may the force be with you

Yahoo partners with eBay to battle with Google, which is teaming with Dell to put the heat on Microsoft

In the war for dominance of the Net, May 25 turned out to be a big day for alliance making. First there was news of an ad revenue-sharing deal between Yahoo! and eBay. Then came the announcement that Google would put its tools on millions of new personal computers made by Dell.

The pairings highlight the importance the fast-growing, $12.5 billion Internet ad market and the race to get in front of as many Web surfers as possible. The alliance with eBay (EBAY) gives Yahoo (YHOO) a way to narrow a lead by Google (GOOG) in generating advertising sales. Paring with Dell (DELL), meantime, helps Google muscle in on Microsoft's dominance of the desktop. "These alliances are predicated as a response to a looming threat" from others, says Standard & Poor's analyst Scott Kessler. "Companies are inclined to make these moves so they can solidify and enhance their competitive positioning."

TWO-WAY TRAFFIC. Under the Yahoo-eBay partnership, which covers only the U.S., Yahoo will supply eBay's site with ads, and the two will split revenue generated from them. eBay's auction listings will be included in Yahoo search results, driving users from that site to eBay's listings. Yahoo will also let users pay for Yahoo services using PayPal, eBay's online payment-processing company, and Yahoo links will be included on the eBay toolbar.

"We have the largest collection of content on the Web in one place, so as they index more and more of our listings...that's very relevant content that Yahoo would like to embrace into their Web search." says John Donahoe, president of eBay Marketplace.

Analysts say the Yahoo-eBay deal is a win for both companies. For Yahoo, it means a chance to get ads in front of eBay's estimated 76 million U.S. users. The deal gives eBay a bigger slice of the red-hot online ad market. It will also be a "big boost" for PayPal, says Scot Wingo, CEO of ChannelAdvisor, a North Carolina company that provides services to eBay sellers and other merchants. Because Yahoo has many paid services, Wingo says, the partnership will give users the opportunity to use PayPal for many more of their online transactions.

On its face, the move would also appear to buttress Yahoo against Google. For instance, Google would miss out on the portion of ads on eBay's site that will be earmarked for Yahoo. But analysts say in practice Google won't be hurt much at all. eBay will continue to be one of Google's biggest customers.

Currently eBay and its subsidiary, Shopping.com, are the two largest buyers of Google ads. According to Nielsen NetRatings, ads purchased through Google by the two companies were viewed a total of 1.4 billion times -- 38% more times than ads purchased with Yahoo from the two. That huge amount of spending from the company only furthers Google dominance in search and, indirectly, its ability to build new businesses that can compete with eBay and Yahoo.

NO THREAT TO GOOGLE. Merrill Lynch (MER) analysts in a research note called the arrangement a "good strategic fit" that could mean as much as $200 million in additional revenue for the Yahoo affiliate network in 2007. But it doesn't change the securities firm's outlook on Google at all. "We do not expect Google to lose traffic based on this announcement and are not changing estimates at this time," writes Merrill Lynch's Justin Post.

The Dell deal, on the other hand, gives Google prime real estate on desktops -- a space dominated by Microsoft (MSFT). Under the alliance, first reported by The Wall Street Journal, Dell computers purchased by consumers, small- and midsize businesses, and select enterprise customers will come loaded with a suite of Google software, including the Google Toolbar and the search application called Google Desktop. The default home page of Internet Explorer will be a page cobranded by Google and Dell.

That not only puts Google's software in front of millions of users who might not otherwise have downloaded it, but also gives those users an express route to search using Google's engine and, potentially, clicking on ads placed alongside search results. Dell is the world's largest PC maker and sold 4.9 million PCs in the U.S. in the first quarter, for a 29.8% market share, according to Gartner Dataquest.

DESKTOP WARS. The offensive could limit Microsoft's ability to use its prominence on PCs to direct users to its MSN Internet tools and services. In recent months, Microsoft has attempted to use its popular desktop applications like Internet Explorer to drive traffic to its Web sites and search engines. That drew the ire of Google, which in April complained to the Justice Dept. about unfair competitive practices.

Google didn't get much satisfaction. Less than a month later, on May 12, the Justice Dept. dismissed the complaint. It seems Google now is taking matters into its own hands.

source:http://www.businessweek.com/technology/content/may2006/tc20060526_212374.htm?campaign_id=bier_tcm