Yahoo + eBay vs. Google

All the speculation about a big Web site merger or partnership has finally been confirmed with the announcement of an alliance between eBay and Yahoo. Forbes.com has a good summary of the implications of the deal, correctly stating that it was inspired by a mutual desire to take on Google, which is invading the turf of both companies.

It's a good deal for Ebay and a risky one for Yahoo.

I'm always skeptical when two companies losing market share try to build it back up with an alliance or merger. Why executives think that combining two companies in trouble means new strength is beyond me. It's usually a sign of desperation and rarely works (remember all the alliances companies formed to defeat Microsoft?)

Alliances between two companies losing market share more often than not drag each other down. Their interests are not always mutual. Most people once thought the merger between AOL and Time Warner was a great idea, too.

Forbes says "Ebay gets access to China, via Yahoo!'s stake in Alibaba.com, while Yahoo! can piggyback on eBay's success in Europe." But the market shares of these companies are not necessarily additive. Ebay customers are not doing the same things as Yahoo customers.

Ebay may benefit because Alibaba owns Taobao.com, which beats eBay handily in Chinese market share of consumer to consumer sales (57% vs. 34%). Combining the two into one big auction site would be an enormous benefit, but nobody has said that's in the works. Alibaba is an independent company.

Will eBay help improve Yahoo's presence in Europe? The collaboration calls for Yahoo's presence on eBay's toolbar, which may not really drive traffic to Yahoo Search except using it to search through eBay. Will people buying and selling stuff really use Yahoo to search the rest of the internet? Only if both search engines have equal appeal, which is not the case.

Yahoo will benefit from the use of PayPal if it gets a discount from eBay. But that also creates strong incentive to create an alternative to PayPal. It's never a good idea when a customer of a service (eBay) buys what was supposed to be a service to everyone (PayPal). I've always felt that merger probably stalled PayPal's growth, and this deal could slow it further.

Yahoo also gets exclusive rights to provide "graphic ads" on eBay. EBay had better tread carefully in ad deals with Yahoo, because ads that eBay buys through Google drives a lot of traffic to eBay. And I assume this means that Google can still provide non-graphic ads on eBay, still the most lucrative type. Too many graphic ads could damage eBay, because the site becomes even more annoying to navigate.

The best scenario for the pair would be a partnership that focuses on their strengths, not their weaknesses. Yahoo should focus on becoming a community site, where it is strong, not a search engine, where it is weak. EBay could add to that community, and perhaps drive traffic to Yahoo's other offerings.

It's logical to anticipate that this alliance could eventually lead to a merger, with the focus shifting to community services, not search. We'll see.