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Yahoo, eBay form Web advertising alliance

Internet powerhouses Yahoo Inc. and eBay Inc. are joining forces in an alliance that further defines the battle lines in an online showdown with rivals Google Inc., Microsoft Corp. and AOL.
/ Source: The Associated Press

Internet powerhouses Yahoo and eBay are joining forces in an alliance that further defines the battle lines in an online brawl with rivals Google, Microsoft and AOL.

Under the multiyear partnership announced Thursday, Yahoo and eBay will draw upon each other’s strengths in online advertising, payments and communications so they can connect with even more Web surfers than they already do.

Shares of both companies jumped on the news, reflecting investor expectations that the deal will open up even more moneymaking opportunities for two of the Internet’s oldest and most successful businesses.

Sunnyvale, Calif.-based Yahoo Inc. operates the world’s most trafficked Web site with 402 million unique users and ranks second in the lucrative search advertising market behind Google. It earned $1.9 billion on revenue of $5.3 billion last year, primarily through online ads.

San Jose, Calif.-based eBay Inc. is the e-commerce leader, with nearly 200 million users of online auctions and another 73 million U.S. accountholders of its payment service, PayPal. It earned $1.1 billion on revenue of $4.6 billion last year, mostly by taking a slice of the auction sales on its site.

Nearly 113 million people in the United States visited Yahoo or eBay or both destinations in April, according to Nielsen/NetRatings Inc.

Thursday’s announcement followed several weeks of rampant Wall Street speculation about the mating dance among the Internet’s heavyweights. At one point, there was even talk that Microsoft Corp. wanted to buy Yahoo.

(MSNBC is a joint venture of Microsoft and NBC.)

Although it’s not expected to have a financial impact until next year, the deal between Yahoo and eBay seems likely to shake up the competitive landscape.

Coupled with Google Inc.’s recent $1 billion investment in Time Warner Inc.’s AOL, the Yahoo-eBay partnership also figures to intensify the pressure on Microsoft to find an ally as it tries to become a more formidable player in Internet advertising.

Industry analysts on Thursday identified Inc., the Internet’s top retailer, and, an increasingly popular teen hangout owned by News Corp., as the most logical candidates for a Microsoft alliance.

Unlike the Google-AOL deal, Yahoo and eBay aren’t swapping any money. Instead, they are pooling together their resources in an effort to boost their revenue beginning next year — a prospect that provided a lift to their recently slumping stocks.

“This is a great deal for eBay in particular,” said Standard & Poor’s analyst Scott Kessler.

In a Thursday research report, J.P. Morgan analyst Imran Khan predicted the deal will increase eBay’s revenue by $350 million next year and boost Yahoo’s 2007 revenue by $150 million.

Neither Yahoo nor eBay projected how their alliance might affect their respective financial outlooks.

Under their partnership, Yahoo will become the exclusive provider of display advertising throughout eBay’s Web site and will add some search-generated ads, as well.

Although eBay has done relatively little advertising so far, its site has the potential to become a major marketing magnet with 60 million unique U.S. visitors last month, according to comScore Media Metrix.

In another new twist, Yahoo’s brand and search engine will be blended into an eBay Web browser toolbar that has been downloaded by 4 million users so far.

Ebay’s PayPal service will become the preferred payment provider for purchases made on Yahoo’s site, which provides a wide array of shopping, auctions and subscription services.

And eBay’s Skype Internet telephone service will be used to explore building another marketing vehicle that would allow advertisers to connect with prospective customers on the phone instead of through their Web sites.

“We are very excited because it allows us to provide the best of class in so many services,” Susan Decker, Yahoo’s chief financial officer, said during a Thursday interview.

The relationship, however, won’t extend to China, a rapidly growing market that has become a top priority for Yahoo and eBay, as well as its major rivals.

Even before teaming up, Yahoo and eBay shared a common interest — thwarting Google’s rapid expansion.

In recent months, Google has invaded eBay’s turf by offering a free classified listing service as well as a payment service. Despite those moves, Google has stressed it has no plans to trample eBay, one of the largest advertisers on its network.

“Google was dipping into eBay’s honey pot and that (irked) eBay,” said Yankee Group analyst Matthew Del Percio. “Now, eBay needs to tread carefully so it doesn’t damage its existing relationship with Google.”

EBay will continue to buy ads through Google’s network while also exploring ways to spend more money on Yahoo’s, said John Donahue, who runs eBay’s marketplace division. “Google continues to be an important business partner,” Donahue said.

Speaking at a Las Vegas investment conference, Google CEO Eric Schmidt told analysts Thursday that he wasn’t concerned, calling the Yahoo alliance “a very good deal for eBay. I think all of us benefit from a stronger eBay.” He predicted Google’s business ties with eBay will continue to strengthen during the next two years.

Google shares rose $1.74 to end at $382.99 Thursday on the Nasdaq. The shares slid by $8.94, or 2.3 percent, earlier in the session before rebounding on news reports of a deal that will install Google software on Dell Inc. computers.

Yahoo’s ties with eBay nevertheless represent a blow for Google, Kessler said.

Mountain View, Calif.-based Google has been steadily widening its lead in Internet search over Yahoo since last summer, according to comScore Media Metrix. Through April, Google held a 43.1 percent U.S. market share compared with Yahoo’s 28 percent share.