Overture’s Business Model Challenged by Competition


Overture’s Business Model Challenged by Competition


Staff Reporter

Overture Services Inc. had emerged over the past two years as a model for other Internet search companies to emulate.

Providing paid results to other Web search engines, Pasadena-based Overture formerly GoTo.com was among the first Internet search companies to turn a profit. It inspired all the major search engines, including Yahoo Inc., Google.com and MSN, to begin providing paid results along with their free, algorithmic-based search listings. Many became Overture customers.

Now, as the business models of the still-young Internet further evolve, Overture finds itself on the defensive. Its main competitor in the paid-listings market, Google, is beating Overture at its own game. Google has won some of Overture’s largest customers and forced it to make less favorable deals to keep others.

In the last two weeks, Overture has responded. It purchased two well-regarded algorithmic search services providers: AltaVista Co. and Fast Search & Transfer ASA of Norway, for a total of $210 million in cash and stock.

Overture officials say the deals will broaden its product offering and help its international expansion. But there are plenty of critics.

“This is a desperate attempt to change their strategy because the basic business model is failing,” said David Hines, president and director of research at Avalon Research Group, a securities research firm in Boca Raton, Fla.

Falling stock

Avalon has had a sell rating on Overture’s stock since March 2002, mainly based on fears that its earnings would suffer as competition increased.

Since Jan. 13, when Overture’s stock closed at $31.04 a share, it has lost nearly half its value. About half of the drop, to a recent price of $15.75, has come in the past two weeks, as investors reacted negatively to the announced purchases of AltaVista (from CMGI Inc.), on Feb. 18, and FAST, a week later.

Overture Chief Executive Ted Meisel said the FAST acquisition would allow the company to be a “full-service search provider” and attack a global market.

“These two new properties help us reach the global market,” said Meisel at a recent presentation to investors.

Critics see a company with an eroding U.S. franchise that faces tough challenges as it retreats to international markets.

Overture has said that the two acquisitions will reduce its 2003 earnings by 20 to 21 cents a share and that its investments in Web analytics and “localized search” will drag earnings down by another 10 cents.

The company projects 2003 earnings per share in the range of 60 to 70 cents; shortly before the AltaVista announcement the Wall Street consensus had been 98 cents, according to I/B/E/S.

There are also questions over whether Overture can integrate the two acquisitions. “We remain substantially concerned about the fundamentals of Overture’s paid-search business and are confounded by the acquisitions of AltaVista and FAST,” Hines said.

The company won several major deals in the late 1990s, but many of these relationships have since disappeared. Contracts were lost last year with AOL, Earthlink Communications, and Ask Jeeves all to Mountain View-based Google.

Google’s clout

Paid search listings allow advertisers to bid for prominent placement in Web search results. On Overture, the highest bidder becomes the first Web site listing the consumer sees. Every time a user clicks through to an advertiser’s site, Overture gets paid.

Google uses a similar approach, but factors in relevance that’s derived from its potent algorithmic search technology. Overture’s acquisitions of AltaVista and FAST are partly seen as a way to boost its paid search product, besides adding free search to its product repertoire.

Overture still holds contracts to provide paid search results to MSN, a unit of Microsoft Corp., and Yahoo. But even there, its position has been weakened. Yahoo, for example, was able to demand a non-exclusive relationship with Overture on a three-year deal reached last April. Yahoo recently purchased algorithmic search service Inktomi, a competitor to AltaVista.

Overture’s Web portal partners could also view the acquisitions as a threat to their own search engine services. “MSN wanted to buy Alta Vista, so now things are more difficult for them. They could view this as Overture trying to be a destination site,” said Danny Sullivan, editor of Searchenginewatch.com, an online trade publication based in the United Kingdom.

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