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Who says the dot-com era's over?

For Overture Services CEO Ted Meisel, the good times are rolling. The twist here is that his company makes money by charging advertisers to get listed in search results.

For Ted Meisel, the dot-com era never ended. Unlike so many Internet ad-based businesses bleeding red ink, Overture Services is not just turning a profit--it's blowing clear past Wall Street's expectations.

Overture operates a search engine with a twist, allowing advertisers to pay to get listed in search results. With a roster of clients including Yahoo, America Online and Microsoft, Overture raked in $20.8 million, or 35 cents per share, during the fourth quarter. Analysts had expected the company to report a profit of 19 cents per share.

In recent weeks, however, Overture shares have had a rocky ride as investors fretted about the loss of EarthLink as a customer and the specter of looming competition. The company largely allayed fears by extending its pact with Yahoo and renewing another deal with Microsoft.

CNET News.com spoke to CEO Ted Meisel about the future of paid search, what Web surfers want, and his particular strategy for operating in a tough ad market.

Q: You had a blowout quarter. What were the biggest drivers?
A: You don't always get to have what somebody referred to as a Barry Bonds-like quarter, so it's certainly a pleasure when you get the opportunity. The results were driven by fundamental improvements in our business, such as our ability to monetize search. We increased the price-per-lead that we delivered from 21 cents to 23 cents. Advertiser sales-acquisition education improved. We improved tools advertisers use to support bidding and listing practices. But, like any business with tens of thousands of customers, there's rarely one magic bullet.

There's a widespread slump in advertising right now. How have you been able to escape unscathed?
In a tough ad environment, performance-based (businesses) tend to do well. We're the beneficiary of that. In any new medium, the first vehicles that work are usually direct-marketing vehicles, and our model is the direct-marketing model. I don't know that it's that the other ones don't work, it's just that in the cycle of development of a new model, it makes sense that ours are the first to develop. We also (extended) deals with Yahoo and Excite.

The idea that you had to optimize the user experience and the business of search was a difficult concept for people.Even though you recently extended terms with MSN and Yahoo, deals with those two companies, and with AOL, all expire soon. Where do things stand now? How important are these clients?
Certainly, AOL, Microsoft and Yahoo are all important, but only an extension of the Microsoft deal is embedded in (our financial forecasts) for the coming year, and that deal is already signed through 2003. We certainly regard AOL and Yahoo as important potential partners, but our business can live without them.

What is the advantage for portal sites in using your model? Why go with Overture instead of a traditional search company?
First of all, for our portal partners we're typically a component of the page, and the page will include algorithmically generated search, maybe some editorially selected listings, probably graphical ads and pay-for-performance searches. The reason that partners have (started) to adopt (pay-for-performance search) as a standard is that people are looking for the main content--the search listings.

To date, our partners have been essentially providing the largest ad giveaway that I can think of to businesses, which is that all these leads that have been going to businesses have been un-monetized. On one side, it's a free customer product, and on the other side, businesses are deriving a lot of benefit (through leads). We're able to sit in the middle, and by building a network (we're able to) drive the value to where it should be.

But they're spending money to get into search listings.
Businesses are already spending money to get in search listings. Traditionally, they're spending that money through search-engine optimizers, playing with meta tags and all the other parts of the black arts of search. Our partners feel strongly that if money is being spent to optimize listings, they ought to get a share.

What's to prevent some of your partners, such as Yahoo, for instance, from simply doing pay-for-performance themselves?
The reason partners have worked with us is that it turns out that this is harder to do than it looks. It's easy to enter and hard to be very successful. Like any business, once you dive into it it's more complex than you realize. We're serving 53,000 (advertisers) with a relatively complicated product, and many of them are very small. And we've developed an integrated systems business process and an entire structure to be able to serve those businesses cost-effectively.

We think it's entirely appropriate for companies that, for instance, want to do product comparisons to get those results in front of appropriate customers. The second piece is on the revenue side. Aggregating searches allows us to offer advertisers a set of searches that's worth their time. For example, across our network we do some 1,000 searches for the term "hiking boot" in one month. That's what you call 2M (2,000 searches) in advertising. How many times do people sell 2M of anything let alone 10 to 20 percent of 2M? That's what we're dealing with here. Search is an incredibly fragmented (business) and we can produce more revenue for partners than they can produce on their own.

You're new to Overture (Meisel joined the company in 1998 and was named CEO in 2000), but can you talk about the beginning? How hard was it to sell this business to venture capitalists?
I'll use the "royal we" here. First of all, that was during the time when there was a lot of capital to fund a lot of different ideas. It's always challenging to raise money, but it was a lot easier then. That cuts two ways, though. The idea that you had to optimize the customer experience and the business of search was a difficult concept for people. It's only recently that it's become clear that you have to do both or you don't get to continue investing in the product. Within a year of funding GoTo (Overture's original name), there were several other searches funded; we were the only venture-funded model like we have.

Are you concerned about the ethical issues of blurring the line between advertising and editorial? You recently put into place some new editorial guidelines. Is that in any way connected to the complaints regarding the search process?
First of all, what we have found consistently in our research--and our partners have echoed the same findings--is that users care about the links in front of them. Either they meet their needs or they don't meet their needs. Very few people are interested in the manufacturing process. So we do what we think is appropriate. You can think of Overture as a paid-listing product, but you can also think of us as a community-based editorial service. We leverage the community of businesses.

We have an editorial team that validates what businesses have told us, and we have an economic model that further validates what businesses have told us. We use that to develop best-in-class product to provide (listings). What we've done recently with the editorial guidelines is further refine them so that what we're now starting to require is not just that the listing is technically relevant but that it's what a user would expect to find.

Was that connected to the lawsuit?
These were not connected to the lawsuit. There's a company that has sued that owns a trademark and says that nobody else can use that trademark in search. And we believe that they're going way beyond the trademark protection afforded by trademark law and in particular ignoring a provision called "fair use."
We think it's entirely appropriate for companies that, for instance, want to do product comparisons, to get those results in front of appropriate customers. But since we've always insisted that listings be relevant and have relevant content, we think we've always been in compliance with fair use guidelines.

Let's talk a bit about Idealab (the incubator started by entrepreneur Bill Gross). Overture was originally an Idealab company, and it still owns some of (Overture). Is there any day-to-day involvement anymore? What sort of input do they have?
Idealab incubated this company; it was actually Bill Gross' idea--that was back in 1998. Over time, as the company has grown, Idealab's stake has become smaller, and it now holds less than five million shares, or less than 10 percent of company. And in a public filing, Idealab has said it has a plan to sell a modest amount of shares on a continued basis, in order to comply with regulatory requirements that Idealab has. Bill Gross is a director of Overture and is (just) like any other director. He has one vote. He's an excellent director in that he knows a lot about the Internet and about performance-based advertising.

Back to the ad market. It's been a terrible year for advertising. What do you see looking forward?
The impact of a softening economy was exacerbated by (the Sept. 11 terrorist attacks). Post (Sept. 11), we saw a lot of larger businesses make across-the-board cuts in marketing and we were no different than other companies. But in the latter half of the fourth quarter and the beginning of this year, we've seen the larger businesses start to come back and, in particular, look for vehicles that make sense, that generate sales.

We've also started to see the beginning of new products coming out again, and new product introduction always drives ad spending. Some will accrue to us and some will accrue to other vehicles online. Small and mid-sized advertisers, for the most part, remained strong through last quarter.

Why the discrepancy?
It may be just in the structure of larger and smaller companies. In a larger company, if you suddenly need to cut the budget, marketing is one of the things you can always cut; it's discretionary. In a smaller company, the head of sales and marketing is usually the same person--it might even be the president. You will often cut those things that are longer-term investments. Performance-based marketing yields a return on investments that's almost immediate.