Yahoo, eBay Partner on Ads, Search

In an effort to win more online advertising dollars and shore up defenses against growing competition, Yahoo and eBay said on Thursday that they've formed a new partnership.

The announcement follows weeks of speculation surrounding potential tie-ups between a variety of online leaders.

A Mutual-Aid Pact

The partnership comprises several deals, including that Yahoo will exclusively provide all graphical advertisements on the eBay.com Web site. Yahoo will also provide sponsored and improved search for some eBay search result pages and offer more up-to-date results from eBay's Web site to customers using Yahoo to search the Web.

As part of the agreement, PayPal, a division of eBay, will begin exclusively providing online payment services for users of Yahoo services and offer payment options for Yahoo merchants and publishers.

Yahoo and eBay also said they'll explore click-to-call advertising technologies, a market that is increasingly attracting attention online. The technology allows Web users to click on an advertisement and be connected via a Voice over IP call to the advertiser.

The companies will also introduce a co-branded version of the eBay toolbar, which will include links to Yahoo Mail and the Yahoo home page.

Yahoo and eBay said they'd start testing some of the initiatives in the next couple months, with plans to implement all of them next year.

Ganging Up on Google

EBay, Yahoo, Microsoft, and Google are among the online powerhouses hoping to hit on the best business model for profiting from the quickly evolving Web. Many of the players have branched out recently into each other's initial markets. For example, Microsoft recently introduced a new online advertising platform similar to one run by Google and said it will use the new platform on its Web sites instead of relying on an engine previously provided by Yahoo. All four companies operate competing VoIP services and aim to earn revenues through advertising by driving traffic to their Web sites.

Both companies realize Google is a dangerous competitor, and this partnership, as a defensive measure, is a smart move, said Rob Enderle of the Enderle Group.

"Much like Microsoft was in the packaged software space, Google is the company everybody is gunning for and represents the biggest threat," Enderle said.

Alliance Could Fail

As it's structured now, the partnership makes sense, but it could fall apart in the future, as Yahoo and eBay continue to develop competing technologies and services, particularly in e-commerce, Enderle said. Yahoo offers online auctions, which is eBay's core business, and both companies have competing comparison shopping engines: Yahoo Shopping and eBay's Shopping.com.

"It's a very thin line that divides the companies' [respective] e-commerce services. If that line gets crossed, the partnership could fail," he said. "But today, the partnership provides a reasonable match for the two companies."

Some view the deal as more positive for eBay than for Yahoo. "We see eBay as the big winner here. This deal should improve the position of an already very strong PayPal franchise. But what's potentially most needlemoving/thesis-changing here is eBay tapping into display advertising," wrote Citigroup financial analysts in a research note.

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