Yahoo/eBay tie-up smart but anti-climactic

Yahoo Inc. and eBay Inc. are doing the right thing with the partnership they announced Thursday, but the impression is that they are running scared.

Industry experts have said for years that Yahoo and eBay could help each other in key areas via a strong partnership like the one they announced Thursday, in which they will cooperate on search technology and advertising and share revenue in the U.S.

However, by doing it now, they're giving the impression they acted out of fear of their competitors, namely Google Inc.

"There's no question that this is a significant partnership, but it seems reactive," says Allen Weiner, a Gartner Inc. analyst. "It's anti-climactic, because we've been waiting for years. If they had done this two or three years ago, they would have done it from a position of strength."

Yet observers agree that it's better late than never and that Yahoo and eBay have outlined a smart collaboration plan that, if properly executed, should yield positive results. And some think it's likely the partnership will be broadened later.

"It's not earth-shattering, but this could be a first step. I think there will be ongoing collaboration in their research and development," says Philip Remek, a Guzman & Co. financial analyst.

The deal did fall short of previous rumors that one of the parties would buy a stake in the other, or that they would merge.

For Yahoo, the biggest coup is becoming eBay's exclusive provider of graphical and sponsored search ads. Despite heavy investments, Yahoo remains a distant second to Google in search.

It should be very attractive to Yahoo advertisers to appear on eBay pages, because eBay users are by definition online shoppers.

EBay, of course, will get a commission from Yahoo. This is the first time eBay will allow a third-party provider to deliver these types of ads to its pages, a spokeswoman says. So far, it has handled ad sales in house, but it will stop doing so once Yahoo steps in. Obviously, it's a big loss for Google and Microsoft to have the ads from their networks kept out of eBay. The blow is especially tough for Microsoft, whose new adCenter needs to build credibility.

Happily for Google, at least eBay didn't agree to market its services and listings exclusively on the Yahoo network. "Such a move would not be in the best interest of eBay, considering Google's dominance in search and the traffic Google delivers to eBay's site," says Dustin Rector, an analyst with Tier1 Research, in a research note.

Meanwhile, eBay will boost the use of its PayPal online payment service through the agreement to make it the exclusive third-party provider of Yahoo's online wallet. Users can store their credit card, shipping and billing information in the Yahoo Wallet for online shopping and for paying for Yahoo services. Yahoo has also pledged to heavily promote PayPal across its network and among its merchants and advertisers. "That has been a focus for eBay in recent months: to get PayPal featured on major online merchant sites," Remek says.

Tighter PayPal integration will give Yahoo the full-featured micropayment mechanism it lacks, and which it needs to further boost its fee-based business, which is growing but is still much smaller than its advertising revenue, Weiner says.

Moreover, this PayPal collaboration puts eBay in a better position to fend off any future threat from budding online listings services such as the fledgling Google Base and Microsoft's Windows Live Expo, now in beta, Weiner says.

EBay merchants also stand to gain, thanks to Yahoo's agreement to help eBay optimize its Web pages for the Yahoo search engine. Yahoo says it will not artificially inflate eBay pages rankings, but it will work with eBay to improve the format of its pages so that more eBay pages will appear on Yahoo search engine results. Hopefully for the merchants, those pages will also come up more often and with better placement. Yahoo will also crawl eBay's Web site more frequently, and more automatic feeds will be implemented from eBay to the Yahoo search index.

"Clearly, more and more customers begin their shopping experience online through a search, and eBay's moves to aggressively position us as sellers within those search results is really critical," says David Yaskulka, founder and chief executive officer of Blueberry Boutique, a shirt and tie seller on eBay. "This will be very positive for us as sellers."

Finally, their stated intention to develop and deploy pay-per-call advertising technologies is also smart. Yahoo stands to benefit because this online ad format, which links potential buyers with advertisers via VOIP, is highly profitable. It commands higher rates than pay-per-click because it more often leads to a purchase. On the other hand, eBay is very interested in enabling this on its Web site, because it believes it will improve sales of big-ticket items, such as cars, Remek says, adding that this was a primary motivation behind its acquisition of Skype last year.

"I'd be curious to see how a pay-per-call service will help with eBay's efforts to localize its eBay Motors service," said Remek, referring to the company's development of what it calls eBay Motors 2.0, which will add a local search component to eBay Motors' national marketplace.

As complementary as the partnership looks, its success isn't guaranteed. First, eBay and Yahoo remain competitors on several fronts, such as comparison shopping, auctions and classified listings. Should their competition significantly heat up in any of these areas, the partnership spirit could be threatened. Also, the partnership applies only to their U.S. operations.

Moreover, eBay has to be very careful how it displays the ads Yahoo will be providing, so that eBay merchants don't feel that these ads are driving customers away from their listings and stores. "That needs to be done extremely carefully and delicately. They need to show complementary products, as opposed to competing products," Weiner says.

Yaskulka isn't too worried. "We've seen some indication eBay is going to mitigate that risk for sellers," he says. "Based on history, I wouldn't be surprised if eBay does something very smart there."

A final caveat is that the companies will now begin testing the technologies involved, so the fruits of the partnership are unlikely to surface until next year, giving competitors a chance to react.