raising the bar. Yahoo! Touts its searches.

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By James M. Pethokoukis