April 28, 2006, 12:00 AM

Looking Smarter

Under the guidance of new CEO David Hills, LookSmart redefines its mission from one to hundreds.

Dave Hills’ history in the television broadcast industry becomes apparent when he describes the direction he sees for Internet search company LookSmart.com. “I see Google, Yahoo and AOL being like the three major networks in television, while we’re like the Turner Broadcast Network,” says Hills, who took the helm of the faltering LookSmart.com 18 months ago. “They offer broad content to the broadest consumer range possible while we’re vertical in nature and are trying to appeal to specific niches.”

If the 21 years Hills spent with Cox Enterprises taught him anything, it’s that the trend among the cable television networks today is to appeal to niches rather than trying to be all things to all people-as evidenced by the number of channels dedicated solely to topics like entertainment news, cartoons, shopping, old movies and travel. And that is the same strategy Hills is applying at LookSmart, a once high-flying Internet search company that was nearly destroyed in 2004 when Microsoft took in-house the job it had been outsourcing to LookSmart.

Complete makeover

Until 2004, LookSmart produced the results that consumers saw when they searched the Internet from MSN.com. In addition, LookSmart sold the advertising that consumers viewed on the MSN search results page. But when Microsoft decided it could search the web on its own-and sell the ads as well-LookSmart lost 70% of its revenue.

The remaining 30% was the result of LookSmart syndicating its search results to other web sites. In the meantime, Yahoo, Google and AOL had come to dominate the Internet search business. Attempting to compete with those three from its newly reduced base was too daunting a challenge.

And so, few disputed that LookSmart needed a complete makeover when Hills accepted the CEO job in October 2004. For starters, LookSmart had to come up with its own look and feel. And it had to attract the eyeballs of consumers who may have used LookSmart’s search engine before, say, at MSN.com, but didn’t even know it because the search engine had someone else’s brand on it.

Because of its former strategy, LookSmart had no customer loyalty or even any consumer recognition. And while LookSmart had controlled the advertising relationships under the old MSN arrangement, without any unique content to offer, those contact lists became simply names and phone numbers, not advertising customers loyal to LookSmart or its product. LookSmart had to find new reasons for those advertisers to stick around.

At that point, rather than try to be everything to everyone, Hills decided LookSmart wasn’t going to even try to take on the big three search engines. Instead, he took a year to come up with an entirely new strategy that utilized the search technology already in house and that would retain as many of the old advertising relationships as possible, but with a fresh approach.

Attack the specialty market

His plan? Attack the specialty markets. Hills and his staff spent a year creating a new concept that they introduced last October-a new LookSmart that consisted of 13 niches or “clusters,” as Hills calls them (see box, p. 65). Each cluster appeals to a specific niche market-such as students, personal investors, fashion etc. Then within each cluster, there are nine to 18 additional web sites with more specific information.

Hills recognizes that even within a given niche, there are smaller more specific niches. “Take our education site for students. We know that the homework needs of a 12-year-old are going to be different from those of a college student so we can’t have just one site that tries to appeal to both. Instead of having one education site, we have three, one for junior high students, one for high school students and one for college students,” Hills explains.

Actually, a check of the education site shows the range is even more extensive-and finely honed-than that, with a section for graduate students and a section for parents looking to help their children study. Even then, users who click on the high school section find selections broken down further into science and math, writing and literature, social studies, lifestyles, educational publications and other topics. The advertising links in this group refer to companies that offer career training, student loans, asset management, concert tickets and computer peripherals, among other things.

Indeed, LookSmart’s advertising strategy is similar to its approach to search. “Take Kaplan, the provider of SAT preparation and other educational services. They run ads on our high school site about preparing for the SATs and run ads on our college site about preparing for the GMATs and run nothing on the junior high site. Our strategy lets advertisers focus on the specific niches they want to appeal to,” Hills says.

Similarly with the personal investor site, LookSmart breaks the market into beginning savers or younger adults, baby boomers who are planning for retirement, and retirees.

Not just stuff to wear

And the style section is not just for researching fashion items such as accessories, clothing, jewelry, makeup and watches, which of course are included. But there are also sections on spas, hair styles and weddings.

The idea is to give individuals “essential” information that helps them in their everyday lives, Hills says, but not “exhaustive” information that is more likely to confuse them.

That strategy of pursuing niches just might work, says Eric Matinuzzi, senior research analyst with Craig Hallum Capital Group, a Minneapolis-based investment company that follows LookSmart. “About 90% of the general search market is controlled by four companies-Yahoo, MSN, AOL and Google. If you want to play in that market, you have to look at the development money those companies are spending. LookSmart did not have the horsepower to play in that league.”

An alternative strategy would be to compete in the “mega search” market, where companies aggregate relevant information from the major search engines. “That would have been a possibility, but there are companies, such as Infospace.com, that have already gained strength in that space and it would have been difficult to take them on,” Matinuzzi says. “Plan C would be to specialize, and given LookSmart’s size, that approach made the most sense.”

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