MSN dealt a predictable, yet massive blow to the Australian search directory LookSmart yesterday with the announcement that MSN search will not renew an agreement to display results from the LookSmart directory. The current agreement which ends in mid January 2004, is LookSmart's largest revenue stream, accounting for over 65% of the already beleaguered company's $140Million annual income. LookSmart, which recently announced a move towards the paid-contextual advertising market, will almost certainly be fatally damaged by this move with LookSmart shares down 52 percent at $1.44 by the close of trading yesterday. Investors fled the company so quickly that trading on LookSmart's stocks was closed shortly after the announcement.

Our analysis: MSN has dropped LookSmart for three main reasons:

1. First of all, LookSmart was entering the paid, contextual advertising sector, a market MSN wishes to dominate in the coming years. The last thing MSN needs is another rival to contend with on top of Yahoo and Google. By dropping LookSmart at this time, MSN is effectively consolidating its competition by eliminating the smallest.
   
2. Secondly, MSN doesn't need to draw results LookSmart as it can now compile its own results from a mixture of Inktomi listings and sites spidered by the new MSNBot.
   
3. Thirdly, Microsoft needs to dominate the multi-billion dollar search market as its traditional markets are either flattening or shrinking as Linux romances the desktop market and Apple's Unix driven Mac OS X continues it's drive into the micro-product market. Microsoft's signature product, Windows has proven to be a constant security risk as viruses and worms continue to penetrate and MS continues to issue patches, leading many IT decision makers towards UNIX and Linux based systems.

Microsoft is clearly aiming to take paid-advertising market share away from current industry leader Google and second runner Yahoo (Overture) however the imminent demise of LookSmart might actually come back to haunt MSN in a few months as LookSmart may have just become a more attractive take-over target for Google or Yahoo. LookSmart's technology is sound and its newly announced paid-placement business model could generate revenues if LookSmart has learned to treat its customers with greater respect than they have in the past. While Yahoo has already been on a purchasing spree this year with the acquisition of AltaVista, AlltheWeb and Inktomi, Google has yet to take over another major search player, instead targeting smaller companies who's technology could improve their current product.

Whatever happens to LookSmart in the coming months, MSN's move has definitely moved the goalposts on the search engine playing field and escalated the business war between the big-three.