Google-eBay Rivalry Heats Up

Many analysts were all but cackling over the recent exchange of blows between eBay and Google. It can be funny to see two large companies acting like a pair of schoolyard bullies to each other. But this isn’t elementary school, it’s business — and warrants closer examination.

It was pretty amazing, first to see eBay get all huffy about Google trying to steal its thunder by holding a party in the same town at the same time, and second to see Google blink in response to what eBay did about it. But there’s a lot more going on here; this rivalry has a long history, so to understand the current moves, we need to take a closer look and even go back in time. As you’ll see, if eBay and Google were two people instead of two e-commerce companies, a psychologist might go crazy trying to figure them out.

To start with, let’s go all the way back to 2002. Relatively new search engine Google was cool then, but barely a contender when compared to its current position in the market. Online auction site eBay, on the other hand, was already known as the place to go for, well, just about anything; people called it the world’s biggest garage sale, for a good reason. The only problem was that most garage sales only take cash; how do you pay for something online when the seller can’t accept credit cards?

At that point, there were a number of online payment services ready and waiting to fill in the gap. The most prominent was PayPal, but eBay came late to the game with its own, which it tried to promote. It couldn’t forbid its customers from using PayPal because too many customers were using it already. By 2002 eBay finally took to heart the old saying “If you can’t beat them, buy them,” and purchased PayPal, quietly retiring its own online payment service.

Let’s take a quick look at eBay and PayPal today, because you’ll need to understand the latter’s importance to the former to get the most out of this trip down memory lane. PayPal now boasts 143 million user accounts throughout the world — there are still some countries in which you can’t use PayPal, but not very many, and I wouldn’t be surprised if plans to bring those countries into the fold are solidly in the works. PayPal brought in $1.4 billion in revenue for eBay last year, making up more than 20 percent of the $6 billion the online auction giant made in 2006.

If you look over the news as I did researching this story, you’ll see that a lot of interesting things happened in 2006. First, let me point out the obvious: somewhere along the line, eBay started advertising heavily on Google. I couldn’t discover when eBay started doing this, but the online auction giant has been the search engine’s biggest U.S. advertiser for years. Its ads showed up on Google more than 188 million times this March alone. That’s more than double the number that showed up for Google’s second biggest U.S. advertiser.

And eBay sees quite a return for its advertising. Deutsche Bank analyst Jeetil Patel believes that eBay may get as much as 20 percent of its web traffic from Google ads. Google, in turn, sees $25 million per quarter in ad revenue from eBay. That’s significant, as you’d expect, but it’s worth keeping in mind that Google made nearly $3.7 billion in revenue in its latest quarter for comparison.

But back to 2006. Almost exactly a year ago, eBay announced its intentions to enter into the keyword advertising business — Google’s bread and butter. The auction company’s intention was to allow eBay sellers to promote their auctions on other web sites. Dubbed eBay AdContext, the program would allow web sites to embed snippets of code that will show ads for auctions. Users of the system would run contextual ads so long as they allowed eBay a cut from the sales proceeds.

Just three months later, at the end of August 2006, eBay agreed to start running Google advertising on its international web sites. This was done in the face of a horrifying stock performance for eBay; by some accounts, the auction company’s shares were headed for their worst performance in six years. The ads from Google started appearing on eBay in early 2007.

So eBay seemed to shove a wedge between itself and Google in June 2006, while the two companies partnered three months later. Between those two events, Google did its own share of wedge insertion with Google Checkout. I covered it back when it was just a rumor and called Google Gbuy. Many believed the service would compete with PayPal. In fact, the way it’s set up, it can compete with PayPal, but it’s intended more as a clearinghouse: vendors who accept payment through Google Checkout can accept several forms of payment, including PayPal at least in theory, while buyers can pay in several forms. The whole idea is to reduce “paperwork;” if you buy stuff from five different merchants, you don’t have to fill out five different online forms if all of them accept Google Checkout and you are set up to pay through Google Checkout. Here’s a link that will give you more information; if you click on the help link on this page, it will take you to frequently asked questions.

When Google introduced Checkout, eBay immediately refused to allow it to be used on its site, citing phishing and fraud concerns. At that time, at least, eBay could argue that Google Checkout was an untried service, and it had forbidden its use out of concern for the security of its customers. Google, for its part, probably alienated eBay further by doing what you would expect it to do when introducing a new product: it undercut its rival’s (PayPal’s) transaction fees, and tried to lure consumers with cash bonuses.

Clearly, eBay couldn’t take this laying down — not just because PayPal was such an important part of its company, but because it stood to be an even more important part in the future. PayPal is currently growing faster than eBay’s traditional auction and shopping business. In fact, Ray Dutta, the former eBay CFO who oversees PayPal, has stated publicly that he is “convinced that PayPal is one day going to be bigger than eBay.”

Meg Whitman, eBay CEO, also realizes PayPal’s importance to the company. Though she has claimed not to be worried about Google Checkout, she noted to the Associated Press that “We’re defending ourselves aggressively with PayPal. That is one of our core businesses.” Alluding to the fact that Google is a search engine, so its interest in online payment systems seems peripheral to its natural focus, she said that “We’re not going to let that go away to someone who’d kind of like to be in the business.”

This brings us up to date. Every year, eBay holds a user conference called eBay Live; this one was scheduled for Boston. Just before it was about to start, Google announced that it would be holding a party in Boston, too, very close to where eBay Live would be held. Google’s party featured free shuttle rides from the eBay Live conference to the party, located at Old South Meeting House. Significantly, this was one of the places where the Sons of Liberty met during the Revolutionary War; it’s significant because Google was calling its party “Google Checkout Freedom Day” and using it to advocate that eBay allow its users to use Google Checkout on the site. Additional party attractions included free food, free drinks, free live music and free massages.

In retaliation, eBay pulled all of its advertising from Google. While eBay refused to admit that it was doing that specifically because Google was throwing that party, Hani Durzy, an eBay spokesman, did say that “We didn’t think it was the way for one partner to treat another.”

And then an amazing thing happened: Google blinked. At the last minute, it canceled the party. The official Google blog entry announcing the reversal said in part that “EBay Live attendees have plenty of activities to keep them busy this week in Boston, and we did not want to detract from that activity. After speaking with officials at eBay, we at Google agreed that it was better for us not to feature this event during the eBay Live conference.”

Nobody is fooled into thinking that eBay pulled the ads for any reason other than as a reaction to Google’s attempt to put pressure on them with this party (eBay has tried to claim that it’s an “experiment”). Nor is anyone fooled into thinking that Google’s response was due to the search engine suddenly having an attack of good taste. With those fig leaves removed, what can we take home from this?

First of all, we now know that large companies are still capable of acting like middle school students. Here’s a nice article that makes that point. More importantly, despite providing Google with a relatively small fraction of its revenue, eBay is strong enough to make it blink; some of us were beginning to wonder whether that was even possible. If others take that lesson to heart, Google may find itself ducking more blows in the future.

But most importantly, eBay’s move may give others in the game something to think about: there is life beyond Google. If eBay sincerely wants to characterize this move as an “experiment” to see how well its advertising is spent, it is going to have to go through with it. What kind of return will it see by investing the advertising dollars originally earmarked for Google with Yahoo, Microsoft, and Ask? I suspect a lot of people would like to learn the results of that experiment!

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