Overture’s Gamble

Overture Services’ move to acquire search engine pioneer AltaVista in a $140 million stock-and-cash deal yesterday was greeted by groans from financial analysts who questioned the cost. The uncertainty of the deal’s effect on Overture’s 2003 earnings drove its stock down 20 percent.

While Wall Street is pessimistic, Overture is betting that it can get a bigger piece of the search industry by offering a complete offering of algorithmic and paid search, while adding paid inclusion to the mix.

Gearing up for Google

In the near term, the AltaVista acquisition gives Overture further ammunition to fight its war with Google. Since Google entered the paid listings space last April, it has targeted Overture’s paid search supremacy. The algorithmic search leader established its credibility by luring away Overture partners EarthLink and AskJeeves. But its big blow came in May, when it landed a contract with AOL.

“It certainly makes them more competitive,” said Fredrick Marckini, chief executive of search-optimization company iProspect. “Google can no longer say they’re the only place for editorial and paid search.”

However, the deal presents a potentially thorny problem for Overture. For the past year, its executives have said one of its big advantages over Google was that it did not compete with its partners for traffic. Google, on the other hand, is the fourth most visited site on the Internet, boasting one of the world’s best brands, and increasingly featuring portal-like features.

With the AltaVista deal, Overture now has a destination site of its own. Overture CEO Ted Meisel went out of his way to downplay this, saying AltaVista would continue as a “test bed” for new paid search products.

Meisel said Overture had been in contact with its two big partners, Yahoo! and MSN, which account for nearly two-thirds of Overture’s revenue. He said they would evaluate Overture’s intentions based on its actions with the site.

Indeed, it seems unlikely that AltaVista could rise to the prominence it once had in the mid-to late-90s. While its name is easily identified with search, AltaVista’s audience is a fraction of what it once was. According to Nielsen//NetRatings, the site drew 5.4 million visitors in January, ranking as the 17th search destination.

“The AltaVista site has dropped in popularity so much that I don’t think Yahoo! would look at this like Overture is going to turn this into a Google-like great search experience,” said Danny Sullivan, editor of Search Engine Watch, which is published by the parent company of this site.

Yet AltaVista still has value as a consumer brand in search. “The name is a good thing,” Sullivan said. “When they go into some of these partners, they have a brand that still carries a reputation for search.”

For a site like CNN, which has signed with Overture for paid listings but still uses Google’s algorithmic search, Overture could now offer a complete search solution, Sullivan said.

More Search Real Estate

While financial analysts nearly unanimously panned the deal, since Overture executives could not give any concrete sense how the merger will affect its earnings in 2003, the combination of Overture’s paid listings business and AltaVista’s search engine highlights a changed search industry. Instead of sharp divides between editorial search and paid search, the lines between the two have been blurred, with paid inclusion now thrown into the mix.

This mix may finally be a stable model for the search industry, after years of floundering by the major players. Some, notably Netscape and Inktomi, tried to make search work using a software model, but were unsuccessful. Excite attempted to make search a cornerstone of its ISP strategy, but eventually failed. For a time, search was considered the foundation for a portal site, which would also include news, free e-mail, and the like. Though many followed this route, only Yahoo! has been successful in implementing it. Now, algorithmic and paid search are considered essential elements, and paid inclusion is the latest important offering.

Paid inclusion allows a company to pay for some of its Web pages to be crawled by a search engine. While this does not guarantee placement, it does increase the odds that a marketer’s page will appear in a search engine’s editorial results.

AltaVista will give Overture a paid-inclusion product, to sell as part of its package of search services. While paid search has taken off, paid inclusion has been slower to catch on with marketers.

One of the chief reasons for this, according to Sullivan, is that paid inclusion is a more complicated marketing concept than pay-for-performance search listings.

“Paid inclusion has been an incredibly difficult thing to understand,” he said.

Marckini said this was another way for Overture to wring more money out of searches. Overture has estimated that the U.S. search market produces 210 million clicks per day, with just 35 to 40 percent commercial.

“This is a battle for real estate on the page,” Marckini said

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