Why Google Should Be Worried

By buying Overture, Yahoo! is challenging its rival in the booming paid-search market -- and giving Microsoft a headache as well

By Alex Salkever

With the acquisition of paid-search provider Overture (OVER ), Yahoo! CEO Terry Semel officially has put a bulls-eye on Google.com, the world's most popular search engine. Now, Yahoo and Google will brawl for the top spot.

The $1.63 billion cash-and-stock acquisition surprised no one. Yahoo (YHOO ) has watched uneasily as Google has built its user base and brand name in the red-hot search-engine market. By some estimates, Google now runs 75% of all search queries on the Internet, either through Google.com or affiliated sites such as America Online (AOL ), the Washington Post (WPO ), and, ironically, Yahoo. That strategy should deposit around $700 million in privately held Google's revenue in-box in 2003.


  Over the past year, Google also has expanded, adding a news search and Froogle, a search engine for shoppers (see BW Online, 1/14/03, "Will Froogle Be a Google for Shoppers?"). Those moves encroached even more on Yahoo's portal strategy of being all things to all customers. So Yahoo has been seeking ways to fight back -- and having exclusivity with Overture fits the bill.

The deal makes a lot of sense for Overture, too. It has been waging a bitter battle with Google in the fast-growing paid-search-listings business. Analyst Safa Ratschy of U.S. Bancorp Piper Jaffray estimates that the global market for paid searches will grow from $2 billion in 2003 to $6 billion in 2006. No wonder the two leaders are competing for clients, whose advertisements appear alongside search results.

Overture has been at a disadvantage to Google in one key way. With a huge base of search queries coming directly to its Web site, Google could maintain higher margins on many of its paid-search sales because it didn't have to split revenues with other outfits. By contrast, Overture has relied on big portal customers carrying its search engine -- and they've been pushing to pay less for the privilege of doing so. The Yahoo deal solves Overture's revenue-splitting problem by providing a huge base of captive search results at Yahoo.com.


  How huge? Yahoo and Microsoft's (MSFT ) MSN Search site represent 60% to 70% of Overture's revenues for paid listings. Under those arrangements, Overture collected some 30% of the money paid by advertisers for click-throughs on paid placements alongside Web-search results. Now, Yahoo will eliminate the middleman and be able to capture 100% of the revenues it previously split with Overture.

Even better, that could give also Yahoo flexibility to undercut Google on prices for paid-search listings. Yahoo CEO Semel also plans to leverage Overture's 88,000 business customers with a view to selling more of his outfit's services -- things like Web and e-mail hosting and job listings.

Those customers represent a powerful sales-lead database, since Overture customers have already demonstrated that they 're willing to pay for online services. Selling existing customers more is usually much easier than winning new customers. And through this acquisition, Yahoo also acquires competing search properties FAST and Alta Vista, which Overture had bought in the past six months to ramp up for a war with Google. Now, Yahoo sees those acquisitions as an added bonus that will keep their technology out of the hands of potential portal rival Microsoft. Both FAST and Alta Vista use search algorithms that match Google's for quality.


  This deal also turns up the burner up under Microsoft, increasing the pressure for it to make strategic decisions about getting into this lucrative business. The Colossus of Redmond has a deal running through 2004 with Overture. But the agreement is flexible and allows Microsoft to build and use its own paid-search listings service alongside Overture's service, if it chooses to do so.

Microsoft also has a deal through 2005 with Inktomi to provide unpaid-search results. When Yahoo bought Inktomi in December, 2002, Microsoft saw the future and began hiring search-engine specialists. Now, Yahoo owns two key portions of MSN's search page.

With Redmond and Yahoo now competing in just about everything online, Gates & Co., must make decisions. Some observers speculate that Microsoft could buy Looksmart (LOOK ), another paid-search provider the giant has a contract with. Microsoft officials have so far declined to comment on those rumors. Regardless, unpaid searches continue to garner more online ad dollars, and Microsoft needs to come up with a strategy to play this game on its own terms.

Ultimately, though, the folks feeling the most heat sit inside the Googleplex. Google CEO Eric Schmidt and Yahoo's Semel have maintained publicly that the two outfits remain allies. And Google has continued to provide Yahoo with unpaid searches that use its algorithms.


  In reality, the two have eyed each other warily for more than a year. Privately, Yahoo executives say they view Google as their chief competitor. And Yahoo is one of the few online brands that can rival Google in recognition and reach. With over 200 million users worldwide, Yahoo still trumps Google in terms of unique visitors.

Plus, Yahoo has boatloads of cash compared to Google. And if it needs to buy anything else, Yahoo has access to public capital markets. Meanwhile, Google won't say when -- or even if -- it plans to go public, but many observers see it happening this year. With the Overture deal, Yahoo has acquired even more engineering talent in the search field. And it has tweaked the interface on most of its pages to more closely resemble Google's bare-bones, utilitarian look.

So, Google should pick up and go home? Hardly. It remains one of the most trusted and respected brands on the Net. And it has likewise expanded sales efforts to grow internationally, where its penetration lags far behind Overture's. Still, with the shadow war now out in the open, the salad days for Google are probably over. Watch for Yahoo to use Overture as a battering ram to pound away at Google's most lucrative business.

Salkever is Technology editor for BusinessWeek Online

Edited by Douglas Harbrecht

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