Yahoo!'s Overture Acquisition

Yahoo’s agreement to buy Overture this week is the latest (and certainly the largest) in the series of search consolidations over past months. In March, Yahoo completed its acquisition of Inktomi. In April, Overture completed purchases of AltaVista and AlltheWeb.com.

What does this latest move mean? The answer depends on your viewpoint. Here’s my rundown of the various industry perspectives.

Overture’s Future Secured

Overture launched as GoTo in 1998. It sought to bring people to a new search engine where top listings were sold on a CPC or pay-per-click basis.

Overture made a major strategy change in 2000. Instead of driving traffic to its own site, it embarked to place its paid listings on other search engines. Smart move. By late 2001, Overture had deals with every major search engine but Google.

Google’s “we can do it ourselves” attitude means the company prefers to sell paid listings through in-house programs. Last year, it expanded its boundaries and built an Overture-style distribution network. Google first captured Overture partner EarthLink, then landed a major coup, snagging AOL from Overture. It later enticed Ask Jeeves into the fold.

Despite Google’s gains, Overture had healthy distribution. However, Overture’s network was centered around traffic from two major partners, Yahoo and MSN. This year, various sources hinted the two might drop Overture and take paid listings in-house. That hurt Overture’s stock price. Losing an important distribution partner, Applied Semantics, was another blow when Google purchased the company in April.

As part of Yahoo, Overture will be free of such stock-rattling distribution concerns. Yahoo becomes a major, permanent partner. Even if other distribution partnerships end, including the important MSN alliance, Yahoo’s traffic means advertisers will find it compelling to continue using a Yahoo-owned Overture system.

Yahoo: Self-Protection

Yahoo bought Inktomi because it determined to win against Google, it had to own the technology behind editorial results.

“We really needed to control our own destiny in this space and not be dependent on any one third-party provider,” Jeff Weiner, Yahoo senior VP of search and marketplace, said when plans were announced last December.

Inktomi freed Yahoo of third-party dependency for editorial listings, but it remained reliant on Overture for paid listings.

When the Overture deal closes, Yahoo, like Google, will control the two key elements of search: good content to attract users and good ads to help pay for the service. That helps secure Yahoo’s future as a search destination.

Consider Yahoo’s nightmare scenario were Microsoft to acquire Overture, outlined by both Forbes and The Street. Yahoo would rely on a competitor for major revenues. Better to strike first. Though, as The Street points out, it’s not a done deal. Microsoft could still pursue Overture, despite the Yahoo offer.

MSN: Which Way Now?

Like Yahoo, MSN found in-house search religion — at least on the editorial front. Microsoft is actively working to build a crawler-based search engine to power MSN editorial results. MSN has been very vocal, saying it’s happy to keep outsourcing paid listings to Overture.

In light of Yahoo’s move, a change of heart is likely. Outsourcing to a “neutral” Overture may be OK. A Yahoo-owned Overture isn’t a likely long-term partner, given MSN and Yahoo are direct competitors.

MSN currently uses Yahoo-owned Inktomi to power some editorial results but has said this will likely end once an in-house crawler is ready. Inktomi is convenient, not a long-term plan. The same probably holds true for Overture.

“We plan to partner with Overture for the short term,” said Lisa Gurry, a group product manager with MSN who’s working with the search team. “For the long term, we are very interested in talking with Yahoo and Overture, learning more about their agreement and thinking more about what’s the best long-term strategy for MSN.”

I think the strategy will be for MSN to develop an in-house program, if only because Google and Yahoo went that route. Creating such a program is a huge undertaking for a company in the midst of building an editorial listings solution from scratch. So it’s possible MSN may buy pieces of what it needs.

FindWhat.com comes to mind as a potential acquisition target. Until this week, FindWhat hardly warranted mention in the same breath as MSN. It’s a second-tier paid listings provider with nowhere near Overture’s or Google’s distribution. But with Overture tainted by a Yahoo association and MSN eyeing Google as a competitor, FindWhat is a potential solution.

Google is another target. It’s been reported Microsoft’s made an informal offer to Google at least once. There’s now reason for Microsoft to sweeten the pot. With Google, Microsoft would gain in-house capabilities for editorial and paid listings — mature, industrial-strength, proven systems. Google’s incredibly popular network of Web sites would enhance the deal.

A disadvantage is the certainty Google’s popularity would suffer as a result of anti-Microsoft sentiment. Google’s press is largely positive, but there’s been a rise in “Is Google Too Dominant?” articles recently. A Microsoft purchase would increase those fears.

Would Google sell? Forbes reports the founders say not at any price, but CEO Eric Schmidt says any serious offer must be considered.

Microsoft may decide the Ask Jeeves-owned Teoma crawler could speed a proprietary editorial solution. Next to Google, Teoma’s crawler is the only major, proven technology. LookSmart’s WiseNut remains in development.

What about MSN’s deals with Overture, one of which was announced just last week? Overture told Reuters Microsoft can get out of the contracts if Overture is sold. Microsoft wouldn’t confirm this when we spoke this week, but it seems likely. Microsoft has said in the past it can escape from its Inktomi contract before the December 2005 expiration.

Advertisers: Little Difference

What does the Overture acquisition mean for advertisers? Nothing major. Advertisers go where the traffic is.

Let’s assume Overture does lose MSN as a partner, which is likely in the long term. Overture will still get advertisers on Yahoo Since Yahoo will almost certainly remain a major traffic source, advertisers will buy from Overture.

So too will advertisers buy Google. Google gets inventory Overture does not, including AOL, Ask Jeeves, and Google itself.

Similarly, whatever system puts ads on MSN will be attractive to advertisers, whether Overture, a new MSN partnership, or an in-house program. MSN’s large audience makes the effort worthwhile.

Searchers: Good for Google Alternatives

What does all this mean for searchers? Ultimately, it’s probably good. It will raise awareness of Google alternatives.

The deal means Yahoo is fully securing the elements it needs to compete with Google in search. By year’s end, we should see fully Yahoo-generated listings, as opposed to the Google-enhanced results Yahoo currently provides.

An important new voice about what’s on the Web will be offered, as Yahoo lost its own voice when renewing with Google last year. Yahoo’s ability to monetize and promote results means more searchers will learn Google alternatives exist.

Competition is good, especially with the increasing view that if it isn’t in Google, it’s not on the Web. In truth, if one search engine can’t find something, the same search with another may work because of differences in how they view the Web. No search engine will ever find everything.

Yahoo’s push will probably cause MSN to redouble its efforts to do well in search. Some fear this ensures Microsoft’s domination of the Web. I think it means we’ll have a third strong and unique search engine (unless Microsoft buys Google). That helps searchers, as well as Webmasters who feel search is too Google-dominated.

Meet Danny at Search Engine Strategies in San Jose, August 18-21.

This column was adopted from ClickZ’s sister site, SearchEngineWatch.com. A longer, more detailed version is available to paid Search Engine Watch members.