Sell-Side Reaction to the eBay-Yahoo Alliance (EBAY, GOOG, YHOO)

Includes: AABA, EBAY, GOOG
by: Mark Mahaney

Yahoo! (YHOO) and eBay (NASDAQ:EBAY) announced this morning a multi-year far-reaching strategic agreement (read: Google challenge). From the joint press release, it is designed: mutually benefit both companies by better serving their user, merchant, and advertising communities in the U.S. The agreement consists of four major components in the areas of search and graphical advertising, online payments, a co-branded toolbar, and the opportunity to explore "click-to-call" functionality.

Those four components:

1) Ads: Yahoo will have exclusive rights to serve ads on eBay sites, reaching eBay’s 200 million users;
2) Payments: eBay’s PayPal service will become the exclusive third-party Yahoo Wallet payment method;
3) Toolbar: eBay's toolbar will be co-branded and fitted with Yahoo links, search, and email functionality;
4) Search: The two companies will collaborate on ways to increase the "quality and comprehensiveness" of Yahoo search results for and to provide Yahoo search users with eBay listings.

Below are Mark Mahaney of Citibank, Scott Devitt of Stifel Nicolaus, and Tim Boyd of Caris & Co's initial takeaways from the announcement:

Citigroup analyst Mark Mahaney:

  • Testing starts soon w/full implementation in '07. No material financial impact in '06; both companies will include any impact when they give '07 outlook.
  • The elements that seem most potentially material include: 1) new graphical adv. opportunities for EBAY on its site - which could be very material w/all the usage on EBAY's core site (76MM visitors & 13B pg views in April); and 2) PayPal becomes the excl. 3rd-party provider for YHOO's wallet & an integrated pmt solution for YHOO's merchants/publishers.
  • We see EBAY as the big winner here. This deal should improve the position of an already very strong PayPal franchise. But what's potentially most needle-moving/thesis-changing here is eBay tapping into display advertising.
  • Stifel Nicolaus analyst Scott Devitt:

  • This deal has been in the works and openly speculated upon for some time, and we do find it beneficial to both companies. We believe the advertising component and the payment component are the relevant pieces of the deal. We also believe this should be looked at as two companies finding significant partners in underutilized components of their respective businesses rather than a broad-based strategic alignment (which often does not add value). We find toolbar and click-to-call to be interesting, but that each could be removed and not impact the strategic or economic value of the deal.

    We had thought that it was possible that eBay could trade its China business for full access to the Yahoo! platform for its Skype business; of course, this did not happen, but we believe has relevance as a future possibility. Right now, it seems Yahoo! is not willing to concede in communications and eBay is not willing to fold in China.

  • Yahoo! gains access to the eBay platform for graphical advertising as well as sponsored search where appropriate in the U.S. We have found eBay's graphical advertising displays to have been underutilized historically, given the lack of touch points that eBay has with large advertisers. Yahoo! has the critical mass with advertisers and should be able to integrate graphical ads throughout the eBay network without impacting the trading platform. The companies need to be very careful about the integration of sponsored search on the eBay platform given the possibility for disruption to the marketplace. eBay's merchants are vocal when the marketplace is impacted negatively and have relevant voices, as such integration of sponsored search needs to be done in a fashion that is not viewed as taking business away from existing merchants. We believe eBay is particularly aware of this and will integrate appropriately to the benefit of the marketplace over time.

    Separately, Yahoo! and eBay have agreed to collaborate on ways to increase the quality and comprehensiveness of Yahoo! search results for and to provide Yahoo! search users with more up-to-date eBay listings. We believe this is additive to the businesses only when it increases the quality of the search, as biased displays do not add value over time. That said, we believe there are ways to better integrate eBay listings at the individual listing level across Yahoo!'s search result network.

  • eBay's PayPal unit gains a significant partner in becoming the exclusive third-party provider of Yahoo!'s online wallet, allowing customers to pay for Yahoo! services from bank accounts, credit cards or balances associated with their PayPal accounts. We assume that this agreement is global in nature, but note that the PayPal U.S. account base of 73 million was used in the press release rather than the more than 100 million global PayPal users. Yahoo! has over 500 million unique users globally and several hundred thousand advertisers of which many are small businesses. Currently, PayPal generates more than 33% of its total payment volume outside of the eBay platform, and we expect the Yahoo! deal to be relevant over time to the merchant services component of eBay's business.
  • We find this deal to be beneficial to both eBay and Yahoo! in terms of creating economic value through partnerships in otherwise underutilized components of their respective businesses. On the surface, we do not believe the deal is particularly relevant to query share and thus, find very little impact to Google and believe eBay's relationship with Google will remain unchanged. In our view, the consolidation of traffic and its associated monetization is what makes Google work and we believe the first phase of this deal does not change the traffic aggregation landscape. We rate shares of eBay, Google, and Yahoo! Buy and we would be buying all three on the recent pullback in the sector. We find the moves in the market today to be a rational reflection of the impact on the businesses.
  • Caris & Company analyst Tim Boyd:

    1. The search/graphical advertising agreement is a win for both companies. eBay gets greatly improved access to the 7th largest e-commerce channel (in terms of user traffic) in the U.S. and should see significant improvement in the monetization of its ad inventory. Yahoo! gains both a key incremental advertising revenue source and access to eBay’s treasure trove of user behavioral data.

    2. The PayPal exclusivity arrangement is a material incremental positive for eBay. In our opinion, this is the most important aspect of the deal, although we haven’t worked out an estimate of the potential financial impact just yet.

    3. The co-branded toolbar will enhance the benefits of the search advertising arrangement. Of the four components, this is the least significant. A nice positive, but it will likely have only a marginal impact on the companies’ P&L.

    4. Skype gains access to some key click-to-call properties. In terms of pay-per-call advertising, Skype should benefit greatly from integration with existing Yahoo! services like Messenger, Local and Yellow Pages.

    5. eBay could get a nice boost in China. Although the current deal applies only to the U.S., it seems a likely prelude to a broader global partnership. Considering how much eBay has struggled in its market share war with Taobao, such a partnership could provide some much-needed relief. We also note that eBay could also get a second chance at getting some traction in Japan and Taiwan (where Yahoo! dominates).

    6. Yahoo! gets a great opportunity to boost its international profile. Again, this would be dependent upon a global extension of the partnership. If this happens, Yahoo! could get a chance to close its global search market share gap with Google and increase the diversification of its geographical revenue sources.

    7. Google could lose some business from one of its biggest customers. We fully expect eBay to continue allocating a significant portion of its search advertising spend to Google – eBay must maintain a strong presence in Google’s search results, plain and simple. We believe that any loss of eBay search spend sustained by Google is likely to be marginal.