Whether Microsoft makes such a play, the software giant will have to be cautious in any efforts to replace Overture. MSN's search traffic arguably rivals that of Yahoo or Google and would not be easily handled by an inferior commercial system. Constructing a pay-for-placement ad network and technology in-house, on the other hand, would probably take the company a few years. Despite the blossoming commercial promise of Web search and ownership changes, MSN has so far been slow to tinker with its outsourcing lineup, which includes Overture, Inktomi and LookSmart. Earlier this year, when Yahoo bought Inktomi, Microsoft did not sever its relationship with the company immediately, as many analysts had expected. It has yet to say whether it will replace Inktomi, but many assume that it will now do so, either before or after it cuts ties with Overture. Indeed, one of the chief risks of Overture's sale to Yahoo is the likelihood that Microsoft will take advantage of a green light to back out of its contract early, analysts said. Microsoft has agreements with the pay-for-placement company until 2004. But according to financial analysts, Microsoft has an out clause built into its contract that gives it the right to forfeit its agreement in the event that Yahoo buys Overture. The clause includes an obligation by Overture to pay Microsoft $50m in the case of a buyout. One financial analyst expects, conservatively, that California-based Yahoo will record $1.725bn in revenue in 2003 after the Overture deal closes -- a number that factors in losing MSN as a customer, which would eliminate some $350m in projected revenues. Added another analyst, Jupiter Research's Matthew Berk: "We expect Microsoft to be in a tizzy about this. The heat has been dramatically turned up for Google. We also expect the heat has been turned up for Microsoft, too." Microsoft is still evaluating the terms of the deal and how they will affect its business, said Lisa Gurry, group product manager for MSN. It is meeting with Yahoo and Overture in the coming days to help understand the deal's probable ramifications, she said. In the short term, MSN's business won't change, she said, adding that she could not comment on any "out clause." "We'll be evaluating our options over the next several days. Right now, it's a three-horse race between Yahoo, Google and MSN, with lots of room for improvement across the industry. We look forward to be being at the forefront of delivering those improvements to consumers," Gurry said. Microsoft has shown increasing signs of interest in Web-based search, recently hiring engineers to begin work on search-related projects. Last month, the software company quietly launched a new search program called MSNBot, which scours the Web to build an index of HTML links and documents. The homegrown system, which performs robot functions previously left to Inktomi and other partners, may pose a significant threat to Google if Microsoft fulfills its promise to make the program a cornerstone of its overall PC and services strategies. Such development efforts could be years away from fruition, however, probably forcing Microsoft to continue outsourcing its MSN search services for the time being. Google may benefit
As a result, Monday's deal could play out well for Google, still a privately held company that had estimated earnings from paid search of nearly $275m last year. Google may benefit from the acquisition on several fronts, including becoming a more attractive partner to MSN. Monday's buyout could also lead to better distribution deals for Google, which may face less pressure to offer up huge revenue sharing percentages to its partners, one analyst said. In a sign of cut-throat competition between Google and Overture, Google recently beat out Overture to win a deal with natural-language search provider Ask Jeeves by offering nearly 80 percent of the search advertising revenues raised on its site, according to one source familiar with the deal. California-based Overture has also been under enormous pressure this year as competition from Google mounted, forcing it to forfeit a larger portion of revenue to partners to maintain their favour. In the first quarter, Overture reported earnings of $11.1m, down two-thirds compared with the same period last year, as traffic acquisition costs increased from 54 percent to 64 percent of revenue. At the time, the company reduced its full-year financial forecast by between 40 percent and 50 percent. Going forward, Yahoo is likely to rein in bids to distribution partners, financial analysts said; a move that would help both companies. "Two intelligent companies competing head to head are not going to offer terms that are going to harm their own business," said a financial analyst who asked to remain anonymous. "The industry has taken out one important player, and the fewer you have in the middle, the [more] economics for the others improves." Yahoo sees opportunities from its Overture acquisition outside of search, as well. For Yahoo, the acquisition cements its position as a new-fangled online advertising network. The company already operates a vast system of advertising research and analysis, designed to improve ad placement and sales within its site network and report on the success of those marketing campaigns. Now, with Overture, Yahoo will be able to coordinate efforts and sell text-based ads across a wide swath of the Internet, as well as its own properties. "Because Yahoo needs to expand its base from Web page advertising such as banners -- a declining market -- its purchase of Overture is a natural and logical fit," said David Hallerman, senior analyst at eMarketer. "That's especially true because next to Google, Yahoo is the second most popular search destination." Through the acquisition, Yahoo not only owns Web search technology and properties from Overture-owned AltaVista and Fast Search & Transfer, but it also owns emerging software that helps evaluate the content of any Web page in order to place relevant text ads on the page. Armed with that technology combination, Yahoo becomes instantly Google-like, with the ability to sell and place ads across a network of Web sites, as well as hawk the search technology to power it. "Yahoo's now in a position to say, 'We can give you search powered by Yahoo and you can make money off of it, too,'" SearchEngineWatch's Sullivan said.
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