Overture Services ( OVER) investors are worried about business that the Internet company might lose. But maybe they should worry instead about the business the company might win. Shares in Overture, formerly known as GoTo.com, plummeted earlier this month after news broke that the remarkably successful online advertising firm lost a distribution deal with EarthLink ( ELNK) to search engine Google. The stock has since regained most of that ground and closed Friday at $30.93.
But maybe people are focusing on the wrong risk, says one investor who is betting that the price of Overture's shares will fall. Instead of fearing that Overture's pay-per-click search engine will lose its presence on sites such as Yahoo! ( YHOO) and AOL Time Warner's ( AOL) America Online, investors should instead worry about the money Overture might have to spend to keep its place. That's because compared with traditional media practices, Overture retains an exceptionally large portion of the money it collects from advertisers, instead of passing it on to the Web sites that use its revenue-generating search engine. As was the case with previous outlying Internet-based businesses, the economics of Overture's operations will over time come to resemble those of television, newspapers and other media, argues the short-seller, speaking on condition of anonymity. That return to the mean would substantially hurt Overture's bottom line. Overture, which in its latest quarter kept nearly 49 cents out of every dollar it collected from advertisers, risks resembling advertising sales organizations in other media -- companies that, after they sell a dollar's worth of advertising, hold onto 15 cents of that dollar at best, and often closer to a nickel.