Salomon Smith Barney cut Overture Services (OVER ) to in-line. Analyst Lanny Baker believes lower traffic payments to small distribution partners means Overture generates a disproportionate amount of profit from its partners beyond Yahoo! and Microsoft, creating a margin risk. Analysis suggests Overture's smaller partners, who accounted for about 35% of third quarter revenue, may account for as much as 75% of overall profit.
While smaller sites lack the traffic and clout to get higher revenue shares on their own, Google's entry into the market provides an alternative; Google's free distribution channel may enable it to pressure Overture's network and margins. He sees $1.29 2002 earnings per share, and cut his $1.10 2003 estimate to $0.95.