Overture Sticks to its Mission

America Online’s decision to turn to Google for its search listings,
including Google’s recently-unveiled pay-for-placement listings, marks a
bump in the road for incumbent player Overture Services, but it by no means
derails the leader in the pay-for-performance search space.

Overture’s investors, however, responded to the news in their usual
manner — overreacting with a massive sell-off, which sent Overture’s stock
tumbling $12.55 at press time, landing it at $21.64 a share, down from
$34.19 at Tuesday’s close. Apparently, blinded by the brands, they failed to
note the solidity of Overture’s model, and its preparations for the future.

“AOL was far from our largest partner,” said Overture CEO Ted Meisel in a
call with investors. “While we can’t release specific numbers of searches
performed, we can tell you that our estimate for the reach of Overture’s
network remains unchanged at around 85 percent.”

The battle over America Online, because of its nature, was one Overture was
bound to lose. Looking at the way AOL described Google in the press release
announcing its new alliance provides some hints about what the ISP giant
sought in a partner. It trumpeted Google as “the most popular search engine
available,” while the pay-for-performance listings were relegated to an
“also” status. It talked of “power search functions” rather than revenue
producing searches. On that battleground, Overture was doomed.

Branding and power aren’t Overture’s strong suits. It abandoned its
destination site — originally known as GoTo.com — in favor of remaining in
the background and letting its partners’ brands (Yahoo!, MSN,
Hewlett-Packard, and AltaVista, to name a few) bask in the limelight. It
also isn’t trying to provide ultra-relevant results through a powerful
search engine. Instead, its aim is to drive traffic to its advertisers.

While Overture’s aims apparently put it in opposition to America Online’s in
this instance, the pay-for-performance player is doing quite well at
reaching its aspirations. Yes, the company put out a pre-emptive press
release in an effort to spin the news away from its loss of AOL (considering
the tendency of its investors to panic, it was likely a good move), but the
diversionary information was extremely relevant. Rather than adjusting its
guidance downward to account for the defection of AOL, Overture revised its
full-year 2002 revenue estimates upward.

Most of the positive momentum was created by the signing of Yahoo! to a
three-year renewal of its distribution deal. In the Yahoo! relationship,
Overture has been successful by playing to its strengths, providing
pay-for-performance listings while rival Google fulfills Yahoo!s algorithmic
search needs.

The loss of America Online, while obviously not desirable, won’t likely have
a tremendous long-term impact. In fact, given AOL’s objectives, renewing the deal
could have had a negative effect — forcing Overture to concentrate on
objectives (branding, power searching) that aren’t central to its mission.

“We always want to make sure we’re working with companies with whom we have
strategic alignments,” said Meisel, also referring to the loss of AOL as “a
minor setback.”

That’s believable, if you look at Overture’s other metrics. Overture’s
number of advertisers is growing — it had 60,000 at the end of March, up
from 53,000 at the end of December 2001. Meanwhile, the number of
“introductions” (clicks on Overture listings) has been steadily rising —
from 338 million in the third quarter of 2001 to 442 million in the fourth
quarter of 2001. At the same time, the price per lead is climbing — from
$0.21 in 3Q 2001 to $0.23 in 4Q 2001.

Overture can keep chugging along because, for the most part, its affiliates
are locked into deals that dont expire until 2003. The only relationships
in question during 2002 are those with AltaVista and Microsoft (for its
Internet Explorer browser). Those relationships expire at the end of June,
according to Overture. AltaVista, because it has always placed a great deal
of importance on its own search technology, is unlikely to cast aside
Overture for a rival like Google. The Microsoft relationship is a little
murkier, although the software giant in February renewed and expanded a deal
for MSN that isn’t set to expire until December 2003.

That’s not to say that Google isn’t a worthy rival. It’s well known to have
some of the best search technology out there, and it has a highly respected
brand. But Google lacks the focus that Overture has demonstrated. (It can
afford to be less focused as a private company.) In recent months, we’ve
seen Google roll out beta versions of a Web API service and a research
service, while it continues to pursue the advertising business. It’s obvious
that Google, though it likely has a promising future, isn’t exactly sure
what it wants to be when it grows up. (It remains to be seen how Overture’s
lawsuit against Google for alleged patent infringement, which was filed last
month, will affect the rivalry.)

Still, Overture isn’t resting on its laurels. In its conference call today,
analysts hammered executives with questions about its guidance for the
future. Where was all the money going? Into investment and international
expansion, said Overture executives.

“There are some real key investments that we’ve been making and planning on
making,” said Meisel on the call. “Those investments focus on product
quality and international expansion. We believe that both of those will
deliver both top line and bottom line results.”

Now, if only investors would believe him.

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