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Monday, July 14, 2003

Much Bigger News: Overture Sees Writing on Wall, Sells Out to Yahoo

Confirming rumors that have been flying for the past couple of months, Yahoo today announced that it is acquiring pay-per-click keyword advertising pioneer Overture services in a deal valued at $1.52 billion.

We'll certainly have more to say a bit later about this landscape-changing deal. In short, it's a smart play by Overture. As a middleman that never owned its own traffic to any significant extent, Overture was stuck with no clear franchise. What it has may be of little long-term value, but in the short to medium term, it has strong revenues, some decent technology, and a large advertiser list. Yahoo could have generated the same revenues with its own in-house operations or through continued deals with the likes of Overture, and it could have built or bought the necessary technology. Finally, we've always argued that the advertiser list is not as impressive as it seems. Those advertisers will quickly go to wherever the traffic is (Google signed up 100,000 advertisers in short order).

In any case, Yahoo obviously decided it would be more convenient to run their internal advertising systems using Overture as a backbone than building and buying what they needed at a lower cost.

But the biggest winner was Overture, which had already admitted in its financial statements that their overall revenue share from portal deals was inexorably shrinking each quarter as the traffic owners took steps to slowly cut out the middleman.

Over the long haul, this can't help but affect Overture's distribution deals with Yahoo competitors such as Lycos and MSN. But short term, this shouldn't affect the accounts or the spending and return on investment patterns of Overture advertisers.

Posted by Andrew Goodman




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