Paid search is the cat's meow if you happen to be Yahoo! (NASDAQ:YHOO), Google (NASDAQ:GOOG), or even a smaller established player like InfoSpace (NASDAQ:INSP) or FindWhat.com (NASDAQ:FWHT). Yet the water isn't lifting all of the ships sailing away in the lucrative world of text search ads.
Yes, that's LookSmart (NASDAQ:LOOK) over in the corner -- standing out like a sore thumb. It's not that the company posted a meager loss while the rest of its peers are profitable. It's not even that the company's revenue dipped to $77 million in 2004 from $135 million a year earlier. That was expected as a result of LookSmart losing out on Microsoft's (NASDAQ:MSFT) MSN.com as a partner when Mr. Softy -- which accounted for two-thirds of LookSmart's revenue -- decided to take its paid search business in-house.
While none of that is necessarily encouraging, the real troublesome metric here is its bread-and-butter clicks. While the company's paid clicks rose from 103 million to 115 million during its December quarter, throughout its ad distribution network the amount that LookSmart was charging for the average click fell from $0.17 to just $0.14.
Paid search, a booming niche that was pioneered by Overture before Yahoo! acquired it, is all about supply and demand. Because sponsors bid up search keywords, one has to question why LookSmart's top bids are falling. Are sponsors simply tapped out, or are they lowering their bids because the site's network isn't producing the quality leads they can find on more established sites?
Salvation isn't waiting around the corner as the company expects to produce another loss in the current quarter with revenues dipping sequentially. It's not pretty. At the very least, the company has a long way to go before it justifies its ticker symbol.
Want to read about some of the companies making it work in online advertising?
Longtime Fool contributor Rick Munarriz is still upbeat about paid search and owns shares in FindWhat.com. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
