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Yahoo To Buy Overture

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Yahoo has announced an agreement to buy Overture, in a cash-and-stock deal valued at $1.6 billion. The purchase is expected to close by the end of the year.

The planned acquisition is the latest in a series of search consolidations that have happened over the past few months. In March, Yahoo completed its acquisition of Inktomi. In April, Overture completed its purchases of AltaVista and AllTheWeb.

What does this latest move mean? The answer depends on your viewpoint. Here's my rundown from various perspectives.

Overture: Future Secured

Overture was launched in 1998. Known then as GoTo, the company sought to bring people to its new search engine where the top listings were sold on a cost-per-click or pay-per-click basis.

Some thought Overture would never succeed since Open Text's earlier experiment with paid listings in 1996 had failed. Nevertheless, the site grew traffic through heavy online advertising and a lucrative affiliate program.

In 2000, Overture made a major strategy change. Instead of driving traffic to its own site, the company embarked to place its paid listings on other people's search engines. It was a smart move that saw Overture, by the end of 2001, having distribution deals with every major search engine but one -- Google.

Google had a "we can do it ourselves" attitude, preferring to sell paid listings through its own in-house programs. Then in 2002, Google decided to expand beyond its own boundaries and build its own Overture-style distribution network. Google first stole away Overture-partner Earthlink, then landed the major coup of capturing AOL from Overture and later enticed Ask Jeeves into its camp.

Despite these Google gains, Overture still had healthy distribution. However, the Overture network was now much more centered around traffic from two major partners: Yahoo and MSN. In 2003, hints and suggestions from various sources that these partners might drop Overture in favor of taking paid listings in-house hurt Overture's stock. Overture was further hurt by the loss of an important distribution partner, Applied Semantics, which Google purchased in April.

As part of Yahoo, Overture frees itself from these stock-rattling distribution concerns. Yahoo will become the major partner that Overture can never lose. Even if other distribution partnerships should end -- including the important one with MSN -- Yahoo still has enough traffic on its own that most advertisers will still find it compelling continue using a Yahoo-owned Overture system.

Yahoo: Protecting Itself

Yahoo purchased Inktomi earlier this year because the company decided that to win in the search game against Google, it needed to control the technology behind producing editorial results.

"We really needed to control our own destiny in this space and not be dependent on any one third-party provider," said Jeff Weiner, Yahoo's senior vice president of search and marketplace, said when the acquisition plans were announced last December.

While the Inktomi purchase freed Yahoo from its third-party dependency for editorial listings, Yahoo remained very much dependent on Overture -- a third-party -- for its paid listings.

Once the Overture deal closes, Yahoo, like Google, will control both key elements to search success: good content to pull users in and good ads to help pay for the service. That helps secure Yahoo's future as a search destination.

Indeed, consider the nightmare situation for Yahoo that Forbes and The Street point out in their looks at the deal, where Microsoft acquires Overture. Suddenly, Yahoo would be left depending on a competitor to help it earn major revenues. Better to strike first and protect yourself -- though as The Street points out, the deal's not done yet. Microsoft could decide to pursue Overture despite Yahoo's offer.

Yahoo Part 2: Winning Others

By obtaining Overture, Yahoo secures its home ground, the Yahoo network of sites. As an extra benefit, that security allows Yahoo to expand beyond its borders, just as Google has over the past year.

One of several reasons behind Google's expansion success is believed to be a willingness by Google to share more revenue with partners than Overture. If true, and this was especially rumored in the Ask Jeeves deal, it was probably an easy decision for Google to make. That's because Google's key partner has always been itself.

Google is in the business of selling listings (and dealing with the overhead involved) for its own needs. This means that any additional revenue gained from distributing its paid listings beyond Google's own sites is essentially "icing on the cake," something nice to have but not essential to the business plan.

The same situation will apply to a Yahoo-owned Overture. Any deals it gains beyond the Yahoo network of sites is essentially icing. Indeed, Yahoo noted in its press conference on the deal that it was not depending on partnership revenue to compensate for the purchase of Overture.

Yahoo would love to keep Overture's existing deals and perhaps land some new ones, of course. There's also reason to believe that the company may be successful in this, whereas neither Yahoo nor Overture on their own would have had nearly as good a chance.

Google's brand is so recognized that some even consider its name to be a synonym for search. Some potential partners might find that a threat. Others, like Earthlink or AOL, recognize that saying their search is "Powered By Google" may help keep their users searching at their own sites, rather than going to Google directly.

Overture never had "search quality" brand awareness as a side benefit for partners. In fact, until recently, Overture lacked the ability to offer a "all-in-one" editorial and paid listings solutions. As for Yahoo, lacking paid listings of its own, it was never in a position to enter the distribution game.

Now combine Yahoo and Overture. Yahoo has a strong search brand that can be wrapped around a new all-in-one search product that can be offered to partners. We could see "Powered By Yahoo" logos showing up on some sites needing a search solution, in the future.

Yahoo won't win some deals because it will be seen as a competitor. Nevertheless, for the first time it will be in a situation to try for some deals at all.

Finally, Yahoo referred to the deal in its press conference as making it "largest global player in the internet advertising sector." Yahoo an ad company? That's a new twist to me. I've certainly seen Yahoo consider itself a media company, where it creates content on which ads can be placed. As an advertising company, Yahoo will seek to place ads on content it doesn't own. Overture will certainly help it, in that regard.

MSN: Which Way Now?

Like Yahoo, MSN has gained the "in-house" search religion, at least on the editorial front. Microsoft is actively working to build its own crawler-based search engine, to power editorial results at MSN. As for its paid listings, MSN had been very vocal that it was happy to keep outsourcing those to Overture.

In light of Yahoo's move, a change of heart here is likely. Outsourcing to "neutral" Overture may be OK, but depending on a Yahoo-owned Overture in the long-term isn't likely, given that MSN and Yahoo are direct competitors.

MSN does currently use on Yahoo-owned Inktomi to power some of its editorial results, but MSN has previously said this will probably end once its own in-house crawler is ready. Staying with Inktomi at the moment is convenient rather than a long-term plan. Now the same seems 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 that strategy will be that MSN decides to develop its own in-house program, if only because it will now deem this necessary given that Google and Yahoo have gone this route. If so, building that program is a huge task to take on for a company that's also in the midst of trying to build an editorial listings solution from scratch. As a result, it's possible MSN may decide to buy some pieces of what it needs.

FindWhat leaps to mind as a possible acquisition target. Until yesterday, FindWhat hardly warranted being mentioned in the same breath with MSN. FindWhat is firmly a second-tier paid listings provider in the United States, having nowhere near the distribution of Overture and Google. However, with Overture now tainted by its Yahoo-association and MSN also viewing Google as a competitor, FindWhat stands out as a possible solution.

An upside for the FindWhat case is that the company itself recently acquired paid listings provider Espotting. Unlike FindWhat, Espotting is very much a first tier player in the European search space, counting Yahoo as its key partner. The company has a proven history of working with major portals and a presence in several European countries. Now "international" FindWhat could make a strong argument that it's the right partner for MSN both in the US and for MSN's important European-editions.

A downside to FindWhat is the fact that it is currently being sued by Overture, which claims a patent on bidding-for-placement. Overture is also suing Google on the same grounds, but Google is in better shape in that its system doesn't rank paid listings purely on bid price. Indeed, one reason Yahoo has given for its interest in Overture was because of Overture's patents in this area.

Google is another target. It's been reported that an informal offer has been made by Microsoft to Google at least once before. There's now even more reason for Microsoft to sweeten its offer. By purchasing Google, Microsoft would gain in-house capabilities for both editorial and paid listings. In addition, these would be mature, industrial-strength and proven systems. It would also gain Google's incredibly popular network of web sites.

A disadvantage for Microsoft is the sure knowledge that Google's popularity would probably get hurt by the anti-Microsoft view that some people hold. Google's press remains still largely positive, but there has been a rise in "Is Google Too Dominant?" themed articles over the past few months. A purchase of Google by Microsoft would no doubt increase such worries.

Would Google even sell? Forbes reports that Google's founders say no any price but that CEO Eric Schmidt says any serious offer needs to be considered.

Ask Jeeves is also worthy of attention. Microsoft might decide it's worth acquiring the Ask Jeeves-owned Teoma crawler to speed up work on building its editorial solution. Aside from Google, Teoma's crawler is the only major, proven technology out there. LookSmart's WiseNut remains in development.

What about the deals MSN has with Overture, one of which was announced just last week. Overture told Reuters that Microsoft can get out of its contracts if Overture was sold to someone else. Microsoft said it couldn't confirm this, when I spoke with them yesterday. However, it seems likely to be the case. Microsoft certainly has said in the past that it could escape from its Inktomi contract before it expires in December 2005.

Google: New Chance With MSN?

One might assume that the Yahoo-Overture deal means bad news for Google, but that's hardly the case. In fact, Google might gain now that Overture is to lose its neutrality by being part of Yahoo.

MSN has made no secret that it views Google as a competitor. However, MSN also sees Yahoo as a competitor -- and perhaps even more so than Google.

"Certainly we are the number one and number two portals, with MSN being the top destination online, and we are pursuing some of the same subscription services," said Gurry about Yahoo.

In contrast, Google competes with MSN only on the search front, not across the entire portal landscape.

"They are still very much a search engine primarily, where we are very much a portal," said Gurry.

Given this, MSN could decide that switching over to Google in the short-term is an easier pill to swallow than sticking with Yahoo. It's also important to remember that for all Microsoft's worries about Google, that company has never actively worked against Microsoft. In contrast, Yahoo has now purchased one of MSN's key partners, Inktomi and seeks to acquire the more important partner, Overture.

Could a Google-MSN partnership really happen?

"There's lots of different directions to go, and it's too earlier to speculate on what our future direction might be," said Gurry.

As for Yahoo, they aren't depending on keeping anyone but would be happy to have MSN and others stay with them.

"We're absolutely committed to our affiliate partners. We want to add as much value as we possibly can," said Weiner.

For its part, Google said it's still studying the Yahoo-Overture deal and may have comments on it in the near future. However, the company has always said it will work with anyone to who wants its services, said spokesperson David Krane.

So even Google declines to be purchased by Microsoft, it probably would be happy to work with Microsoft as a partner.

Advertisers: Little Difference

What does the purchase of Overture by Yahoo mean for advertisers? Nothing major. Advertisers will go where the traffic is.

Let's assume Overture does lose MSN as a partner, as is likely in the long-term. Overture will still get advertisers on Yahoo, and since Yahoo will almost certainly remain a major traffic source, advertisers will keep buying from Overture.

So too will advertisers keep buying Google, because Google gets you on places that buying Overture does not, such as AOL, Ask Jeeves and Google itself.

Similarly, whatever system puts you on MSN -- be it Overture, a new MSN partnership with someone else or a new MSN in-house program -- advertisers will buy that, as well. That's because MSN's large audience will make the effort worthwhile.

Searchers: Good For Google Alternatives

What does all this mean for searchers? Ultimately, it's probably a good thing, in that it will raise awareness of alternatives to Google.

The deal means Yahoo is fully securing the elements it needs to compete with Google in the search space. I would expect that by the end of the year, we should see fully Yahoo-generated listings, as opposed to the "Google-enhanced" results that Yahoo currently provides.

That means an important new voice about what's available on the web will again be offered, since Yahoo lost its own voice when renewing with Google last year. In addition, Yahoo's ability to monetize and promote these results means that more searchers should learn that Google alternatives exist.

Such competition is good, especially where there's an increasing view that if it isn't in Google, it must not be on the web at all. The truth is (and always has been), if one search engine can't find something, the same search with another might work because of differences in how they view the web. Of course, the ultimate truth that no search engine will find everything should also be remembered.

Yahoo's push will probably cause MSN to redouble its own efforts to do well in the search space. While some fear this will ensure Microsoft's domination of the web, I instead think it will mean that we'll have a third, unique and strong search engine (unless Microsoft simply buys Google). That will help both searchers as well as webmasters who feel the search universe is currently too dominated by Google.

Combining Inktomi, AltaVista & AllTheWeb

If the acquisition goes through, Yahoo will be the first company to ever own three distinct crawler-based search engines. Yahoo currently owns Inktomi already, and in purchasing Overture, it will gain AltaVista and AllTheWeb.

(By the way, runner up goes to Excite, which in 1996 purchased both WebCrawler and Magellan. That gave Excite its own crawler plus WebCrawler's spider. Magellan was a human-powered directory, by the time of its purchase).

How do you put all these together? Yahoo's spin is that there are parts of all of them that will be used, somehow, as part of an eventual single system.

"While we continue to go forward with our integration and strategy with Inktomi, we believe AltaVista and [AllTheWeb” complement the Inktomi assets. [AllTheWeb” has important international assets, and AltaVista is a leading multimedia provider on the internet," said Weiner. "Also, you're picking up a lot of engineering talent, as it applies to web search."

The first part of the response sounds similar to what Overture said after they bought both AltaVista and AllTheWeb, the idea that somehow, each fills in a missing piece that the other lacks. The reality is that these were all independent, functioning systems. Rather than being complementary to each other, they duplicate each other. What's really going to happen is that the best pieces from each will be kept.

Yahoo still hasn't released Inktomi results onto its own site, presumably because it's still doing development work behind the scenes. It may also be that the deal with Google may impose some undisclosed restrictions as to when Yahoo can bring in other results.

Regardless, Yahoo will keep moving ahead to develop Inktomi independently of Overture's plans for AltaVista and AllTheWeb. That's because the two companies can't work together on integrating all three crawlers until after the deal actually closes, which isn't expected until toward the end of this year.

As for Overture, it's already well enmeshed in combining the AltaVista and AllTheWeb systems. That work will have to continue, because it could turnout that the Overture-Yahoo deal might not get approved.

So, crystal ball time. I would expect that over the coming months, you'll probably see Inktomi go live on Yahoo. Meanwhile, in the coming months, you'll probably see AltaVista and AllTheWeb switch over to using a single crawler-built index -- let's call it the Overture index.

By sometime early next year, I would expect that work to combine the Inktomi and Overture indexes would be well along. So around mid-to-late 2004, we might finally see the single "Yahoo" index emerge, for use on Yahoo, AltaVista and AllTheWeb -- assuming those other two sites are still around.

As for paid inclusion, one eventual index means there should be only one eventual program, rather than the three separate programs that now run for Inktomi, AltaVista and AllTheWeb. Furthermore, I actually think you may see the demise of paid inclusion happen altogether. I'll explore this more in a future article, but here's the short summary of my reasoning.

Paid inclusion came about because companies like Inktomi had no other way to offer revenue to potential partners. Now that Yahoo owns Inktomi and will own Overture, it doesn't need to dive into the messy world of paid inclusion to monetize its pages. Instead, it can continue along with paid listings, as it has already done with Overture.

Instead, I think what will happen is that for commercial queries, you'll see more of the page dominated by paid placement listings. I also think you'll see paid inclusion survive but really as an extension of paid placement. It will be a way for advertisers to have their web sites scanned for content, then be able to show up for terms that no one is explicitly bidding on, for a flat rate.

Interesting Observations

Finally, I wanted to share a few interesting things that are likely to come out of the Yahoo-Overture deal.

First, Overture is currently suing Google over patents on paid listings. That sets Yahoo up to be suing Google, when the deal is complete. Yahoo had no comment on whether the suit would be dropped or what might happen with it.

Second, Yahoo has stressed that it was interested in Overture in part because of its patents on both paid and crawler-based listings. This resurrects the idea that Google and others might find themselves threatened over crawling the web, based on patents originally obtained by AltaVista. Whether those patents would actually hold up is hard to know.

Third, it's an amusing merry-go-round that some of the people in Yahoo and Overture have been on, as part of these recent deals.

Overture web search division chief scientist Jan Pedersen was originally with Infoseek, then landed at AltaVista, now works for Overture and looks to become a Yahoo employee.

Meanwhile, Overture's web search products vice president Tim Mayer was originally with Inktomi, moved to AllTheWeb, then was absorbed by Overture and now will be returning to some of his Inktomi colleagues who work at Yahoo.

Finally, Tim Cadogan, formerly of Overture, found himself making headlines when he jumped ship to become Yahoo's vice president of search. Now he'll be reunited with former colleagues, when the Yahoo-Overture deal concludes.


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