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Yahoo! Needs Overture

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By Rex Moore (TMF Orangeblood)
May 16, 2003

If there's one thing Yahoo!'s (Nasdaq: YHOO) just-released 10-Q makes clear, it's that Overture Services (Nasdaq: OVER) is very, very important to its well-being. At the same time, Overture's success could be harmful to its own health.

When someone runs a search on Yahoo!, a certain number of "sponsor results" will appear along with the regular listings. Those sponsored links are provided by Overture, which collects a fee from the advertisers each time their link is clicked. Overture then shares that revenue with Yahoo! (or any other partner site that uses its listings, including The Motley Fool).

For the three months ended March 31, Overture paid $53.7 million to Yahoo!, which accounted for 19% of the portal's total revenue. So why should Overture be wary of its own success?

It's likely Yahoo! is not fond of being so dependent on an outside company for nearly one-fifth of its revenues. As a result, it might be looking to develop its own pay-per-click model. This would not only bring the process in-house, but would also allow it to keep the entire payment from sponsors instead of sharing it with a partner.

The language in Yahoo!'s 10-Q cannot be overly comforting to Overture. Its sponsor listings are "currently" provided by Overture, for example, with the initial agreement extending for another two years. Also, as it warns of its dependence on such revenue, it states: "If we are unable... to continue to secure an arrangement with a third party provider such as Overture on terms which are acceptable to us, or we are unable to develop our own ability to provide this service, our revenue could significantly decline."

Might one solution to the issue be a Yahoo! buyout of Overture? With more than $800 million in cash and equivalents in the portal's coffers, it's certainly a possibility. And if the price is right, it would also make more sense to buy a company that already knows what it's doing, and is very profitable to boot.

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