March 27, 2005

Cracking the Code on Barry Diller’s Bizarre Ask Jeeves Acquisition: Why and Wherefore

AskJeeves & Barry Diller’s IAC
Think that resemblance is mere coincidence…? I think NOT! A week ago that oligopolist of the online Barry Diller announced he was buying also-ran search engine Ask Jeeves for almost two billion dollars, prompting many to declare a move to get just 5% of searches an utter waste of capital… but wait! There’s a competitive strategy in here somewhere… we just have to ask the right questions to find it.

Most importantly, what’s the real reason Barry Diller decided to buy out Ask Jeeves? Because his other sites need the traffic… and, if IAC can generate that traffic quickly enough, Diller should be cash-flow positive even before the search engine’s ad revenues kick in. Here’s a summary of the deal and speculation from

    IAC/InterActiveCorp, which operates a variety of online and offline businesses, including CitySearch, Expedia, and Ticketmaster, today said it will acquire Ask Jeeves Inc., for $1.85 billon.

    Ask Jeeves is the fourth-largest Internet search engine and, by comScore Media Metrix's measure, the ninth-largest Web property.

    In a statement, Barry Diller, chairman and CEO of IAC, said, "Ask Jeeves was founded almost 10 years ago based on the idea that simple text search results alone are not sufficient or satisfying--but, rather, that consumers want answers to questions--and questions posed in natural language and answered with spot-on accuracy were especially desired and appealing. Of the many search engines launched during that time, Ask was one of the very few that established itself and we believe that in the future it has the potential to become one of the great brands on the Internet and beyond, and by beyond, we mean in wireless, in the search for anything on any device."

    "It does look like there's going to be another major player in this market," says Marianne Wolk, an analyst for Susquehanna Financial Group. "However, we caution that IAC and Ask Jeeves are coming from behind. Ask Jeeves has invested significantly less in geographical expansion, technology expansion, and capital expenditures to reindex the Web, than [have] larger peers such as Google, Microsoft, and Yahoo. And there's going to have to be significant investment made by the combined company to catch up."

    The other major search players aren't sitting still either. A Yahoo spokeswoman today confirmed that it plans to buy Ludicorp Research & Development Ltd., which owns Flickr, an online photo-sharing site favored by bloggers. Wolk predicts that America Online, Google, Microsoft, and Yahoo will continue to make significant investments and acquisitions in search-related areas, particularly blogging and social networking.

    "This really just emphasizes my point that the major players are aggressively spending to expand overseas, and enter new markets such as blog search, content search, image search, desktop search, and video search," says Wolk. "And Ask Jeeves is way behind in most of those investment areas."

    Ask Jeeves' purchase last month of Trustic Inc., the company that runs blog aggregator Bloglines, represents an effort to close that gap. But experts suggest the distance is considerable.

    "If you look at the market share of the search portals--Google, Yahoo, MSN, and AOL--Jeeves really has a sliver in comparison to those others," says Kevin Lee, executive chairman of search-engine marketing firm "Can Jeeves be resuscitated with enough cash and savvy marketing? Perhaps it can. Clearly, Diller and his team have some thoughts with respect to Jeeves that they believe they can add value to Jeeves' current situation and maybe bring Jeeves back."

    Lee, like others in the search industry, shares Diller's view that "search for anything on any device" has potential going forward. But he's guarded in his assessment. "I think the whole convergence with wireless is going to continue to move slowly but surely," he says. "Device-agnostic search is going to be there in the future. I'm not sure that any one player has an advantage now given how early that game is. Any momentum any one player has can be eliminated with enough marketing dollars."

The key to understanding this competitive strategy is to understand that, despite all of the momentum behind Google and Yahoo and AOL and MSN, there will never be one big winner in the search engine marketplace. We’ve been fragmented for a decade and there’s little sign of that changing. Eric Chabrow’s blog entry captured this perfectly:

    Today, Google and Yahoo dominate the search market; they account for nearly 70% of all searches, according to comScore. Internet users conduct about one-quarter of Web searches on sites operated by MSN/Microsoft and AOL/Time Warner. Ask Jeeves accounts for only 5% of searches.

    But, as Diller points out, searches represent a very small slice of American media, even less so overseas. He compares the search market to other media, such as cable TV, where no one company dominates but scores of businesses are profitable. Despite its rapid growth, the Internet remains a relatively young industry. And search is even younger.

    Appearing on CNBC the other day, Diller addressed the search-engine sector: “It’s the very beginning of its growth. … This is going to be a world, just like the media world, where there will be many players, many people providing service.”

    Diller plans to grow Ask Jeeves by placing a search bar on Web pages of IAC’s other sites such as the online travel agency Expedia, Home Shopping Network, Ticketmaster, CitySearch, and Diller said IAC sites attract 44 million unique visitors, and expects many of them to use the Ask Jeeves search bar instead of going to another site to conduct a search, such as Google.

    Too many people are infatuated with companies like Google. They’re judging this sub-sector by the number of searches. True, search and portal companies do reach out through acquisitions and partnerships to create synergies, but that doesn’t explain how the market got so out of whack. How else could Google have a market cap topping $49 billion on only $3.2 billion in sales last year when IAC generated nearly twice that amount in revenue but has a market cap of $15.4 billion, less than one-third of Google’s?

But in the end, this thing is all about creating a search destination that feeds the rest of the IAC network. According to Michael Stroud:

    It's about being a portal to every one of the products and services that Diller's IAC/InterActiveCorp provides—including LendingTree,, Ticketmaster, Home Shopping Network, Expedia, and—as well as many products and services that Diller's partners will provide. If he succeeds in driving traffic to those sites, he'll generate cash from Ask Jeeves, even before advertising revenue kicks in.

    You can easily see how. Plenty of website owners would be interested in putting an Ask Jeeves button on their websites if, say, Diller offered to pay them a fee every time a customer used Diller's search engine to buy one of his services or those of a partner. Isn't that exactly what does when someone lists their favorite book or DVD on their website and then directs visitors to to buy it?

    Similarly, you can see how a partner—whether a retailer or a mobile phone operator—might be willing to give Diller a little cut every time a customer buys an IAC product or a IAC partner's product after discovering it through the IAC portal. That's exactly how Ticketmaster works, after all: buy a ticket, pay a premium to IAC.

    Yes, the market can only probably only support a few big search engines, if you're talking about encyclopedic sites that connect you to everything from the Civil War to Martha Stewart. But it doesn't follow that niche search services catering to specific communities—in this case, buyers of products and services—can't flourish.

    Newspaper readers, after all, don't flock only to USA Today or the New York Times, while ignoring local papers. Consumers don't choose to watch only CBS, ABC, NBC, and Fox, rather than cable or local channels.

    Diller knows all about that reasoning. He was scoffed at almost 20 years ago, when he challenged the Big Three networks by cobbling Fox together from a hodge-podge of local stations. With Ask Jeeves, he's trying a new twist: creating a unifying engine that works across IAC's disparate products and services.

    Yahoo and Google do the reverse: they have a unifying engine, and they're seeking the products and services to monetize it. And there's no business on the web like show business, which seduces millions of online shoppers with CDs, DVDs, and other Hollywood products.

    It's no accident that Yahoo chairman Terry Semel, Warner Bros.' former chairman and co-CEO, chose to set up his new media division in Santa Monica. Entertainment news on Yahoo is just a mouse click away from Yahoo ads for online vendors of CDs and DVDs, or entertainment products for sale in Yahoo Stores.

    So there's no reason why other media companies or big retailers—even specialized ISPs and mobile carriers—can't set up their own search sites, tailored to their own communities. And don't be surprised if some of them say "Powered by Ask Jeeves."

Ah-HA! That’s the secret! The erosion of market share away from the search engine leaders and toward verticals! Why didn’t I think of that?! Diller actually couldn’t have succeed if he’d done things any differently. That’s why Diller is considered one shrewd, dude, though… right?

- Arik

Posted by Arik Johnson at March 27, 2005 08:50 AM