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I regularly read stories about how Yahoo and Microsoft are ganging up on Google. Whether its the recent announcement of instant messenger compatibility, or the simple fact that Yahoo and MSN are both spends tens of millions of dollars promoting and revamping their search engine marketing offers, there is a lot made of the increasingly bitter fight between these three giants.

My sense, however, is that the real struggle is between Google and eBay. Let’s face it, as much as Yahoo and MSN try, the battle for search (or search engine marketing) is over. Google owns something like a 56% market share, has smarter people, and has amazing brand recognition – such that irregardless of how bad Google’s search might become, consumers will still perceive it is the #1 search engine.

So I think that Google has (rightly) concluded that it is game over when it comes to online search. The focus now is on figuring out the next high margin online business to enter into. There are basically two choices – pure ecommerce a la Amazon, or the “online marketplace model” of eBay. Considering the impressively low (or nonexistent) margins for Amazon, there is actually only one choice – eBay.

How Google is Attacking eBay

Google hasn’t been too stealthy about how they intend to beat eBay. The strategy is quite simple: build competitive products, attract users by pricing the products well-below eBay rates (or even free), and leverage Google’s bully-pulpit – that is, the massive traffic and market share of the Google search empire – to virtually require people to use Google’s products at least as a complement to eBay’s rival products. Let’s look at a few examples of how Google has used this strategy to date:

1. Froogle – Competitor to eBay’s; Offered for free (compared to CPC pricing for; Promoted with one of only five links on the Google homepage. Clearly, if you are selling products online, you would be dumb not to use Froogle. Note that Google monetizes Froogle via its AdSense contextual marketing product (which, ironically, is also how generates a lot of its revenue). Suffice to say, with this monetization in place, Google can forever give Froogle away and forever cause’s margins to compress as a result.

2. Google Base – Competitor to Craigslist and eBay; Offered for free (compared to listing fee and sales commission on eBay and flat fees on certain categories on Craigslist); Promoted by requiring Froogle users to enter their products into Google Base first before they can show up on Froogle. Google Base is definitely a product that Google has yet to perfect and in its current iteration it is a blip on the radar compared to eBay or Craigslist (note: eBay has a 25% stake in Craigslist). That being said, the fact that Google rushed this product onto the market and is continuing to promote it via Froogle indicates that they have not yet given up on the dream of competing with eBay/Craigslist for the ‘classifieds/marketplace’ market online.

3. GTalk – Competitor to eBay’s Skype; Offered for free (Skype charges for some services); Promoted by integrating it into Gmail. Here’s an example of a product that will probably never make Google much money, but could be very effective in reducing eBay’s ability to monetize its $4 billion acquisition of Skype. After all, why pay for Skype when Google is free?

4. Google Checkout – Competitor to PayPal; Offer for free up to a user’s current AdWords spend with Google (PayPal charges a percentage of the sale price); Promoted by giving users a special “shopping cart” logo on all of their Google AdWords placements on Google. As I noted in my last column, the shopping cart logo on AdWords really gives eCommerce sites no choice but to use Google Checkout. And since it is free, there’s actually a strong incentive for advertisers to push purchasers toward Google Checkout as opposed to eBay’s PayPal.

5. Quality Score – Google’s recent update to its “Quality Score” algorithm was allegedly made to ferret out “made for AdSense” (or MFA) arbitrage sites participating on the AdWords network. It turns out that these MFA sites aren’t the only sites that were targeted by the Quality Score update. In fact, Google is directly attacking “incentive sites” like “” and removing these from AdWords (or more specifically, raising their minimum bids to $5 or $10, effectively making it impossible to advertise at all). The rational behind eliminating incentive sites is “bad user experience” and “frequent user complaints.” Of course, no one really knows if Google really received lots of complaints about incentive sites, we just have to trust Google’s word on this point.

But let’s play this scenario out a little further. Google has just removed sites that are either MFAs or have “bad user experience.” What other sites could possibly be included in one of those categories? Recall that has publicly stated in its SEC filings (prior to being acquired by eBay) that something like 40% of its revenue comes from AdSense ads on its site. In other words, could very easily be classified as an “MFA” and removed from AdWords by Google.

Similarly, eBay is famous for buying millions of seemingly irrelevant terms like “Nuclear Bomb” and “Belly Button Lint.” Surely there have been tons of user complaints about the poor user experience of clicking on an ad on Google, being sent to eBay, and not being able to purchase the aforementioned nuclear bomb the user had his heart set on. I don’t think it would be a reach for Google to conclude that many of eBay’s ads create a bad user experience and therefore should be banned from AdWords.

And since so much of the Internet’s traffic flows through Google (something like 56%), if Google did indeed prevent eBay and from advertising on AdWords, this would have a very meaningfully negative impact on these companies’ ability to drive new customers to their sites. Food for thought.

How eBay is Responding

eBay has some really nice businesses with high margins – in particular eBay itself and PayPal. Both of these businesses are near monopolies, and both have withstood attacks from strong competitors in the past (Yahoo Auctions, Overstock, and even eBay’s version of PayPal before they just acquired PayPal itself). So eBay is used to the attention and has successfully responded in the past.

As far as I can tell, eBay is responding to Google in three ways today, with a fourth that I predict will occur in the next 1-2 years:

1. Block Google products wherever possible: eBay has made it clear that Google Checkout is not welcome on eBay. This is clearly a defensive strategy. At the end of the day, the only impact it has on Google is that Google can’t make money off eBay transactions through Google Checkout. Of course, considering the fact that Google Checkout will be mostly free for the majority of its users (most of whom already use AdWords), this strategy is mostly a way to protect PayPal revenue than it is to impact Google Checkout revenue.

It should be noted that there are two ways that banning Google Checkout could seriously backfire for eBay. First, it could anger eBay users who would like to save money by using Google Checkout instead of PayPal. Second, it could be grounds for allegations of anti-competitive behavior (read: an anti-trust lawsuit). This point is particularly relevant to my point #4 below.

2. Introduce competitive products to AdWords: eBay recently announced that it is launching a competitor to AdWords called “eBay AdText”. eBay may try to leverage its existing relationships with tens of thousands of loyal eBay sellers to get these folks to replace AdSense on their Web sites with AdText. Perhaps taking a page out of Google’s checkout scheme, I wouldn’t be surprised to see eBay basically give sellers some sort of discount or free listings on eBay in exchange for using AdText instead of AdSense.

Ultimately, for this strategy to work, the overall package eBay proposes to its sellers has to result in more revenue or eCPM than AdSense. Initially, this will be difficult, since eBay’s optimization algorithm will probably be much weaker than AdSense’s right out of the gate. Nonetheless, I do think that attacking AdSense is a viable strategy. In the end, Web site owners only care about the bottom line – if eBay can combine discounts on eBay with an algorithm close to on par with AdSense, the results might be better economics than Google and a big blow to the Google Machine.

3. Gang Up on Google: eBay recently announced a wide-ranging deal with Yahoo to provide co-branded toolbars (competitive with Google Toolbar), combined advertising strategies (competitive with AdWords), and potentially click-to-call functionality (competitive with GTalk). The deal also made PayPal Yahoo’s exclusive payment provider (competitive with Google Checkout). There’s no doubt that this is a smart move by both Yahoo and eBay.

At one point in time, you could argue that Yahoo and eBay were largely fighting over the same space – in particular, eBay’s “buy it now” functionality and Yahoo’s “stores” seemed destined to clash over dominance in the small business “marketplace” space. I think both of these companies now realize that the “enemy of my enemy is my friend” and trading blows doesn’t make much sense now. There is a far greater menace out there.

And there’s no reason to think that this is the last partnership eBay is pursuing. You would think that similar negotiations must be in the works with Microsoft (MSN) and AskJeeves (or all of IAC, for that matter). The fact that Google has been rattling cages in Redmond with ominous announcements of Excel-killers, support of FireFox (Internet Explorer killer), and potential online operating systems has probably only accelerated discussions.

4. Anti-Trust? If Google simply dominated search, I’m not sure that this would be much of an issue. Google, however, has made it clear that they are using their dominance in search to force their way into other lucrative areas, like comparison shopping, online classifieds, and online payment processing. At some point, Google is going to piss enough big companies off that the Department of Justice (DOJ) is going to start getting pressure to curb Google’s growth.

Considering the fact that eBay’s business lines are all in Google’s sights, it wouldn’t surprise me at all if eBay has already started some discussions with the DOJ on this point. There is, however, one problem that needs to be mentioned; in many ways, eBay is a monopoly in its own right. And in many ways, eBay using their own monopoly power to their advantage, as seen in their blockage of Google Checkout on eBay. Imagine if instead of Google Checkout it was “Blogation Checkout” – a small Mom and Pop company trying to compete with PayPal. I think eBay might be in trouble.

The bottom line, though, is that eBay does need to be careful about throwing stones at glass houses here. It’s hard to complain about anti-competitive behavior when you are exhibiting that very behavior.

And the Winner is?

Right now, I have to say that Google is winning this battle. The way I see it, eBay’s moves to date have been entirely defensive and are mostly directed at preserving its own revenue instead of biting into Google’s (I am withholding judgement on eBay’s AdSense killer and partnership with Yahoo. These moves do suggest an offensive is being mounted, but it is too early to say whether these will have any success). Google, on the other hand, has only seen its market share increase in its core business (search) and has launched a slew of products that leverage search to gain traction in eBay’s businesses. Based on what I have seen to date, Google’s efforts will bear some fruit. Google Checkout will be a success, Froogle already has some market share, and Google Base will someday attract a loyal following. All of this adds to Google’s bottom line at eBay’s expense. Do I think Google will destroy eBay and PayPal? Of course not. But if this war continues along its current trajectory, my guess is that eBay will be the company in the end that will cry uncle first.

Tags: ebay versus google, ebay adtext, google checkout, paypal, gtalk, skype, craigslist, google base, froogle,, antitrust