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Search site Overture has big plans

SHARE Search site Overture has big plans

PASADENA, Calif. — 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 has become one of the Internet's biggest moneymakers this side of eBay.

Yet the skepticism about Overture persists. Even as Overture's annual revenue heads toward $1 billion, Wall Street is worried the 6-year-old company 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 recently soured on the company's prospects.

The doubts have weighed heavily on Overture's stock, which has slumped while the shares of less prosperous Internet companies have soared. Through June 11, Overture's stock had plunged 39 percent this year. During the same period, the Dow Jones Internet index climbed 52 percent.

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

"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 8-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 Alltheweb.com for $100 million.

The company plans to use those sites as test labs for exploring new ways to probe the Internet, parlaying what it has learned from its commercial search engines to develop better algorithmic formulas.

"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.

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."

While the technology for running pay-for-performance systems is complex, the concept is simple: 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 GoTo.com until late 2001 — maintained the method would generate highly relevant results. Management reasoned that 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 as "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 percent of the online traffic that clicks on its advertising links.

That dependence has convinced some analysts that Overture will be forced to pay Yahoo and Microsoft even more for future traffic or, if its stock remains in the doldrums, submit to a takeover.

Pay-for-performance search is expected to attract as much as $2 billion in Internet advertising this year, up from $100 million just three years ago.

Not all the money is flooding into Overture and the Web sites that draw upon its search engine because several other companies, most notably Google, have copied the concept.

The rivals have had good reason to emulate Overture. Since first becoming profitable during the summer of 2001, Overture has earned $114 million during the past seven quarters — tough times for most Internet companies. During the same period, Yahoo managed to make $57 million, while Amazon.com Inc. suffered 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 percent — $54 million — of Yahoo's $283 million in revenue.

But Google's inroads in commercial search have been hurting Overture by eroding its profit margins and luring away major partners like EarthLink Inc. and America Online. The pressure finally forced Overture in April to lower its 2003 earnings outlook — a move that 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, given the company's trailblazing record.

As Meisel reminded analysts in a meeting last month, "We have put on the map a market that didn't really exist until we came along."