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Is Overture an Engine of Growth or Formula for a Letdown?

Despite its profitability since mid-2001, some on Wall Street doubt the search firm's prospects.

June 16, 2003|Michael Liedtke | Associated Press

People scoffed a few years ago when Overture Services Inc. vowed to build an Internet search engine that sold the top spots in its rankings to the highest bidders.

The ridicule seems absurd now that ad-based search results have turned into an online gold mine. Overture, headquartered in Pasadena, has become one of the Internet's biggest moneymakers.

But even as Overture's annual revenue heads toward $1 billion, Wall Street worries that the 6-year-old firm will become obsolete almost as quickly as it emerged as a pioneer. "There are quite a few wild cards facing Overture," said Derek Brown of Pacific Growth Securities, one of several analysts who have soured on its prospects.

The doubts have weighed heavily on Overture's stock, which has plunged 39% this year. In the same period, the Dow Jones Internet index has climbed 50%.

Overture has no doubts about its future, promising to deliver more breakthroughs that will diversify its business, delight Web users and unnerve its biggest foe, the far better known Google Inc.

"Five or 10 years from now, we are going to look back at the current state of Web search and be embarrassed, like we are now when we look back at old technologies like Betamax VCRs and eight-track tapes," said Gary William Flake, Overture's chief science officer.

As a prelude to its next big push, Overture recently snapped up more search artillery by buying AltaVista for $107 million and for $100 million. The company plans to use those sites to explore better ways to probe the Internet.

"When you have a great product like we do, it's certainly tempting to sit back and rest on your laurels, but we're not going to do that," said Ted Meisel, Overture's chief executive.

Alltheweb hopes to make its first big splash under Overture's ownership this summer when it introduces a search index spanning 3.5 billion Web pages -- compared with Google's current index of 3.1 billion pages.

Since dot-com entrepreneur Bill Gross launched the company in 1997, Overture's bread-and-butter has been a commercial search system known as "pay for performance." Advertisers bid for the right to have their links displayed under specific search terms. The auction determines the order in which the links are displayed on a Web page.

Critics initially derided this approach as crude, but Overture -- known as until late 2001 -- argued that the method would generate highly relevant results because Web sites wouldn't bid for traffic unless they thought they had something meaningful to offer.

Overture licenses its results to a wide range of Web sites that take a cut of the fees generated whenever someone clicks on an advertiser's link displayed in a section typically labeled "sponsored results."

The system has proven be a hit among Web surfers and Web sites alike. Overture's links are on pace to attract 2.4 billion clicks this year. The company's search database includes 88,000 advertisers who paid an average of 37 cents per referral during the first quarter, up from 24 cents the previous year.

For all its success, Overture seems vulnerable because it relies on just two companies -- Yahoo Inc. and Microsoft Corp. -- for 65% of the online traffic that clicks on its advertising links. Moreover, Overture faces competition in the pay-for-performance market, notably Mountain View, Calif.-based Google, which adopted the concept.

The rivals have had good reason to emulate Overture. The company, which first became profitable in the summer of 2001, has earned $114 million over the last seven quarters -- quarters that have been tough for most Internet companies. In the same period, Yahoo earned $57 million, while Inc. had net losses of $324 million.

Yahoo has been doing better lately, with a big helping hand from Overture. During this year's first quarter, Overture's advertising referrals accounted for 19% -- $54 million -- of Yahoo's $283 million in revenue.

But Google's inroads in commercial search have been hurting Overture by luring away customers such as EarthLink Inc. and America Online. The pressure forced Overture in April to lower its 2003 earnings outlook -- a move Meisel describes as "a stutter-step."

Overture expects to regain its stride by the end of the year -- a promise that management says should be taken seriously. As Meisel told analysts in a meeting last month, "We have put on the map a market that didn't really exist until we came along."

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