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Search Engine Resurgence - Column

The tech sector has been ravaged by scandals, a sagging economy, a battered Nasdaq and dim prospects for recovery. But in the midst of the economic carnage, dealmakers have been finding some diamonds in the rough, and lately the venerable search engine has been the hottest jewel on the market.

Late last week, Google paid an undisclosed amount for Pyra Labs , the maker of Web log software and owner of the popular Blogger.com site. And yesterday, another search-engine company, AltaVista of Palo Alto, Calif., was bought for $140 million in cash and stock by Overture Services , a company that provides paid search listings to Yahoo! and other portals

One major reason for these deals is their relatively cheap price. In late 1999, before the Internet went bust, AltaVista was valued at nearly $3 billion, so the company was bought for a song, at least compared to the heady days of the bubble. Yahoo! made its own deal in December to acquire the search-engine business of flailing Inktomi Corp. for just $235 million -- a deal size that would have been laughable during the Internet boom.

Why was Pasadena, Calif.-based Overture able to land AltaVista for such a good price? Seems AltaVista "fell out of favor after it launched an ill-advised expansion to duplicate Yahoo's smorgasbord of online services, opening the door for search engine upstarts like Google to establish themselves. By the time AltaVista reversed course and returned to its search roots, its business was sinking in financial quicksand," The Associated Press reported. * The Associated Press via washingtonpost.com: Overture To Buy AltaVista For $140 Million * The Los Angeles Times: Overture To Buy Web Search Firm AltaVista (Registration required)

The search-engine deals also are a sign that a lot of tech companies are still searching for the right way to make money. Hawking free searches can't be lucrative in the long-run. But searches tied to ads -- where companies pay for top billing in Internet search results -- are one promising (albeit controversial) area. The San Jose Mercury News noted: "The move, coming on the heels of Yahoo's $235 million purchase last month of AltaVista rival Inktomi, signals an increased focus by surviving Internet companies on the lucrative business of using search queries to drive advertising revenue. Search ranks only behind e-mail as the most popular Web activity." According to London's The Guardian, "The agreement gives Overture guaranteed access to its ad clients. Its 80,000 advertisers bid for placement on search results and pay Overture only when a consumer clicks on their listing."

Here's a glimpse at how the ad-search model works, according to the Mercury News: "The publicly traded [Overture] is expected to hit $1 billion in revenue this year by licensing technology to Yahoo, MSN and others to place text-based ads alongside search results. Overture auctions placement in search listings to the highest bidder and shares the per-click revenue with its partners. Overture has had to share a growing portion of revenue from sponsored searches with its partners since Google launched a competitive paid-search offering last year." * The San Jose Mercury News: AltaVista Finds A Buyer In Overture Services * The Guardian: Sign of the Times Sell-Off

The New York Times reported on the fight for market share between Google and Overture: "Over the last year, Google has also become a potent threat to Overture in selling search-related advertising, and it won away Overture's biggest client, America Online, offering a combination of traditional search results and advertising related to users' searches." * The New York Times: Overture Services to Buy AltaVista for $140 Million (Registration required)

At an analysts meeting last week, Yahoo also embraced the notion of paid search results. According to the San Francisco Chronicle, Yahoo "executives stressed, the company gets money from an array of other areas including paid consumer features such as online personals and souped up e-mail, paid search results and Internet access. 'We're no longer limited to one source of revenue,' Terry Semel , Yahoo's chief executive, told analysts at his headquarters. ... The company, he said, will focus on just a handful of new initiatives to transition free users to subscribers, not the scattered approach that has characterized Yahoo in the past." * San Francisco Chronicle: Executives At Yahoo Upbeat On Prospects For Financial Year

The paid search results trend -- on search engines and media sites alike -- has its critics. CNET reported: "News and information sites are joining the commercial search craze, adding paid links to their query results and pushing the boundaries of the Web's hottest advertising format. Last week, sports site ESPN.com signed a deal that has pay-for-performance ad company Overture Services offering up links to CD players and sports memorabilia as well as news articles when readers conduct searches on the site. The deal followed a similar announcement from CNN.com, which recently redesigned pages to feature commercial listings. Others, including CBSMarketwatch.com and Forbes.com, are expected to follow. As a result, readers seeking the latest news about Iraq could find themselves targeted with ads for T-shirts and eBay collectibles, items that appeared recently in a search conducted on CNN.com. It's no wonder. Pay-for-performance search marketing is a rare bright spot in the online-ad industry, tempting struggling Web sites with the promise of easy money through seemingly risk-free partnerships. But as news and information sites such as CNN.com line up for their cut of the pie, some wonder whether the practice is getting out of hand." * CNET's News.com: All The Search That's Fit To Print