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 Yahoos 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.