Microsoft Corp.’s MSN division will drop its contract with Internet search firm LookSmart Ltd. in January, marking a new stage in the software giant’s long-term plan to develop its own search tools.

The news sent LookSmart shares plunging nearly 60 percent.

San Francisco-based LookSmart, which receives nearly 70 percent of its quarterly revenue from MSN, will be forced to cut costs, chief executive Jason Kellerman said. He declined to offer any financial specifics, saying the company was still grappling with the news.

“We’re going to need to make some changes around here,” Kellerman told analysts and reporters on a conference call.

Shares of LookSmart plummeted $1.74, or 58 percent, in extended trading Monday on the Nasdaq Stock Market, after closing the regular session at $3.02. Microsoft shares rose 11 cents to close at $29.19 on the Nasdaq.

LookSmart has worked with MSN since 1998.

MSN will almost immediately quit using LookSmart’s technology on its United Kingdom sites, said MSN lead product manager Lisa Gurry, and will remove it from its U.S. sites on Jan. 15.

Microsoft is hoping to tap into the increasingly lucrative business of Internet searching, which is worth billions of dollars each year as companies pay for prominent placements in search results.

Companies including Google, Yahoo, and MSN offer search tools for computer users looking for news, information, shopping sites or other Web sites. Users enter keywords and the search engines return listings of relevant Web links, based on algorithms and other formulas.

But the results also include a section of links to advertisers who pay for inclusion based on the keywords. For example, a user who types in “Hawaii vacation” may see links to travel agencies or Hawaii hotels.

Those paid results amount to billions of dollars a year for search sites, and have become increasingly important in MSN’s bid to post a profit, analysts said.

Gurry said Microsoft decided to drop LookSmart after conducting tests in its U.K. sites. She said MSN believes it can provide better search results to consumers by relying more on technology from Microsoft or another search firm partner, Overture. Gurry added that the company has no plans to terminate its contracts with Overture or another search firm, Inktomi.

However, that could change, said Charlene Li, an analyst with Forrester Research, considering that Microsoft competitor Yahoo now owns Overture and Inktomi.

Although search companies have been on notice ever since Microsoft said earlier this year it was working on its own search-engine technology, “the timing of (this) was a lot sooner than they expected,” Li said.

Source: Associate Press