August 28, 2006 2:55 PM PDT

Google, eBay: Strategic bedfellows

An old saying from the Chinese philosopher and general Sun Tzu could be applied to an alliance between eBay and Google: Keep your friends close and your enemies closer.

eBay and Google, two Internet giants that butt heads when it comes to online commerce, announced a deal Monday that allows the two companies to share revenue on search-related text advertisements delivered on eBay's sites outside of the United States. The two companies will also jointly develop "click to call" ads, which rely on Internet voice technology to connect an advertiser with a consumer.

Financial details of the multiyear agreement were not disclosed, but the companies said they will begin testing ads in early 2007.

The deal naturally shuts out eBay's U.S. advertising partner, Yahoo, which holds exclusive rights to supply sponsored links to the auctioneer's North American site. But this three-way rivalry puts eBay in the cat bird's seat to see which company--either Google or Yahoo--performs better when it comes to search ads.

"Clearly, eBay's keeping its options open," said Marianne Wolk, senior Internet analyst at Susquehanna Financial Group.

The move adds to a swarm of recent alliances in the upper echelons of Net media and shows that the race is on among Google, Microsoft's MSN and Yahoo to lock in partners. In recent months, Google has teamed up with Fox Interactive (MySpace), Dell, Adobe Systems and Time Warner's AOL. MSN has partnered with social network Facebook, and Yahoo signed on eBay for U.S. advertising.

But some aspects of the eBay-Google accord could be more about long-term strategy than short-term cash.

As part of the deal, Google will deliver sponsored links to eBay's search results pages only when there are insufficient results from eBay for a particular query. Why is this important? Because eBay, by virtue of its tagline, "Find it on eBay," sells most products on its site. Turning up an insufficient search result is awfully difficult on eBay because of its sheer mass, so Google ads may wait in the wings, analysts say.

For example, type in an esoteric query like "Led Zeppelin motorcross bike" or "antique kitty litter" and you'll find at least one result on eBay. Even an implicitly illegal query for "stolen cars" calls up results.

Adding to that, eBay said that the deal won't affect 2006 or 2007 financial results.

It appears that the company is keeping one of its bigger rivals close, while promoting its own Internet voice technology Skype. As part of the deal, Google will bundle Skype into its search toolbar, despite the presence of its own voice technology, Google Talk. Also of note, Wolk said, is the development of click-to-call advertising, which if projections pan out, could be worth $4 billion to $5 billion in advertising revenue in the years to come.

Industry analysts were surprised that Yahoo lost the deal to Google, given that it's long been rumored that eBay and Yahoo might merge to fend off Google. eBay and Yahoo have synergies, despite competing for auctions in Asia, in that eBay is largely about transactions and Yahoo is largely about content. Google, in contrast, is attempting all trades.

"There's this whole trend toward alliances, and Google is clearly after as much market share as it can grab. I'm surprised Yahoo isn't getting more aggressive," said Chris Sherman, executive editor of industry site SearchEngineWatch.com.

Only in recent years has eBay and Google's rivalry heightened. eBay has long been one of Google's leading search advertisers as a way to drive traffic to live auctions. But in the last year Google has become a rival to the Web's leading auctioneer by introducing a classified ad service and an online payment technology that competes with eBay's PayPal.

Despite this, Google was the natural choice for eBay when it comes to an international ad partnership, some financial analysts say. According to Susquehanna Financial estimates, Google served 62 percent of the search-advertising market internationally in 2005, compared with Yahoo's share of 32 percent. Google simply has a better corral of advertisers abroad, analysts say.

What's most important to eBay, analysts say, is that it turn more profit from advertising as its auction business matures.

In the last year, for example, the online auctioneer made roughly $1 in ad revenue per visitor, compared with Yahoo's estimated $7 in ad revenue per person, which includes branded advertising, according to figures from Susquehanna Financial.

eBay is in a good position to make more money. It typically fields about 350 million search queries a day for products alone. In comparison, Google gets 365 million daily queries, not all of which are commercial, according to estimates from Susquehanna Financial.

"There's a big pursuit of eyeballs right now," Wolk said. "All the networks are looking to lock in market share and be the leader in monetizing that traffic."

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The cost of doing business with Google
EBay is smart in working with Google. While other technology innovators (eBay included) are having difficulties keeping the costs of online and search technology down as they forge new frontiers, Google seems to have it under control.

Technology, bandwidth, and licensing are easy. Those costs are known. But much like the price of gas, the environmental factors affecting online and search technology are guaranteed to go up, as they are not tangible enough to determine. Changes in the market or broader economic or social ecosystem are beyond the control of any one organization, and all suffer the rising costs. Except Google.

Working out this advertising/free phone integration deal with eBay gives Google a great opportunity to push in yet another new direction. While it is obviously a technology powerhouse in that it has created its own innovative model of search technology that protects it from the cost hikes outside, Google can still benefit from alliances with other technology greats.

Google's technology and cost advantages are explained in "The Google Legacy", published in September 2005 by Infonortics, Ltd. (www.infonortics.com). Additional information about Google is available at the author's Web site (<a class="jive-link-external" href="http://www.arnoldit.com/articles/online-costs/" target="_newWindow">http://www.arnoldit.com/articles/online-costs/</a>)
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