EBay: Take That, Google!

After pulling its ads from Google in a counterprotest, the online auction giant has started buying again, but not as much as before. Yahoo! and Microsoft could gain

by Catherine Holahan

The bill has arrived for Google's protest party at last week's eBay conference. And even though the party was canceled, the cost is much higher than Google probably expected for its poke at a rival Internet powerhouse.

In apparent retaliation for the planned intrusion on its annual pageant, eBay abruptly pulled all U.S. advertising for its online auction and shopping sites from appearing with Google's search results. Having made its point, eBay (EBAY) is ready now to resume paying for Google (GOOG) search ads—only at lower levels than before.

But eBay says the reason for scaling back goes beyond displeasure at Google's ploy, which was meant to protest the exclusion of Google's Checkout service from the list of accepted payment providers on eBay's sites. During the 10 days that eBay did not place ads for its sellers' products next to Google's search results, traffic on some eBay sites actually increased, says eBay spokesman Hani Durzy.

Some of that increase was undoubtedly due to the immediate impact of the hype over the eBay Live! conference, held in Boston June 14-16 (see BusinessWeek.com, 6/15/07, "Beantown's eBay Circus").

Ad Dollars Headed Elsewhere

But eBay also found that reallocating ad dollars to the search engines at Yahoo! (YHOO), Time Warner's (TWX) AOL, and Microsoft's (MSFT) MSN resulted in new buyers shopping on its sites. "One of the biggest takeaways is that we are not as dependent on Google AdWords as some may have thought," says Durzy.

That's good news for Yahoo and Microsoft, two of the likely beneficiaries of eBay's change in spending. Durzy wouldn't say exactly how much eBay spends with Google, or by what percentage that spending will decrease. However, eBay is known to be one of the largest buyers and bidders for a multitude of keywords, thereby securing the right to have its ads appear next to the search results whenever those words are typed by Google users. Financial analysts estimate eBay has spent just shy of $25 million per quarter on Google AdWords in the past.

Google won't quantify its ad revenue from eBay publicly. In a statement, the company would only confirm that eBay is again buying ads: "Over the last seven years, we have worked closely with eBay to drive customers to their site and build value for their business and the business of their sellers. We look forward to a continued partnership."

Shifting Balance of Power

Compounding Google's loss of ad revenue from eBay is a potential drop in the prices other advertisers may pay the search provider as a result of eBay taking some of its ad dollars elsewhere. Google sells ads by auctioning off search terms, with the bids setting the price an advertiser is willing to pay each time a user clicks on its ad. EBay's presence in those auctions drives up prices because rivals must compete with those bids to get their ads displayed prominently. If eBay bids less aggressively or doesn't bid at all on certain terms, the reduced demand may push prices lower.

A significant eBay scaleback would give smaller AdWords buyers reason to celebrate. Small businesses with modest advertising budgets have found themselves on the losing end of the bidding, with more big companies, such as eBay, spending on search ads (see BusinessWeek.com, 1/22/07, "The Small Fry Sour on Search Ads").

Still, eBay needs to be careful, too. While it may not want to spend more money on Google ads than it has to, the company also may not want to make it too easy for the little guy to win keyword auctions. In many ways, eBay competes with those smaller vendors, many of whom are eBay sellers with their own Web sites. The easier it is for eBay sellers to market directly to consumers and drive large numbers of buyers to their Web sites, the smaller the cut they'll have to give to eBay for an auction sale.

And then there's Google. Despite the rare display of contrition in calling off its party, now that eBay is making some of the punishment permanent, who's to say the mighty search engine doesn't have a few vindictive tricks up its own sleeve?

Holahan is a writer for BusinessWeek.com in New York.