Behemoths' Dance EBay Talks to Microsoft, Yahoo About a Common Foe: Google Auction Firm Both Needs And Fears Search Giant; To Compete or Cooperate? Discussions Focus on Ad Buys By MYLENE MANGALINDAN and ROBERT A. GUTH April 21, 2006; Page A1EBay Inc. is talking to both Yahoo Inc. and Microsoft Corp. to determine whether one of them might be a worthy ally against a common threat: Google Inc. After years of working closely with the search giant, eBay last year became alarmed as Google started assaulting its turf in multiple ways. In one case, Google launched a classified-advertising service that competes directly with eBay's online auctions and other listings. The two-track discussions began in earnest last autumn, people familiar with the talks say. They could result in some kind of alliance in which eBay, of San Jose, Calif., would increase ad spending with its chosen partner and provide access to the wealth of data it has collected about its consumers. The two sides could also more tightly integrate technical aspects of their systems to better cross-promote their businesses. It's not clear how much money would be involved or whether the parties have considered a more complex financial transaction, such as one side taking an equity stake in the other. But choices are seldom clear-cut in today's Web business. Upon hearing of eBay's talks, Google, Mountain View, Calif., offered an olive branch, in the form of a series of proposals designed to tighten the relationship between the two companies. The superiority of Google's search technology makes it a better place to advertise, say people familiar with eBay's thinking. Today, eBay is in a curious position -- negotiating alliances to wean itself from Google while discussing deeper ties with it. Tech companies have long had to walk such a delicate line between cooperation and competition. But these days, Google's clout has magnified the problem. EBay has "known for some time that Google poses tremendous opportunity in the short term but is perhaps their biggest threat in the long term," says Jeff Lanctot, general manager of Avenue A/Razorfish, an online-advertising agency. EBay, Yahoo, Google and Microsoft are clear leaders in the tech world and yet their competitive landscape is still profoundly uncertain. In particular, the rapid growth of online advertising has injected new competition into the Web, forcing the foursome to challenge each other in ways they hadn't in the past.So dizzying is the array of potential options that eBay executives have drawn up a chart mapping its three main businesses -- an auction marketplace, the PayPal online-payment service and Skype, an Internet phone service -- along with potential partners for each. The decision eBay makes will go a long way toward determining what kinds of businesses it will be in. Executives from the companies involved think these talks could herald mergers or acquisitions that would reshape consumer commerce on the Web. Each company is offering eBay a somewhat different package. At their core, though, the talks are about advertising. Whoever wins eBay will probably gain the right to display their clients' ads on eBay's millions of auction pages. Google, Yahoo and Microsoft all have systems in place that syndicate advertising to third-party Web sites, with all parties sharing the revenue. EBay doesn't currently run such ads. The winner would also get ad dollars from eBay, one of the Web's biggest advertisers. People involved in the talks say that any, or all, of the discussions may fall through and that no date has been set for a decision. EBay already does business with all three companies and will likely maintain ties with all. EBay spokesman Chris Donlay declines to comment on any talks and plays down the company's rivalry with Google. "Given how fast the Internet changes, it's no surprise that the line between competition and cooperation is sometimes blurry," he says. Spokespeople for Yahoo, Google and Microsoft also decline to comment. EBay's conundrum stems from its deep dependence on Google, one that started when eBay became one of the first customers of Google's search-based advertising system. When Internet users search on Google, the service brings up text ads related to those words on the results page. In 2001, eBay paid Google to post ads for its auctions pegged to thousands of search words. Search for "antiques," say, and Google would post an eBay ad with text such as: "Whatever you're looking for, you can get it on eBay." EBay's spending on Google soared, dwarfing spending on similar services such as Yahoo's Overture and Microsoft's MSN. John Aiken, managing director at Majestic Research, an independent equity-research firm, estimates that eBay spends about twice as much on Google ads as other individual search engines, and that Google brings up to three times as much traffic to eBay as other search engines. EBay won't give details about its ad spending. Few at eBay initially saw reason to fear Google, say people at the company, in part because of a 2003 study it commissioned from McKinsey & Co. McKinsey concluded that Google wouldn't use its search capabilities to break into e-commerce. That made Google a manageable threat, say people familiar with the study. EBay's dependence on Google increased as it shifted ad dollars to online ads from traditional media throughout 2004. But 2005 brought worrying signs that Google had the potential to become an entry point to the Internet for online shoppers, challenging eBay. Google, as part of a broader hiringspree, began recruiting eBay engineers and business staff. Senior eBay executives feared Google was staffing up for a move into e-commerce, say people familiar with the matter. In June, news broke that Google was developing a system for online merchants to take payments securely. Few details were available, but it sounded like a competitor to PayPal, eBay's own online-payment service. Then, in October, Google started testing a free online-classified service, Google Base, a product targeted at the heart of eBay's business. Even before news of Google Base became public, eBay executives met that summer to assess the threat. In a role-playing exercise, they split into two groups: A "green team" pondered eBay's interests; a "red team" tried thinking like Google, say people familiar with the meetings. The greens returned with status-quo scenarios in which eBay and Google continued collaborating, these people say. The reds,
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