May 16, 2003

Nearly one fifth of Yahoo's overall first-quarter revenue grew out of its partnership with Overture Services, a provider of paid search listings, the Web portal disclosed in a securities filing Thursday.

In a measure of the alliance's weight on Yahoo's earnings, the portal reported income of about $54 million from its partnership with Overture. That's 19 percent of the total revenue logged for the three months ended March 31 and more than double the roughly $23 million, or 12 percent of total revenue reported in the same period of 2002.

Overture provides payments to Yahoo for displaying its advertiser-sponsored search listings atop results pages. Each time Web surfers visiting Yahoo click on one of the sponsored links, Overture collects a fee from the advertiser behind the link and shares that revenue with Yahoo.

Yahoo has benefited heartily from the deal. In April, it reported its fourth consecutive quarter of profitability and its second consecutive quarter of growth in advertising revenue, partly because of cost-free revenue from Overture. Yahoo's recent filing illustrates how much influence the pay-per-click search provider holds with Yahoo. Without the reported $54 million in fees, Yahoo's profit of $46.7 million for the first quarter might have suffered.

As a result, industry analysts have speculated that Yahoo will eventually build its own paid search business and slowly edge out Overture, which has a contract with the portal until April 2005 with an option to extend the deal to 2011. Others have speculated that Yahoo might purchase Overture with its surplus cash of $750 million, a short-term interest-free loan it secured earlier this year.

But Safa Rashtchy, senior analyst with U.S. Bancorp Piper Jaffray, said Yahoo benefits so nicely from the Overture relationship because it does not have to assume Overture's costs. The Web portal only reaps the rewards of revenue.

"This dependance on Overture for profits...is an indication of...the risk it will face if it were to build (such a service) in-house, since the level of monetization, and hence profits, will fall off sharply," Rashtchy wrote in an e-mail to CNET News.com.

For the first quarter, Yahoo parsed revenue into three categories: marketing services, fees and listings. Marketing services, which encompasses online advertising and the paid search deal with Overture, jumped 38 percent year over year to $190 million. Executives said this revenue line got a boost from Overture and from traditional advertisers. Yahoo Chief Terry Semel said last month that excluding payments from Overture, marketing services revenue increased by a "double-digit percentage" over the same period last year.

In the filing, Yahoo acknowledged its reliance on Overture for revenue and highlighted some of the risk involved with its recent acquisition of Inktomi, an algorithmic search service that competes with Google. It said that by owning Inktomi, Yahoo is now in greater competition with AltaVista and Fast Search & Transfer, which are now both owned by Overture.

"We also generate a significant amount of revenue from our search and directory capabilities through an advertiser’s purchase of an enhanced placement in our results," the filing said. "If we are unable to provide search and directory services which generate significant traffic to our Web sites, 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.

By Stefanie Olsen
Staff Writer, CNET News.com

        

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