Yahoo To Buy Overture

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.

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 thirdparty 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.

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.

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.

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.

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