Answers.com Struck By New Google Algorithm

Answers.com (ANSW) announced this morning via a press release that due to an algorithmic change in Google Search, Answers is no longer showing up as frequently in Google searches. The stock is down 19% on the news. Remember, ANSW is extremely dependent on Google traffic, which we have postulated is behind their acquisition attempts for Dictionary.com.

What’s the damage? Traffic levels are currently down approximately 28% from levels immediately prior to the change.

Here’s what the company had to say:

"The major search engines modify their algorithms all the time,” added Mr. Rosenschein (ANSW’s CEO). “This change only demonstrates the sound business rationale behind our agreement to purchase Dictionary.com, because it underscores a primary motivation for the deal: to secure a steady source of direct traffic and mitigate our current dependence on search engine algorithms… As we work to restore normal traffic levels to Answers.com, we are confident that our efforts will result in a stronger and more valuable company."

Clearly, Answers needs to diversify away its risk inherent in depending on Google so greatly for traffic. The rationale behind the acquisition of Dictionary.com was ANSW’s effort to procure organic traffic.

Now, things are really tough for Answers. Before this happened, it was unclear that Answers could get a $100M deal done. Now that their traffic is plummeting, it may get even harder. Combined with a cratering high yield market and a decreased appetite for stocks, Answers should be scrambling - looking for The Answer.

Disclosure: Author’s fund does not have a position in any of the stocks mentioned here as of 8/1/07.

Comments

[AbhishekGupta]

I think acquiring dictionary.com etc is a very strategic move to get more hit rates. Now too in google when you type a word you still have the link to answers.com for the meaning

[bradleyh]

Zack,

As someone who works in the Internet, let me tell you diversifying away from Google is easier said than done. They are so dominant in the search market, that to not use them means you're not in business (unless you're someone like Facebook, etc who uses networking to bring people in). But Answers, like About.com and many others, it built as an SEO engine, so natural Google traffic is all they get. These models are not good enough to survive on their own. There are many other companies that have been hurt by Google's algorithm change, but they have better models, so they can pay for Google traffic (and SEM traffic is much much more stable than SEO traffic). I would just say to any investors, definitely be careful before spending a lot on a company that is highly dependent on SEO. It's a risky proposition.

Brad

[zack miller]

Hi Brad,
Thanks for the important comment. I totally understand how hard it is for other internet sites (specifically those dependent on organic Google traffic) to diversify away from the search behemoth.

As you point out, it's ANSW's model and its relative dependence on Google traffic that makes it so vulnerable. My point was that Answers' move to purchase Dictionary is a natural outgrowth of their lack of control over SEO traffic.

[Roy Sencio]

Zack does have a point, it's really easier said than done... however acquiring dictionary.com is a good move

[User 176917]

Answers Tips should be industry standard(or should have been for a long time now). Anyone private and business should want it. But I bet no one knows what it is.