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Monday, December 23, 2002

Yahoo Buys Inktomi!

End all the speculation about the future of Yahoo's relationship with Google. Yahoo has just acquired Inktomi in a $235 million transaction.

Although Yahoo had gone back with Google as its search provider in September in a "stopgap" renewal of their previous relationship, it looked to us then ("Will Google Defend its Yahoo Turf?," June 24, 2002) as if Inktomi was a logical second choice. Indeed, other than protecting the status quo, we thought Yahoo had "no reason not to" sign Inktomi. All the others (FAST, Teoma, AltaVista) were longshots.

During the fall, Google's power continued to grow to the point where it not only became a threat to all others in the business of providing Internet search, but it started looking like it was in the business of driving traffic to multiple Google-branded entities. That is to say, Google was becoming a portal.

Thus, the "stopgap deal" will now be wound down to ward off competition from a legitimate competitive threat. Yahoo has decided to take the logical tactical step of acquiring the #2 provider of crawler-based web index search, Inktomi.

Earlier this week, a prominent industry exec suggested to me that a company like Overture should buy out Inktomi. I didn't agree, citing the fact that Overture's ad-serving culture would not integrate well with that of a search technology provider. But it's safe to say that the Yahoo buyout took all of us by surprise.

Also recently, Inktomi's Ken Norton intimated to me that Inktomi would win an old distribution partner back from its competition next year. I'm not convinced that this buyout has been in the making for a long time; rather, I suspect that Inktomi was in the process of successfully wooing a distribution partner, and more recently, the deal was escalated to a buyout. On the other hand, Inktomi shed its non-core assets and downsized the company on more than one occasion this year. The goal might have been to achieve break-even to avoid bankruptcy, but the result was that the company became a much leaner and more attractive acquisition target.

Given the yet-again-changing configuration of Yahoo Search, will they now renew their focus on directory results while making Inktomi paid submission virtually impossible to ignore as well?

It's obvious now who is in the driver's seat here: the portal. Yahoo. (Portals are important? Portals have leverage? Go figure.) They've played search partners off against one another again, and now find themselves in the position of monetizing search in (at least) three ways:

  • Sponsored listings from Overture - prominently displayed since the most profitable of the three

  • Inktomi paid inclusion & Index Connect

  • Directory submissions.


There is now virtually no "unpaid" search on Yahoo! Will this hurt their credibility? Or is Inktomi's product good enough to satisfy consumers in spite of the paid inclusion model?

If portals have all this power, and Google is becoming one, how will they start to throw their own weight around? How quickly will Google hurry to consummate its long-delayed IPO given that the company could be weakened irreparably by further delays in this new "everyone against Google" climate?

So many questions. So much fun.

Posted by Andrew Goodman




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