Yahoo's Japanese subsidiary is considering how to revamp its search business and has a few likely options: Go it alone; team with Overture and Google; or choose just one of the Internet search companies as a partner in a potentially lucrative alliance.
The decision could have a significant financial impact for the companies involved, as paid-search listings have become a rare success story in an otherwise ailing online ad industry. Yahoo'sreceived a $30 million boost last month as a result of a recent partnership with Overture, according to analyst estimates.
Google and Overture have
"People (in the search industry) are definitely looking to see who is going to get this deal," said Jeff Fieler, an analyst at Bear Stearns. "Whoever gets (it), they will own the Japanese market."
Pasadena, Calif.-based Overture has become profitable by inviting marketers to bid to have search terms, or words used in a search, bring up their Web site in the search results; they pay only when Web surfers click on their link. A commercial search kingpin, it licenses search listings to and shares revenue with Yahoo andportals, and numerous smaller Web sites.
Despite this success, analysts are still closely watching Overture's expansion efforts overseas and the increased competition it faces from Google, a relevancy-search site that is a popular destination for Web surfers. In the past year, Mountain View, Calif.-based Google has unveiled an ad-listing service similar to Overture's and has won contracts for that service from Internet service providers America Online and EarthLink.
Last week, concern over Overture's shrinking margins and thecaused the company's share price to drop by more than 16 percent in a day to around $23. Analysts from Merrill Lynch and U.S. Bancorp Piper Jaffray quickly reiterated their "buy" recommendations on the Overture stock, citing market overreaction.
Those events have put overseas development on investors' radar. In addition to seeking growth in European markets, Google and Overture are entering Japan, which has the second-largest Internet audience in the world after the United States. The country also has a thriving e-commerce industry that is ripe for search-engine marketing.
Google quietly opened an office in Tokyo in 2001 and started selling AdWords--a bid-for-placement listings program--on Google Japan in late July. Earlier this year, Overture announced it would launch in Japan in the first quarter of 2003, but in September moved the launch date forward to the end of this year. Both companies face the challenge of gathering enough Japanese advertisers to their listings to make their services attractive to license for the likes of Yahoo Japan.
Founded in 1996 and partly owned by Softbank, Tokyo-based Yahoo Japan is the dominant Internet presence in the country--reaching nearly 20 million people a month, or 78 percent of the Japanese Web population, according to research firm Nielsen/NetRatings. By contrast, Google reaches about 18 percent of the country's market, and MSN about 48 percent. Yahoo Japan is so entrenched that failure to compete with its auction service caused auction giant eBay to close its division in Japan.
Scott Morris, a spokesman for Yahoo Japan, said that the company is looking at potential partnerships for paid search, but does not have a deal yet. He would not comment on when an agreement might be signed or which companies are being considered as partners.
Google representatives did not return calls seeking comment.
A source familiar with Yahoo Japan's thinking said that the company may choose to feature both Google and Overture listings on the site, giving Yahoo an opportunity to compare effectiveness.
Such a deal would give Google a toe in the door to provide advertising listings for Yahoo in overseas markets. Google powers only noncommercial search results for Yahoo and Yahoo Japan. Yahoo has an exclusive deal with Overture in the United States that would prevent a U.S. deal between Google and the Web portal for sponsored listings.
Another search-industry source said that as early as last week, Yahoo Japan was in discussions with a number of companies for a partnership, but that the company also was considering building an ad-listings business on its own.
Given that sponsored search is a new to Japan, the local Web portal could just as easily develop its own relationships with marketers there and cut out intermediaries such as Overture and Google. Analysts say this could happen if the profit-sharing offers made by the search companies to Yahoo Japan are not attractive enough.
Some investors clamoring to see long-term growth opportunities for Overture say that such an outcome would be a hit to the company. Others emphasize the importance of overseas partnerships.
"International is where the new outlets are going to be," said Justin Baldauf, an analyst at Merrill Lynch.
Ted Meisel, Overture's CEO, said in the company's third-quarter earnings call for analysts that Overture is keen to form a relationship with Yahoo Japan. Jim Olson, an Overture spokesman, echoed the sentiment, but said that even if the company does not secure a relationship with Yahoo's Japanese subsidiary it would still be on solid ground in the new market. Overture has already signed deals with NTT-X--which operates the Goo portal and Lycos Japan--and with Infoseek Japan. In addition, it is testing its service with MSN in Japan.
"We're well-positioned as a result of our relationship with Yahoo Japan's sister site (U.S.-based Yahoo)," said Olson. "But Yahoo Japan is considering a range of choices for paid search. You may see no deal, a long-term exclusive deal, or anything in between. We would certainly like to work with them."
Fieler of Bear Stearns said that for Yahoo Japan, it may be more attractive to work with a paid-search partner--as long as the revenue-sharing makes sense. In the United States, Overture expects to share with its partners, on average, about 61 percent of paid-search profits from the fourth quarter this year, 2 percentage points higher than in the third quarter.
One industry executive familiar with Google's revenue-sharing model said that it could pay out as much as 75 percent of its profits from search-engine marketing.
But Fieler said that if Overture does not get a deal with Yahoo Japan, the strength of its long-term U.S. partnerships would prove enough to keep the company on a solid financial course. If it does snag a partnership with the unit, that could be a boost to its financial results and stock price, he said.
Still, some paid-search executives say Yahoo Japan could jockey for its own service. "Since technology is not a huge barrier, Yahoo Japan is looking hard at whether they should launch it themselves," said one source, who said a deal could be signed in the coming months.
"Investors are looking for rapid growth areas," said another source. "The Japanese market--the second largest Internet population online--(provides) a huge e-commerce opportunity."
News.com's Jim Hu contributed to this report.