Overture May Mute Rivals
Having shown that online advertising can actually be profitable, Overture Services Inc. is girding for a fight as Internet search engines try to duplicate the Pasadena company’s success.
Overture sells “sponsored links” that pop up in search engines on portals such as Yahoo Inc., Microsoft Corp.’s MSN and AOL Time Warner Inc.’s America Online. Advertisers bid for placement and pay Overture only when someone clicks on their links.
That pay-for-performance approach has made Overture one of the few profitable online ad services and a Wall Street favorite. In 2001, a year in which dot-coms melted into oblivion, the company posted a $20-million profit on revenue of $288 million.
But others are trying to play Overture’s finale.
Search engine Google last month snatched away a contract with EarthLink Inc. Overture’s agreement to post listings with America Online expires next month. Its contract with Yahoo expires in the summer, and Yahoo has contemplated creating its own service.
Company executives, though, don’t expect the competition to set them back.
“We’re all over it when new entrants come into the market,” Chief Executive Ted Meisel said.
Overture’s approach is simple and offers clients a more definitive way to measure the effectiveness of an offer than traditional banner or pop-up advertising. Advertisers bid for placement, with the highest bidder appearing at the top of a list of search results. When a consumer clicks on a link, the advertiser pays Overture a set fee, which is split with the hosting site.
Advertisers request to be listed under specific key terms. A car dealership, for example, might ask to be listed in search results for “cars.” So whenever someone types “cars” into the search field of, say, Yahoo, the ad listing pops up. Its ranking depends on how much the advertiser agreed to pay Overture.
The search engine has about 8 million paid listings from 53,000 advertisers. The average fee paid by advertisers at the end of 2001 was 23 cents per click-through; the average advertiser paid $1,980 during the fourth quarter.
Since launching the service in 1997, Overture has come to rule the market. But with Google jumping in and Yahoo considering it, Overture might find itself having to bid for placement in the same way its advertisers do.
“The company that’s the best organized to make the most money can pay the most to buy the distribution,” said Lanny Baker, analyst with Salomon Smith Barney.
Should Google, or any other competitor, offer higher rates to partner sites, Overture might have to increase the amount it pays as well. But right now, Baker said, Overture is in the best position to offer competitive rates.
Although Google’s search engine could draw advertisers and customers away from Overture, analysts do not believe it is likely. The company is modeled after the Yellow Pages, which has “almost a natural monopoly,” said Safa Rashtchy, analyst with U.S. Bancorp Piper Jaffray.
The phone book contains all businesses in town and nearly every household has one, virtually eliminating the need for a second Yellow Pages, Rashtchy said. If Overture includes listings from a majority of advertisers, they--and the customers--will have no reason to go anywhere else.
About 95% of Overture’s traffic comes from its partner sites.
Although the company is poised to dominate the pay-for-performance industry, its stock has not been so stable. Shares fell 41% in early February when EarthLink announced it had chosen Google to run its search engine. The stock rebounded but fell again two weeks later when Google announced it was offering cost-per-click searches. The stock peaked at $108.25 in November 1999, when the company called itself GoTo.com. It fell $1.85 Friday to $29.02 on Nasdaq.
Analysts expect the company to extend its contracts with AOL and Yahoo later this year, but shares could drop again if the company fails to do so.
“Psychologically, the stock will need [the contracts to be renewed],” Rashtchy said.
Having built partnerships with most of the major portals in the United States, the company is now expanding into international markets. Overture signed a multiyear contract with AOL in January to provide search results in the United Kingdom, Germany and France. The company also has an agreement with one of Europe’s leading Internet service providers, T-Online.
In addition, Overture is working on securing longer contracts with its current partners--last month the company extended its contract with Microsoft to provide search results for its MSN Web site through 2003--and increasing the number of results that are listed on each partner site.
“This is really an attractive business,” Meisel said. “It’s going to invite competition.”
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