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    Overture deal may lead MSN to buy, build service
    July 14, 2003 1:31:00 PM ET



    By Reshma Kapadia

    NEW YORK, July 14 (Reuters) - Yahoo Inc.'s(YHOO) decision to buy online ad provider Overture may lead Microsoft Corp.'s(MSFT) MSN Internet service to rethink its ad pact with Overture and instead buy or create its own competing service, analysts said on Monday.

    Shares of small search companies such as LookSmart Ltd. (LOOK), FindWhat.com(FWHT), Ask Jeeves Inc.(ASKJ) and InfoSpace Inc.(INSP) rose sharply on the prospect of further consolidation, analysts said.

    "They (MSN) are looking at either building or buying," said Kaufman Bros. analyst Richard Fetyko. "In the 'buy' case, I think LookSmart is an option, but that still wouldn't take care of MSN's Overture deal. MSN would still have to buy or build a paid placement business or go to FindWhat.com."

    While MSN would be entering the search arena a bit later than its rivals, Forrester Research analyst Charlene Li said the company could make inroads quickly.

    "They will probably develop search technology on their own, including the pay-for-performance part," Li said. "They are starting from way behind, but they did that with MSN.com."

    Analysts said Microsoft has recently been talking about entering the search business, including algorithmic search, which relies on technology, rather than sponsorships, to deliver the most relevant results.

    Yahoo said it remains committed to Overture's (OVER) distribution partners, but Jupiter Research senior analyst Matthew Berk said how this plays out will not be seen for some time. "Microsoft, from their point-of-view, probably seems threatened. They will certainly want to make more defensible their position here."

    Two of the buzzwords of the Internet advertising business have been "paid placement" -- or paying to have an ad in the form of a link placed prominently in search results -- and "paid inclusion," or paying to have a link simply included in a search engine's database.

    Shares in Web search companies have shot up this year as business models for search engines have become more focused and the pay-for-performance model of online advertisement has proven itself a legitimate outlet for both new-media and traditional advertisers.

    While Microsoft may look to smaller players to help build its business, Berk said the better option may to create its own ad service. He noted that many of Overture's other distribution partners would not have the resources to explore options like MSN.

    GOOGLE MAY ALSO BENEFIT

    Wall Street analysts said Google, the dominant search engine, may also benefit from the deal as Overture's partners reassess pacts and may see Overture as more of a competitive threat now that it has a closer relationship with Yahoo.

    "Before, Overture was not so much a competitor. It might make it more agreeable to certain partners to partner with Google, where before it may have seemed like going to bed with the enemy," said William Blair & Co. analyst Troy Mastin.
 
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