Once again, investors in

Overture Services

(OVER)

must decide whether new competition poses a major threat or a minor irritation.

This time around, the question revolves around a service scheduled to go fully operational this week from

FindWhat.com

(FWHT)

, a company that, like Overture, operates a pay-per-click Internet search engine through which companies can target advertisements at Internet users based on the keywords those users are using in their searches.

Though the estimate-beating Overture boasts revenue 16 times that of FindWhat.com, and though FindWhat.com's service -- for which it has only one customer -- is barely up and running, FindWhat.com's venture takes aim at what Overture's critics say is Overture's chief vulnerability: the market power of the largest search engines and Internet portals on whose properties Overture operates its search engine.

FindWhat.com's fledgling effort, says CEO Craig Pisaris-Henderson, addresses the portals' desire to take greater control of pay-per-click advertising on their sites, and helps them reduce the role of middlemen such as FindWhat.com and Overture.

"We truly think there is a very large opportunity to change how this sector works," says Pisaris-Henderson.

FindWhat.com's shares, down 43% from their 52-week highs, fell 26 cents Friday to close at $3.54. Overture's shares, which endured extreme volatility through the spring of this year, fell 13 cents to close at $22.50, down 48% from their 52-week peaks.

Details, Details

At issue for Overture are the details of a new relationship with one of its partners,

Terra Lycos

(TRLY)

.

Starting this week, Terra Lycos will be using using FindWhat.com's pay-per-click search technology on its Lycos and HotBot sites. Under that arrangement, advertisers bid on particular words or phrases which an Internet user might be searching for. Thus, if a hot tub manufacturer bids on the phrase "hot tub," the manufacturer's ad or listing will pop up among -- or adjacent to -- the search results returned after an Internet user plugs "hot tub" into a search engine. The advertiser pays only if the Internet user clicks on the listing to visit the advertiser's site.

What's new in the arrangement is that FindWhat.com will be private-labeling its search engine for Terra Lycos and whatever subsequent customers it can drum up. The usual practice for FindWhat.com and its larger competitors, Overture and the privately held Google, has been to sell advertisements, bill advertisers and pay Lycos a cut of its advertising revenue in return for placement on Lycos. Under the new deal, Lycos will do the selling and the billing of the larger advertisers itself, and pay FindWhat.com a percentage of its revenue in return for FindWhat.com's technical and operational services.

The benefit to large portals, says Pisaris-Henderson, is that they get to recognize 100% of the pay-per-click advertising revenue as their own, and they have the opportunity to sell multiple products, including pay-per-click advertising, to their clients.

Selling Point

That is indeed a big selling point, says Tom Wilde, general manager, search services, for Terra Lycos. "We believe that owning a relationship -- a direct financial relationship with online marketers is a priority for us," says Wilde. "Having a direct relationship with customers is one of the key assets of any business."

Pisaris-Henderson says FindWhat.com is getting no upfront or guaranteed payments from Terra Lycos but will be paid an undisclosed percentage of sales. Pisaris-Henderson declined to project the impact of the new product on FindWhat.com's financials, other than to say that improvements would take time. The company will be seeking deals with other companies in addition to Terra Lycos, he says. "This is the first relationship we intend on having," he says, "not the only."

As for the effect on Overture's business, forecasting that looks even harder to predict. Overture, which already provides the top search results for both Lycos and HotBot, will continue doing that through 2003. (The FindWhat.com deal, for now, covers only advertising tiles adjacent to search results.) Overture also has deals to supply listings to Lycos properties in Europe and Japan.

Furthermore, earlier this year Overture was able to extend long-term deals with two major portals,

Yahoo!

(YHOO)

and

Microsoft's

(MSFT) - Get Report

MSN. FindWhat.com, by Pisaris-Henderson's own admission, is a second-tier player; before the Terra Lycos agreement, its biggest distribution deal came from Excite@Home, which subsequently filed for bankruptcy.

But the threat that major portals could eliminate the pay-per-click search engine middlemen -- or at least squeeze more money out of them -- has been one of the issues dogging Overture's shares. Asked whether deals of this type could undermine Overture's business, Overture spokesman Jim Olson responds, "We believe that our partners will continue to see the value in partnering wth us, based on superior economics, product quality and performance we can offer them, both from an operational and technological standpoint."

Wilde, who initiated the deal by putting out a request for proposals for private-labeling a paid search engine, says he spoke with all the likely industry players. So why did FindWhat.com end up the supplier? "They are, self-admittedly, a kind of second-tier player in this market," he says. "They view this is as a way to participate in the first tier without going head-to-head with Overture or Google."