eBay to See Greater Upside Than Google From Multi-Year Advertising Deal

Caris & Company analyst Tim Boyd addresses clients on the recently announced eBay-Google advertising partnership. His note follows:

eBay (EBAY) and Google (GOOG) yesterday announced a multi-year partnership consisting of two primary components involving text-based advertising and "click-to-call" advertising functionality.

1. Google will become the exclusive provider of text-based advertising on eBay outside the United States. This agreement provides Google advertisers access to one of the Internet's largest and most dynamic online communities and seeks to simultaneously enhance the shopping experience for eBay buyers by making it easier for them to find the products they seek.

2. eBay and Google will integrate and launch "click-to-call" advertising functionality within eBay's U.S. and international marketplaces and Google's search platform. The click-to-call capability will allow a user to click on a link or icon within a product or service advertisement to initiate an Internet voice call to participating eBay merchants or Google advertisers directly from either company's respective sites, using Skype or Google Talk. Starting in the near future, Skype will offer its users the option to download the Google Toolbar, to which Skype will add a custom button. The companies will also explore interoperability between Skype and Google Talk via open standards to enable text chat and online presence.

Our thoughts on the partnership:

1. Although neither company released the financial terms of the deal, our sense is that eBay will garner greater financial benefits. We base this assumption on two observations: (a) the fact that Google’s network partners typically earn an 80% revenue share; (b) the fact that Skype is currently the clear #1 VoIP “click-to-call” solution in terms of users and user growth rate.

2. eBay benefits from the partnership in two ways: (a) better monetization of its international web sites; (b) placement of a Skype “click-to-call” button in Google’s search results. We view the latter as especially important given investor concerns about how eBay would monetize its acquisition of Skype.

3. The primary benefit to Google is the addition of a major international network partner. This could be especially helpful to Google in Asia, where it faces much stiffer competition (than in Europe, for instance) from local search players like Baidu.com (BIDU).

We maintain our 2*/Above Average rating on EBAY and our 1*/Buy rating on Google.

GOOG-EBAY 1-yr comparison chart: