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February 05, 2008

Blue Plate Special: eBay/AOL rumors with a side of Microsoft/Yahoo!

After a little blurb in the Merc, speculation is running around that eBay may bid on AOL.  As part of the big Goog/AOL deal, it was stipulated that TWX must spin out AOL in 09 (I believe).  This is an interesting combination and makes more sense than you would think on the surface.

But before we go there, let's think about our friends at Yahoo!.  The time for an independent Y! is over.  They have shot two full magazines of bullets into their feet and every other appendage they have is riddled so it's time to put a fork in Yahoo! - it's done folks.   The only question I have is if it goes to Microsoft (I'd say 80% likely) or is cut up into chunks for a 'sum of the parts' that exceeds Microsoft's bid (unlikely).  So let's assume that microHoo! happens and we now have a clear search oligopoly (Feels like 2005 again?).

This is actually short-term good for eBay IMO. They can play Goog/MicroHoo! off each other for best ad deals, maybe replace one of the shopping engines in there with shopping.com, maybe get some nice eBay placement in the copious portals that will need to be  combined and monetized.

The search wars become the e-commerce wars?

Long-term though as Goog/microHoo! battle it out, the battlefield will move from Internet Advertising+search to ecommerce.  Why you ask?  Well, if you look at internet advertising, the biggest chunk is search and search breaks down into these verticals:

  • ecommerce/retail - 40%
  • travel - 20%
  • finance - 15-20%
  • pharma - 10%
  • other - 10-20%

Another datapoint out there is Google publicly publishes they drive 40% of ecommerce GMV.

As the Goog/MicroHoo! battles really heat up, it will be a natural progression of the war for each of them to go after that largest chunk, ecommerce, in a very material way.  You can see google already preparing for this with google product search (GPS) (the artist previously known as Froogle) and google checkout.

Once the war comes to e-commerce, eBay will either need to pick a company (I'd vote microHoo! because I don't see google+eBay mixing very well) to join deeply with or face not only one, but two very large, new competitors that are gunning for them.   Through all of this let's not forget Amazon will continue to be independent (retail components makes then un-acquirable by goog/microHoo!).

So if you're eBay you need to think of a 09 chess board that looks like this:

  1. eBay independent - largest marketplace, increasingly reliant on goog/microhoo for traffic.
  2. Amazon independent - Retailer with bustling 3P business.
  3. microHoo! - 30-40% traffic, several CSEs, Y! stores to bring to bear on ecommerce, potentially able to leverage ad marketplaces to ecomm marketplaces?  Windows tie-ups possible (Can you imagine IE saying - Hey Dude, I see you are shopping for an ipod, come on over to the microHoo! marketplace instead!)
  4. google - 60-70% traffic, growing ecommerce focus, probably buys AOL and ties up that traffic.

Enter AOL

This brings us to AOL.  Buying AOL could be a smart move.  Say what you will about AOL, but we are able to see the referrer traffic for Google and AOL traffic is very very high quality traffic.  The embedding of the search engine within the AOL 'garden' makes it very sticky and eliminates any fraud or randomly bad clicks.  Also, don't forget eBay has had a very long relationship with AOL where they have owned a big corner of the ecommerce world there.  The only exception is shopzilla which powers the AOL shopping engine.

I wouldn't want to face the playing field above without my own traffic source.  If you are disintermediated from buyers, then either Goog or microHoo! can erect their own eBay-lite (fixed-price only marketplace kind of thing) and then siphon off all the traffic you would normally be able to buy into that marketplace and put a World of hurt on you.  Sure you would still have organic traffic, but let's be  generous and say that's 60-70%.  Losing 30-40% of the buyer flow would be something the eBay of today couldn't really survive as they are busily handling their own internal issues.

Thus imagine a playing field like this:

  1. eBay independent - largest marketplace, owns large organic 20% traffic source, AOL.  Able to play microHoo!/google off each other for AOL search deal that INCLUDES a non-compete on the marketplace side.  By the way you try to hose Amazon in there.
  2. Amazon independent - Retailer with bustling 3P business, loses some AOL traffic.
  3. microHoo! - Willing to pay stupid money and make crazy deals to usurp google out of the aol search deal and bring 'balance to the force'.
  4. google - shocked to see a world where they have lost 10-15% of that AOL traffic to microsoft when they thought they had it all locked up.  Search share drops to 50%.  May not get to an ecommerce counter-punch to fight eBay/microHoo! biz relationship.

If I'm eBay and I want to be independent, this is a battlefield you can do something with because now you've got a dog in the traffic fight and you can really leverage that to diminish your competitive landscape. In fact, I'd go so far as to say that if eBay doesn't get a dog in the traffic fight, they may be forced into a M+A situation.

In reality, MicroHoo! will probably bid so much for AOL that it will quickly get outside of eBay's range, but from an antitrust kind of situation it could play out that neither google/microsoft can really get in there, and then there's a long-shot eBay could do this.  They could also partner with a cable/media co for it as well and include some BD elements that get much of the benefit of owning AOL.

Oddly enough I think it makes sense strategically for eBay to look at if they really want to remain independent.  If they don't, then it's a question of when is the best time to merge with Goog/microHoo! to maximize shareholder value.  I'd say it has to be timed just right so you let microHoo! get some momentum and then see the battlefield come to ecommerce, but before either co can get seriously invested in a diet-eBay competitor, it is time to sell.

One thing's for sure, it's going to be an interesting 08/09 in the world of internet behemoths!  eBay Strategies readers, let me know your predictions via comments!

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