Google Making More Inroads on Overture

When Overture Services (OVER Quote) got hit by a big piece of bad news last week, a smaller piece of bad news got lost in the shuffle.

That's the contention of one analyst who follows Overture, the strong-performing pay-per-click search engine company that cut its earnings forecasts last week.

While investors punished Overture for Wednesday night's lowered guidance, they likely overlooked an acquisition that Google, the privately held rival to Overture, announced that same day. But Google's deal to acquire California software company Applied Semantics strikes additional blows to Overture's business, says Derek Brown, an analyst at Pacific Growth Equities.

Overture says Google's Applied Semantics acquisition isn't as significant as Brown makes it out to be. But as Overture makes acquisitions of its own to expand into new markets, the Google deal, at the very least, illustrates the competitive forces at play behind Overture's scaled-down expectations.

On Monday, Overture's shares dropped 20 cents to close at $10.70. The company's stock has dropped 35% since Wednesday night, when Overture cut its 2003 earnings per share forecast from 63 cents to 42 cents at best.

At issue is the impact on the paid search business of Applied Semantics' transformation from a partner of Overture to a subsidiary of Google. As Google says in the announcement of the deal for the privately held Applied Semantics, the heart of Applied Semantics' products is technology that "understands, organizes and extracts" content from Web sites and other databases "in a way that mimics human thought."

A key application of this technology, says Google, is a product that enables Web publishers to automatically place online advertisements on Web pages on the basis of their relevance to the content of those pages.

That process is a critical element of a recently introduced service of Google's, which places advertisements on Web pages of certain Web sites corresponding to the content of those particular sites. Like Overture, which delivers search results based on the search terms that Internet users type into a search engine, Google branched into the new content-targeted business from selling advertisements keyed to the search terms people type into the Google search engine.