Microsoft Fears Send Overture Plunging

"We believe SoundView's report is simply wrong, based on our ongoing communication with Microsoft," said Overture in a statement. "The fact is we have a strong and growing relationship with Microsoft, which was demonstrated earlier this week with a new search agreement for Korea. We have agreements with MSN in the U.S., Canada, the U.K., Germany, France and Japan." Overture reiterated that its agreements run through the end of 2004 for the MSN.com site, and through the end of 2003 for the window that pops up when users of the Internet Explorer browser click on the "search" button in their toolbar.

MSN's Visse said Rohan's report was correct in reporting that Microsoft was making investments to improve its customers' search experience. But though he wouldn't specify exactly the areas of search in which the company is investing, Visse said paid search wasn't one of them."The Overture partnership provides a lot of value for MSN," said Visse. "They've done a great job creating a market."

"I believe my sources are good," Rohan told TheStreet.com. "I verified this multiple times, as has our analyst who covers Microsoft."

Far-Reaching

Bolstering his thesis, says Rohan, is Microsoft's continuing practice of negotiating deals with Overture that are less than two years in length. The Internet Explorer search pane element of the new Korea deal, for example, expires with similar deals in nine months. (That quick expiration could be explained by Microsoft's desire for a convenient negotiation schedule rather than a lack of long-term commitment.) "Microsoft is setting itself up to move to its own internally developed solution, if the internal solution proves successful," says Rohan.

If Overture were to lose Microsoft or Yahoo! as search partners, says Rohan, the effect on Overture would be huge. If the pay-per-click revenue derived from the two online giants was excluded from Overture's results for the fourth quarter of 2002, says Rohan, Overture would have lost 35 cents per share on revenue of $68 million rather than earning 24 cents per share on revenue of $200 million.

>To order reprints of this article, click here: Reprints