Google and eBay's New Connection

The sometime rivals' latest joint venture will allow them to expand international reach and integrate free phone service with ads

When eBay announced a wide-ranging U.S. advertising deal with Yahoo! in May, most people assumed it was an attempt to team up against Google's growing dominance. Some even speculated that it was a prelude to a merger that might have the breadth and size to take on the hard-charging Internet search giant.

So much for speculation. A deal announced Aug. 28 by eBay (EBAY) and Google (GOOG) now appears to put the kibosh on the notion of an "ehoo" or "Ybay" to challenge Google. Instead, eBay signed up Google to provide Web search advertising outside the U.S. And the pair will cooperate on developing so-called click-to-call ads—which let potential buyers click on a link and talk directly to sellers or their call centers—throughout the world. Tests of the ads in the multiyear agreement will begin in early 2007, though neither side revealed specific terms.

The deal is another sign of the complex web of alliances emerging as Internet advertising and e-commerce increasingly meld. Even as Google creates services such as online payments and product listings that compete with eBay, the two companies still find themselves inextricably intertwined. "We believe the way to maintain continued momentum is through partnerships," says Nikesh Arora, vice-president of Google's European operations.


  Driving this unlikely alliance is the apparent recognition by each company that joining forces to complement their shortcomings beats expensive market-share wars. eBay, one of Google's biggest customers, needs the search titan's advertising expertise to complement its international e-commerce business. Google, meanwhile, may need eBay's 100 million Skype Net-phone customers to be able to participate in the nascent click-to-call ad market.

If investor reaction is any indication, both eBay and Google are poised to benefit. Both companies' stock prices moved up 2% on Aug. 28, to $25.79 for eBay and $380.95 for Google. That's despite the fact that eBay, for one, doesn't expect to see any impact from the deal in its financial results this year or next. "The deal is a positive," says Scott Devitt, an analyst with Stifel, Nicholaus & Co. "But it's going to take several testing cycles to see how it will work on the site."

Still, this partnership could potentially be even more important to eBay than the Yahoo (YHOO) deal. eBay now generates more revenues abroad than it does in the U.S.—about 51%. And with 75% of its page views generated outside the U.S., according to JPMorgan (JPM), it's easy to see why Google's international reach is so attractive.


  What's more, in some of eBay's international markets, such as China, competition has forced it to reduce or eliminate listing and other fees. So advertising is crucial to drive more revenue. The question is whether local sellers and buyers will be more open to ads even if they replace fees. In the U.S., sellers appear cool at best to ads that appear alongside their paid eBay listings, notes Scot Wingo, chief executive of ChannelAdvisor, which helps merchants sell on eBay and other venues. "The seller on the street is wondering why eBay is focusing on advertising rather than improving the site," says Wingo.

Both companies may benefit by teaming up to push click-to-call ads, which will use both Skype and Google's own Google Talk voice and text messaging service. For eBay, this part of the deal could provide a way for Skype to generate revenues. It could also help Google expand more into local advertising. Small businesses that don't have much of a Web presence often want phone contact with customers, like they get with Yellow Pages ads.

"It's a logical extension for Google, as they try to create an easier path of new kinds of advertising," says John Federman, chief executive of eStara, a Reston (Va.) provider of click-to-call services to (AMZN), Verizon (VZ), Sears (SHLD), and others. "Consumers have absolutely embraced it." And that kind of enthusiasm is music to the ears of any Web giant.

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