Microsoft Denies Paid-Search Plans

Overture Services and Microsoft denied an analyst’s report on Wednesday that said Microsoft would develop its own paid-search service that would put its relationship with Overture in jeopardy.

In a research note, SoundView Technology Group’s Jordan Rohan cited an internal memo and remarks Steve Ballmer made last week as evidence that Microsoft, whose MSN service provides about one third of Overture’s revenue, would develop its own paid-search platform.

“Overture may attempt to deny the gravity of the evidence,” Rohan noted, “yet we believe the implications are clear.”

Microsoft, however, dismissed the report as uninformed.

“Microsoft and MSN are completely committed to our relationship with Overture,” said Bob Visse, director of marketing for MSN. “We have no intention of developing our own paid-search platform.”

Visse said the company continued to invest in search, but apart from the paid-listings area.

“Overture has been a great partner for us and continues to be, and we think they do some things that are pretty unique and different,” he said.

The search industry has seen a flurry of activity in the past four months, as Yahoo moved in December to buy search provider Inktomi, and Overture followed by snatching up search engine Alta Vista and the Web search unit of FAST Search and Transfer last month. Through all the frenetic activity, Microsoft has remained aloof.

The company uses a variety of search solutions. In addition to its own homegrown algorithmic search, MSN uses paid inclusion through LookSmart and some listings from Inktomi. Overture has provided paid listings on MSN since last January. Overture is contracted to provide paid listings on MSN’s search sites until December 2004; the Internet Explorer search panel deal ends a year earlier.

The loss of MSN would be a major blow to Overture, which has seen its dominance in the paid-search business vanish. Last year, Google began a rival paid listings program, AdWords, which enabled it to snatch away key Overture partner AOL, in addition to deals with Ask Jeeves and EarthLink.

Even with the defections, Overture has a growing business that is set to top $1 billion in revenue this year, yet the company depends on its partnerships with MSN and Yahoo for two thirds of its business. Since it made search a top priority, Yahoo has made noises that it will take more control of search on its portal, stressing that its contract with Overture, which expires in April 2005, is “flexible.”

“We are confident that by the middle of 2005, both Microsoft and Yahoo will have phased out Overture for domestic paid search,” Rohan said in his note.

For now, Overture has a deep relationship with MSN, providing paid search to the portal in all six countries Overture operates. Yesterday, Overture and MSN Korea announced a three-year paid-listings deal.

“The fact is we have a strong and growing relationship with Microsoft,” said Overture spokesman Al Duncan.

Rohan took the drastic step of cutting his price target for Overture’s stock, which has been cut in half since early January, to $6 from $20. The downgrade news sent Overture’s shares spiraling down more than 20 percent.