LookSmart Still Isn’t Dead; Finds New Role “Mining Diamonds from the Dirt” in the World of Second-Tier Search Engines

10/4/10Follow @wroush

When a public relations group in San Francisco contacted me to see if I’d be interested in meeting with an executive at LookSmart, my first reaction was “LookSmart? They’re still in business?”

I’d known people at the 13-year-old company back in the dot-com era, after it went public on the NASDAQ (LOOK), won big contracts to provide directory listings and cost-per-click advertisements for Microsoft’s MSN portal and other sites, saw its stock shoot from $12 at IPO to more than $70 in early 2000, and grew its offices near Pacific Bell Park (now AT&T Park) to more than 700 people. But the crash of 2000-2001 decimated online advertising, and then in 2003 Microsoft launched its own search and advertising platform, taking away 90 percent of LookSmart’s remaining volume overnight. The company pretty much dropped off my radar after that.

And many other people’s, too, apparently. Out of curiosity as much as anything, I agreed to meet recently with Gill Brown, LookSmart’s vice president of advertising network sales. Brown told me that when a recruiter called him about the sales position in early 2009, “The first words out of my mouth were, ‘LookSmart’s still in business?’”

These days, Brown explained, LookSmart is a provider of pay-per-click text ads to what the search industry calls “Tier 2″ search engines—everything smaller than Google, Yahoo, and Bing. Together, the Big Three providers—which are really just the Big Two, since Bing now powers Yahoo—control about 95 percent of the search market. But within that last 5 percent are hundreds of other search companies, including moderately well known entrants like Ask, AOL Search, Cuil, Lycos, Excite, AllTheWeb, and Altavista, and many less familiar names. And together, these Tier 2 players field billions of search queries each day—which creates a market for the same type of keyword-based advertising that’s turned the AdWords platform into such a cash cow for Google.

Gill Brown

Gill Brown

Many companies are vying with LookSmart to be, in essence, the AdWords of the Tier 2 world. But the second tier is a messy and unregulated place, where it’s not unheard of for publishers to run scams such as setting up bots that click on ads on their own sites or competitors’ sites thousands of times per hour, generating more revenue for themselves or hitting competitors with outrageous pay-per-click charges. Brown’s focus since joining LookSmart in February 2009 has been on using its vast troves of search data to identify the most secure, reputable, and effective Tier 2 players and making sure that LookSmart’s clients’ ads only show up on those sites.

“We want to be known as the Tier 2 network you can trust,” says Brown. “That’s all about proving to advertisers that we have the quality, and that when there is a hiccup we deal with it like a great company should.” At the same time, LookSmart uses its data to help advertisers determine which ad slots will lead to the most conversions, i.e. actual purchases, and which ones have the most favorable revenue-sharing terms.

These days, all of those decisions are made by software on the fly at the moment a search-results page is being assembled, which means LookSmart’s algorithms have to make their determinations in microseconds. LookSmart now processes two billion search queries a day—placing ads from aggregators like Kontera, Oversee.net, Affinity, Advertise.com, Bravenet Media, and LeadImpact across dozens of search sites—and recently completed its first profitable quarter in six years.

It’s a remarkable turnaround for a company that’s been through several near-death experiences. Brown, who came to LookSmart after long stints at Yahoo’s search marketing division and Emeryville, CA-based digital marketing startup Tribal Fusion, says there’s been an almost total turnover in the company’s executive leadership over the past 18 months. Longtime board member Jean-Yves Dexmier, who became CEO of the company last December, “has brought a new energy, a new strategy and direction to the company,” says Brown.

Brown, who is listed as the number-three executive on LookSmart’s website after Dexmier and chief financial officer Steve Markowski, says he had been pushing for just such a shakeup since arriving at LookSmart. “I was pleased that [Dexmier] joined the company, because his strategy mirrored my drive and what I thought the company should be doing,” Brown says.

Brown says he it became clear to him shortly after joining LookSmart that there wasn’t any more room in the top tier—Google, Microsoft, and Yahoo have the market for premium keyword-based text ads locked up. He saw an opportunity, however, for the first player that could bring greater safety and security to the Tier 2 market, which has long been “buyer beware” environment, in his words.

“The knock on Tier 2 has always been, ‘There’s a bunch of junk in there. Spiders and bots and God knows what’s going on in there—it’s ugly, I’m afraid of it,’” Brown says.

To weed out the disreputable search providers while still distributing its clients’ ads as broadly as possible, LookSmart has partnered with companies that make click-fraud detection software, such as Anchor Intelligence and Click Forensics. It has also built quite a bit of its own in-house traffic quality management software.

The job of those systems, Brown says, is to play a continuous game of “whack-a-mole,” catching anomalous spikes in click-throughs on clients’ ads before they get out of hand. “We have what we call a ‘surge suppressor’ that catches these patterns early, before they go crazy,” Brown says. “We say, ‘We need to stop that source right now and have a human go take a look and find out why it went from 500 clicks per hour to 10,000 clicks per hour, and let’s not expose our advertisers to it until we’re comfortable with it.’”

The more instances of click fraud the company can detect, the better its filters get, Brown says. “What we have been able to do, especially in the last year, is really weed our traffic and understand it click by click. We have quality standards that we abide by, and work with customers on a service level so that if there is any problem we follow up on it immediately, which has not traditionally occurred in this space.”

If you’re wondering why any of this worth the trouble, when advertisers could simply put their ads on Google or Bing, well, it’s all about costs and benefits. Because there are fewer bidders for Tier 2 ads, and the competitors are smaller, the per-click prices advertisers end up paying are lower, which can offset the added risk of click fraud. Also, Tier 2 includes “a lot of solid traffic sources that provide real conversions for people,” says Brown.

“I had a customer about a year and a half ago who put it to me in a way I really like. He said, ‘The real leader in Tier 2 is going to be the company that helps me mine the diamonds from the dirt.’ Right now you’ve got a big pile of dirt, with a few bad guys down at the bottom end that can cause problems. The company that will win, like LookSmart, has got to be able to use technology as well as humans to combat that, and give the best possible odds of great clicks coming through. “

Brown says he thinks that LookSmart’s volatile years are behind it. The company has $25 million in cash from operations in the bank, is stable at 70 employees, and most of its stock is held by a small group of “very loyal institutional investors,” he says. The company’s goal now, he says, is to become known as “the crown jewel of that Tier 2 space.” And maybe even to emerge as something new: what he jokingly calls a “Tier 1 and a half” advertising network—”a bridge between the Tier 1′s and the great unwashed masses.”

Aside from its technology, the company has one other thing going for it, Brown says—the power of a once-familiar brand that most people assumed was dead. “All the big advertisers and agencies, they all used to be with us,” he says. “So it’s not tough when you call them on the phone. Their reaction is the same as yours and mine. They say ‘Wow, I haven’t heard from anyone at LookSmart in six years. Come on in, I just want to see what you look like!’ We get a lot of that—but I’ll take that meeting every time.”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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