Yahoo and EBay Join to Fight the Giants

By Yuki Noguchi
Washington Post Staff Writer
Friday, May 26, 2006

EBay Inc. and Yahoo Inc. forged an alliance yesterday aimed at capturing more online sales and advertising dollars, while giving both greater leverage against their primary rivals, Google Inc. and Microsoft Corp.

The partnership spans some of the most critical areas of both companies' businesses, adding eBay's Paypal online payment system throughout Yahoo's operations and giving Yahoo an exclusive deal to sell display ads for

That two of the Internet's top brands decided to cooperate so closely highlights how powerful Google is becoming as it roves across the online business world, competing with eBay in online classifieds and payment systems and with Yahoo in search and content. It also leaves Microsoft in increasing need of a partner of its own, as its online service trails the others in search and advertising.

"This deal is partially offensive, partially defensive for eBay and Yahoo," because it allows the companies to share technologies and combine resources, said Philip Remek, an analyst for Guzman & Co.

Yahoo is the most visited site on the Internet, and eBay is the world's largest auctioneer. Consumers will start to see experimental versions of joint offerings in coming months. Yahoo users will more easily be able to make calls off the Internet by "clicking-to-call" local merchants, for example, using eBay's Internet-phone company Skype. EBay users will have greater access to Yahoo's news and entertainment content through a toolbar championed by both brands.

"I think it plays to the complementary strengths of both companies," said eBay president and chief executive Meg Whitman, speaking at a Goldman Sachs investor conference yesterday.

Speaking at its annual shareholder meeting, Terry Semel, chairman and chief executive of Yahoo, said the deal is a "terrific strategic partnership for our company."

One area not covered by the arrangement: instant messaging. Yahoo's service will not be compatible with eBay's Skype instant messaging; Yahoo already has such an agreement with Microsoft's MSN.

Such overlapping deals show how Internet companies are jockeying for Web surfers' time and interest, which translates into more opportunities to sell advertising.

Microsoft appears to be planning to chart its own course in competing for an advertising network, and for building its online audience. Earlier this year, Microsoft lost out to Google in negotiations to forge a deal with Dulles-based AOL LLC. Google invested $1 billion in AOL and deepened its search and content-sharing arrangement.

Separately, Google yesterday announced a partnership deal with Dell Computer Corp. to install Google's software on its computers, an arrangement that threatens to diminish Microsoft's presence on the consumer desktop.

"Microsoft has been jilted twice this year, by AOL and eBay," said David Card, an analyst with Jupiter Research. Through MSN, Microsoft still has a large community of users for its Web-based services, but it is trying to improve in areas of both search and advertising sales, he said. "They are trying to go it alone."

Advertisers are also spending more to run ads alongside search results, or pictorial ads that run on Web pages, as viewers spend more time online and less time with traditional media sources. Google, the search engine with the most traffic, dominates the search-based advertising market, while Yahoo has the largest advertising network for pictorial ads, and is also trying to catch up to Google on search-related ads.

"It's a bigger win for Yahoo, in many ways, to win against Google," said Charlene Li, an analyst with Forrester Research. EBay, meanwhile, pays both Google and Yahoo to sponsor links next to those companies' search results, but it has been cautious about selling ads on its own site. By employing Yahoo to provide such ads, it could boost its relatively meager share of the online ad market, she said.

EBay also might tap more locally based advertisers by integrating Skype throughout Yahoo's network, Li said.

For now, the companies' collaboration will happen exclusively in the United States, but if it succeeds, it might extend into other parts of the globe, Whitman said.

Shares of eBay closed up $3.68 yesterday, at $33.88 a share. Shares of Yahoo closed up $1.13 a share at $32.92.

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