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I think the key question is whether Google is planning on moving into eBay's key auction business. If Google is planning to launch an auction service, then it's not so much a matter of if there will be a divorce, but how soon it will happen. Once Google becomes a direct eBay competitor, eBay will be reluctant to shovel money toward one of its most formidable competitors. And Google, for its part, will be in a position to give its own auction service more prominent placement in search results than eBay's ads. In that case, it's almost inevitable that the relationship will break down in acrimony.

On the other hand, if Google is *not* planning to enter the auction market, then both companies have every incentive to patch things up. eBay needs the traffic (in particular they need to not lose customers to other auction sites) and Google can use the revenue. One likely way they might patch things up is through a formal alliance, wherein Google agrees not to enter the auction market for several years, and in exchange eBay agrees to purchase a certain number of ads.

One case study to look at is the relationship between Google and Yahoo! when Google was in its early growth phase. Yahoo was convinced search was a mature market, and so they outsourced their search functionality to Google (and before that Inktomi). By the time they realized the threat and cancelled their syndication deal with Google, Google had already matured into a large, well-known company. Although eBay clearly isn't making that caliber of mistake--they haven't outsourced the auctions themselves to Google--eBay should still take it as a cautionary tale. It's not a good idea to bankroll your competitors' R&D.

On the other hand, it's not like Google is cash strapped. And for that reason, Google is likely to have the upper hand in the negotiations. There are plenty of other auction sites that would love to have the top slot in Google's search results. But with Google's market share above 50 percent (and still rising), it's awfully hard for eBay to walk away from the table.

So it's probably in eBay's interests to try to get a formal deal with Google sooner rather than later. One model for a deal would be Google's 2005 deal with AOL (http://news.com.com/What+the+Google-AOL+deal+means+for+users/2100-1024_3-601032 7.html), in which Google got a 5 percent stake in AOL in exchange for cash as well as collaboration between the companies' various products. In the case of eBay, eBay could offer Google $1 billion in equity to Google in exchange for $1 billion in AdWords credit. At the same time, the companies might be able to agree to achieve interoperability between Skype and Google Talk and a deepening of their deal (http://news.zdnet.co.uk/internet/0,1000000097,39281969,00.htm) last year that involved Google text ads on eBay pages. 

A messy divorce would hurt both companies, but would have a bigger impact on eBay. Google is not hurting for advertisers.  Although eBay's ads have been ubiquitous in Google's search engine results pages (SERPs), they currently represent $25 million in ad revenue. Google had revenues of $3.66 billion for the quarter ended March 31, up 63% from 1Q06 and 14% from the previous quarter.  That means eBay represents about 0.7 percent of one quarter's revenue for Google. Big ad partnerships matter, but this isn't the heart attack for Google that some folks would like to imagine. 

The bigger question is whether eBay could get the same quality targeted traffic spending that $25 million elsewhere. That money was being spent at Google rather than Yahoo or MSN for a reason. It wasn't charity or goodwill (alas, there seems little of that left between the two companies), but represented about 60 percent of eBay's search ad spending. My guess is that Yahoo is the likely beneficiary, as it has an ad partnership with eBay dating back to May 2006).  

But this may also give Microsoft and eBay something to talk about. Microsoft should be motivated to make some headlines in the advertising space that don't involve being outmaneuvered by Google (a widely-held take on the battle for DoubleClick). A decision by eBay to shift its Google ad spend over to Microsoft would have PR value to Ballmer & Co. (and that $25 million in revenue, which is nice as well.) And it would sure beat throwing chairs about another "loss" to Google.

At the end of the day, Google is always going to wield more power than eBay. How many times a day do you use eBay? How vital is it to your everyday life? Negligible. What about Google? I would be lost without it, quite literally. I found my current job and flat using Google searches as the starting point. I moved to Barcelona 6 months ago with only Google as my guide. eBay has done nothing to me, and it just tries to take.

If eBay withdraws its support of Google, big deal, Google suffers a dip and remains the most powerful brand on earth at the present time, advertising every other product under the sun.

If Google withdraws its support of eBay however, the dip is much larger for them. If Google were to refuse to publish any links to eBay sellers, they would soon find somewhere else to sell. Like "Google Auctions" for example. Now there's an idea for a site...

If I was Google I would be engineering this to happen right now and preparing the search filter to strip "eBay" "Paypal" "Skype" etc. from any results. If I were eBay I would be very very careful what I did next.

Google and eBay are on a collision course, and things will likely get very cool before they warm up. At one time, eBay was about online auctions while Google was about search and paid search ads. But over time, eBay has branched out and now has Skype and PayPal, while Google has Google Base and Google Checkout and other designs on e-commerce. So in some ways they are starting to compete, while in others they don't. This is the classic case of Silicon Valley co-opetition, where they remain customers and allied on some issues while being in competition in others.

But Google went too far by trying to woo eBay customers at the eBay Live conference by throwing a pirate party for its Checkout service. eBay has already aligned with Yahoo in an attempt to take on Google, and so this move will push eBay even further into the arms of Yahoo and/or Microsoft.

So will this be a messy divorce? On the face of it, yes. But in reality, no. While eBay is the biggest Google customer, Google only takes in $25 million from eBay in a year, and that's a tiny fraction of all of Google's revenues. The advantage Google has is that it has thousands, perhaps millions, of customers who pay for AdWords and AdSense ads, many of whom are small companies. To some extent, that inoculates the company from bad relations with one or two big customers.

On eBay's side, the company will lose a chance to market itself via Google paid search ads, likely a huge source of traffic for the site and its various auctions. eBay could easily switch to Yahoo Panama or MSN AdCenter to recoup that traffic though those services pale in comparison to Google in driving traffic. More likely, eBay will realize that it can't really pull all its ads from Google if it wants to retain its traffic leads and will have to cave in that respect.

If eBay does stick with its ban of Google ads, it might provide an important test case in the market: Can a big Fortune 500 online company get by without relying on Google to drive traffic? If eBay is successful, it could lead to other big customers leaving Google for other options in online advertising. But if eBay fails, and has to go back grudgingly to Google with its tail between its legs, then Google might be able to lock in customers even more.

So while the divorce might be slightly messy in public, it probably won't change either company's bottom line much, and could provide an important test of a large company jumping off the Google bandwagon.

It is impossible to say how much it would impact the bottom line of both, it depends too much on other factors (like the other revenue streams at the time, etc).  Any divorce will not last too long. The business models of both depend too much on it.

However, Google is in a better position to expand away from the dependency on eBay, since it has more potential sources of revenue. They just need to attract a few more real-world players to be able to leverage the loss of eBay, and they have the sales force to do that now. eBay will have to look hard to find a similar source of eyeballs. Their only option is to invest a fair share of their revenues with Yahoo, MSN, and other smaller players - and maybe seek a different channel for advertising.

That said, eBay is big enough to be self-sustaining by now. While there may have been a mutual dependency a few years ago (Google needed eBay revenues, eBay needed Google to deliver eyeballs) that can not be true anymore (or else, eBay is in incredibly serious trouble). eBay has to have a self-sustaining buyer and seller community by now.

So their best alternative is to try to leverage that community to find more business. Upsell is always the easiest sale. Especially since the most lucrative part of their business is not likely to be people selling old baby clothes to each other for a few dollars, but people selling classical paintings etc. Of course, there are fewer of them - but it is also a community which is more tighly linked.

Hope this helps

//Johan

If one were to model some calculations, it actually would reveal that the squabble between the two firms would not really have any long-term significant impact on either firm. The reason is that the actual changes that take place are occurring in competitive markets.

• Google's adword auctions are competitive and vibrant, with many bidders bidding on key words, product names, etc.
• The market for online advertising is competitive, and even context-sensitive search results have multiple players, of which Google is merely the leader.

In competitive markets, when one customer/vendor goes away, another customer/vendor can fill the void. Let's look at it from the two perspectives separately.

From Google's perspective: eBay is possibly their biggest single customer. To put a numeric value on that spending, Merrill Lynch analyst Justin Post does back of the envelope calculations that estimate that eBay ad spending represents 1% of Google revenue. He also estimates that this makes up 9% of eBay’s total marketing spending in the US, or about $170 million/year.

Seems like a lot of money, but even if it all disappeared, it would only be a 1% revenue hit for Google, which is eminently survivable. However, this overestimates the impact. AdWord sales are an auction, and eBay is simply the top bidder in $170M worth of auctions. Assuming they take their ball and go home, the second-highest bidders in those AdWord auctions would then buy the Google AdWords. So that 170M would drop, but by a lesser amount.

So the direct result is a less than significant drop in Google's revenue. The more important impact is the reputational and word-of-mouth impact if eBay succeeds in maintaining their business after cutting AdWord spending. The message that sends out to other Google advertisers is that you can work around Google if you choose. But even this impact is minor, since there is not a growing sub-strata of discontent among Google's customers - that honor belongs to eBay. Despite the fact that Google has very little lock-in, it also has very little risk of a rapid exodus, because it actually has happy customers.

From eBay's Perspective: According to ComScore data, traffic direct to eBay from Google represented 6% of eBay visits. That's a significant chunk of traffic, although I would expect it amounts to less than 6% of eBay's active bidders. That is because people lured to eBay by a Google ad are less likely to be eBay members than people who used eBay search tools, and are more likely to abandon before bidding. However, this probably does represent a good stream of new eBay members. I would venture a guess that the Google ads are more significant to eBay as a member acquisition tool than a auction sales tool.

So let's ask if quitting Google will stem eBay's new member acquisition rate. In a vacuum, perhaps it would, but there are plenty of fish in the advertising sea, so eBay could just focus it's ad spend on Yahoo, Ask, MSN, AOL, and any other of the myriad search sites out there.

Does eBay lose revenue because of quitting Google? Well, as I said above, Google probably doesn't deliver too many active bidders, but even if it did, it just means that eBay auctions would have slightly less bidding activity, and would end at slightly lower winning bids. eBay would collect slightly lower commissions. But, like a Real Estate agent, eBay doesn't care too much about the actual sales price - they mostly care about volume of items sold. And the loss of Google AdWord traffic probably won't decrease the amount of items sold on eBay.

The real threat to eBay is Google launching a competitive auction site. Google no doubt has the technology, the clout, the popularity, and the resources to do so. Yet auctioning is a "network economy" where the value of a marketplace is related to the square of the number of active participants. That reality makes it very hard for anyone to compete with the incumbent leader. That is why many other firms have failed through the years as eBay continued to grow. But what about a very popular, credible alternative (Google) vs. an auction site with which many merchants, sellers, and buyers have become frustrated?

Conclusion: Google has already relented on their planned protest in front of the eBay conference, so that's a start in mending fences. Also, eBay is probably just trying an experiment to see how their business is impacted by the Google-free test. By so doing, there marketing department can better model their best spending practices. There is speculation that eBay has already made their quarterly estimates, and therefore have some wiggle room to experiment, and that they will cease the test on July 1 when a new quarter starts. As long as the two companies remain involved in their current activities, there is limited overlap and competition between them (skype v Googletalk comes to mind, as well as PayPal and Google pay). They will work out their differences, and eBay might adjust their spending amounts based on the current experiments results.

As for "replacing revenue", that's simple. Both companies will lose revenue in auction processes, therefore, a second-highest bidder likely exists for many iterations. The lost revenue will be replaced by the second-highest bidder and only small net losses will result.

• Google drives traffic to eBay through its search engine and Froogle and eBay is in turn one of the largest advertisers on Google’s AdWords program.
• Google is the exclusive provider of advertisements on all non-US eBay properties.
• Google and eBay have agreed to implement progressive features such as click-to-call - a feature that could potentially drive more revenues to both companies.

• Google’s recently rolled out Checkout as a direct competition to PayPal and which is also responsible for the recent friction between the two companies. PayPal currently contributes about 25% to eBay’s top line and is projected to grow into a business larger than eBay itself. This is perhaps why eBay sees Google as a major threat.
• Google Base is a direct competition to eBay’s investments in Craigslist and Kijiji.
• Google offers GTalk in direct competition with eBay’s Skype.

I honestly do not think it will hurt each other's bottom line.

eBay is not in a dire position to need traffic driven to it. It has a huge global user base and there's not really anyone out there using Google that does not know of eBay. Also if I am thinking of purchasing a new product and I am considering using eBay I will go to their site and search and not worry about the product showing up in an ad via an organic search on Google. And last if I am on a content-based site (ie blog, news, etc) where an eBay contextual ad appears I am not likely searching for a product. And if I am reading a review the reviewer is likely to link to where to buy it anyway. Basically if consumers want something or consider buying something from eBay they will go there directly.

Google is also not going to lose much percentage of revenue from the loss of one major client in their advertising network. Granted they want the business but it's not a client that is going to sway the bottom line between black/red.

Regardless its a childish squabble that is unlikely to last since both companies provide value added services to one another. On paper it's a great relationship. If they didn't involve corporate politics in their talks none of this would happen.

eBay should realize Google Checkout is a natural progression to Google's platform and they should realize it's not likely to replace PayPal anytime soon. And, no one really uses Google Base so eBay should not worry about that platform.

Both can easily replace the lost revenue but I think it would be mutually beneficial to put the argument to rest.  

Although eBay is/was Google's biggest single AdWords account, the 'long tail' nature of Google's operation is such that the single loss is merely a drop in the ocean for Google.

eBay are closing their account because they don't like Google's entrance into the payment business with CheckOut, which competes with the highly profitable PayPal product operated by eBay.  However the interesting point is in the detail: Google Checkout is not only cheaper to use than PayPal, but the 'discount' occurs based on AdWords spend.  This is probably the real reason why eBay have decided to remove their own AdWord spend. (you get a discount on your CheckOut use when you buy AdWords credit)

Why put money into the very product which, when used by others, makes your own payment gateway uncompetitive?

In terms of relationships, I don't think eBay or Google will repair or restore it - for the first time they are now competitors and it no longer makes business sense to support a product that is part of the value chain that directly competes with your own product.

The interesting point here is that it makes a rumored eBay/Yahoo! merger more interesting as suddenly the two have more in common.  eBay will now be looking for a significant player to provide alternative inventory - which Yahoo! can provide with Panama.  Further more, Yahoo! has no competing payment gateway to Google's CheckOut and as such Yahoo! PayPal would fit nicely within their portfolio not only as a stand-alone business but also as they move to 'micro-subscription' models for properties like Flickr ($25/year) and Yahoo! Small Business.

During the cold war era you couldn't go a day without someone uttering the words "Mutually Assured Destruction," which of course referred to the fact that neither the U.S. or The Soviet Union would be foolish enough to initiate a tactical nuclear strike because it would end up in the complete eradication of both countries and their surrounding areas.

Some of the coverage in the broader media would have us believe that eBay and Google are inextricably linked much in the same way. The story goes that Google is too reliant on eBay as a large customer AND because of the cache of having them on board to allow a separation to persist. On the flip side, it's been argued that eBay can ill afford to lose the world's most efficient online ad platform in an ever-increasingly competitive global market (where eBay's growth must come from as the domestic market matures).

Yet, even a cursory look at the real numbers suggests their fates are far less intertwined than one might think.

According to several recent reports from sell-side investment banks, eBay represents approximately 2% of Google's GROSS revenue and an equivalent amount of its profits. For a hyper growth company with a big-time stock multiple, losing 2% of one's revenues will hurt in the near term, but it's hardly insurmountable. Google arguably has much bigger sites set on the opportunity for Google Checkout, for example, and one could make the leap that Google would trade it's ad revenue from eBay for a chance to dominate the online payment processing market.

And what does eBay get for that 2% contribution to Google's bottom line? According to those same reports, about 5% of eBay's inbound traffic is driven by Google. Not insignificant, but hardly at the levels one might have expected given Google's dominant position in search and ad placement globally.

Ultimately, because eBay and Google executives are adults and profit-driven, logical people; this recent tiff is much ado about nothing. However, since this question asked a "what if" scenario...we can let the mind race a bit about what a tried and true divorce would mean.

Let me put my futurist hat on and give you some food for thought...

*** Yahoo! and eBay announced a key partnership last year for U.S. based ad placement. Yahoo is undergoing a major reshuffle and eBay's Meg Whitman is considered one of the best executives in the industry. It's not out of the question that these companies consider a more formal partnership (whether that's a strategic tie up or a merger remains to be seen). A contentious eBay/Google relationship could exacerbate what's already a possibility.

*** Microsoft. Microsoft's acquisition of aQuantive for $6 billion showed not only a willingness to make large acquisitions [which is hasn't done in recent memory] but also a desperation to accelerate its presence in the online advertising market by any means necessary. If we're to believe recent reports that it was looking to acquire Dow Jones, it's hardly a stretch to think Microsoft would consider an eBay tie up. The question is, would eBay be willing to sell? I'm guessing not. Ultimately, I don't think Microsoft's MSN is positioned to make up for Google's lost 5% by itself, but it would at least benefit on the margin.

*** Google has quietly been building its presence for Google Checkout. And while they've taken the kid gloves off lately and become more public with it, it stands to reason they are still holding back a tad in the public eye in deference to eBay. A formal divorce would likely bring with it a major step up in Checkout marketing and P.R.

*** Secondary and tertiary ad plays would benefit. eBay wouldn't and couldn't make up for Google's lost traffic through one additional partner. The more likely situation (absent a Yahoo! tie up) would involve allocating that spend across the spectrum of other ad plays; at least for 6- to 12-months wherein eBay would be in a period of evaluation. Whichever vendors have the most efficient results would probably start to get an ever-increasing piece of eBay's spend. In addition to MSN and Yahoo!, other potential beneficiaries would include: Ask.com (Interactive Corp), AOL, Marchex and innumerable other niche players.

*** International players will increase in importance. A public divorce between eBay and Google could/would lead to more public tie ups with foreign properties. Remember that both auction/commerce portals AND ad-serving/placement/search engines have been more regionally tied than the megastars would hope. You could expect eBay to more aggressively endorse search players in the APAC region while Google would probably put more direct investment in a number of eBay competitors internationally.

If I were handicapping this, I don't see a formal end to this relationship because presumably it's too profitable for both sides to walk away from. Logically, eBay can't get as efficient traffic from other sources and, by the same token, Google isn't going to magically find that lost 2% revenue, at least not at the same margin. Yet, were it to happen, aside from creating a lot of buzz and keeping bloggers, writers and television media outlets happy for a few days, it would likely add another bit of momentum behind the forces already at work to align Internet ventures more closely with one another.

Ebay spends approximately 25 million per year on Google advertising. Although this makes EBAY one of Google's largest advertising clients the 25 million only represents about 1/480th, or about 0.2%, of Google's 12 billion annual revenues, almost all of which come from advertising via adwords and advertising on other sites via Adsense.   Assuming some Small percentages of large numbers are significant amounts of money but in this case it seems unlikely that even a complete boycott of Google by EBAY would significantly undermine Google's future revenue prospects. Also, it is extremely unlikely that EBAY would choose this path because they'd be forsaking valuable search traffic and the prominence the EBAY listings get by appearing after Google search queries. EBAY benefits from the ads even when they *do not pay for the click* because they still get some "branding" value from the impressions. 

How much traffic is EBAY getting from Google compared to the total traffic for EBAY? Hitwise has noted from the recent EBAY experiments with traffic that while Google to EBAY traffic dropped about 7% during the ad boycott it had a trivial impact on EBAY's total traffic. I'm not sure but the Hitwise numbers seem to suggethat about 93% of the Google to EBAY traffic is from Google organic listings, and thus not affected by advertising campaigns (contrary to some claims to the contrary Google is almost certainly faithful to the promise not to give organic advantages to advertising clients).

Here is my estimate of EBAY's traffic from Google *advertising* (not including the far greater number of organic search Google visits).

25 million spend:
Average cost per click estimate for EBAY: .25
Annual extra EBAY traffic from Google PPC: 100 million visits.

(Google's revenue per query was estimated in late 2004 to be .09 with revenue per click at .54. However, EBAY is bidding broadly on a huge number of terms and it seems reasonable to assume that their average CPC would be far less than the average across the network)

Although 100 million visits is a substantial number it is a very small fraction of EBAY's total visitation.    Also, EBAY could easily replace this traffic with advertising buys through other advertising networks such as Yahoo, MSN, Adbrite, etc.   That said, Google historically has a superior return on investment and superior ad management capabilities so adwords remains the preferred advertising vehicle, especially for big players.

Summary points:

Neither company is even remotely "dependent" on the other for traffic or revenue.   EBAY revenue represents only about 0.2% of Google revenues.

It appears likely that the current arrangement is a "win win" for both companies as it ads to Google's bottom line while providing EBAY with visis and branding value.

It appears unlikely the companies would "divorce" their modest mutually beneficial arrangements but even if they did it would not harm either of the company's prospects significantly.

Sources:
http://finance.yahoo.com/q/ks?s=GOOG
http://battellemedia.com/archives/001102.php
http://weblogs.hitwise.com/bill-tanc er/2007/06/ebays_experiment_an_update.html
http://www.reuters.com/article/consume rproducts-SP/idUSN2216055620070622
http://weblogs.hitwise.com/bill-tancer/2007/06 /google_ebay_data_on_the_tiff.html

Both companies are established brand names. eBay is the site when it comes to bidding on items and Google is the site when it comes to search and advertisement (AdWords).

There are times when I am searching for something on the net and land on a page where I see an eBay advertisement for the same and I realize what a fool I was, I should have looked it up on eBay. I click that link and buy that item from eBay. If eBay withdraws its ads, it will lose this kind of traffic which I believe is a huge number.

Let us look at Google now in the same situation. I am looking for some info and I land up on a page and I see some advertisement for some relatively unknown company, I do not click it and continue on my search. Had it been eBay, I might have clicked it. Thus Google failed to provide me good context sensitive advertisements, in turn causing lower click through rate. This will provide companies with similar products to jump in and cut through both Google's and eBay's profits as well.

In a situation like the one mentioned in this issue, both companies lose and worse end users lose. It is absolutely important for both of them to sit together and work it out. Arguments are okay but if affects revenue and creates a bad user experience, it is in the long run going to affect the brand image so they need to work it out and be more professional.

The Google / Ebay relationship is perhaps more important for Ebay than it is for Google.

According to Reports, Ebay spends a little over $26MM monthly on Google Advertising, or $312MM annually. In return, Ebay gets about 33 million visits per month from Google, which is more than Yahoo and Microsoft.

How a divorce would affect Google

Losing $312MM from the bottom-line is not a small matter, but in the context of the growth of Google's business, it will not affect the bottom line more than perhaps slowing growth.

Google's recent business moves have been pragmatic (as opposed to the per-chance product-oriented strategies of a few years ago) and as a result they have built a deep and timely relationship with Apple for the iPhone. This, alone, can be enough to allow Google to recover from a detachment from Ebay.

Google can use the iPhone to intergrate and promote its Checkout product, which would seal out Ebay from mobile commerce and exchange; can make headways with its GoogleTalk Product, and even have a chance at an auction site with the iPhone.

The reason for these bold claims is that the iPhone is set to become - over the next few years - the first interface people use to logon to their lives, with the advantage that these people can be anywhere. It is a different ballgame from a PC and thus a product that pre-empts itself by being resident / visible first to the users will have the chance to be more successful than one which requires additional steps (e.g. to browse to an area).

However, it will be even better for the bottom line if Google can maintain its advertising relationship. For this, Google should focus on reprioritizing its Checkout product and find ways of setting up strategic partnerships for advertising as Yahoo has done.

How a Divorce would affect Ebay

Ebay, on the other hand, may be hit harder.

Adwords allows Ebay to not only advertise its own engine, but also advertise on behalf of the many "Ebay Businesses" that run from within the site. Supporting Ebay Businesss is a clear objective already stated in the communications form both Ebay and Google. 

Supporting the business is not just a matter of pulling traffic, but of  (1) segmenting your ad spending proportionately to ebay businesses (i.e. you can do micro-spending for micro-retailers on ebay) and (2) pulling the right type of traffic.

Losing 33M users would be a big hit to Ebay, but it still has some options to recover its bottom-line impact

 1-  Use leverage to negotiate better deals with Microsoft and  Yahoo. Showing them the interest that Ebay has recently, Microsoft and Yahoo would go out of the way to take a piece of the $26MM spent monthly on Google, which could include discounting or a mixture of promotional deals that makes Ebay's ad-spending more cost-efficient, and hence more profitable.

Ebay is likely to use this strategy for traffic that is not unique from Google in terms of demographics / reach.

2- Increase Reach from other channels. Ebay could consider changing its traffic generating model. Widgets that let you browse against a specific tag within Ebay might be useful for niche blogs and websites -- suppose I have an iPhone blog. It would be good to be able to see the last 10 auctions for the iPhone, or otherwise even add my own listing through the widget. 

With a combination of more profitable advertising and diversifying the channels it is using for finding traffic, Ebay may be able to recover its 33M visitors / month in the mid-term.