Yahoo, eBay deal ups pressure on Microsoft

SAN FRANCISCO - Microsoft Corp. may need to cut prices or pursue a deal similar to Yahoo Inc.'s and online auctioneer eBay Inc.'s partnership to gain ground in the lucrative internet advertising market, analysts said last week.

On Friday, the online media giant Yahoo and eBay said they agreed to a broad tie-up in the United States to boost their positions amid growing competition with Google Inc. and Microsoft.

The partnership between the two Silicon Valley giants, however, should not immediately hurt Google, whose dominance in Web search makes it impossible for companies like eBay to ignore, analysts added.

"The deal shows they need to be more creative and go after the advertising base more aggressively," said Martin Pykkonen, an analyst at Hoefer & Arnett. "It does put more emphasis on whether you get there through an alliance or on your own."

Under the deal, Yahoo will become the exclusive provider of graphical advertising on eBay, the biggest e-commerce player, and provide some search services within eBay's site to connect buyers to items they seek.

In return, Yahoo will promote PayPal, EBay's popular online payment system, as a way for Yahoo's hundreds of thousands of affiliated websites and small business owners to conduct transactions online.

Yet Bruce Richardson, an analyst at AMR Research, said it would be difficult for Google and particularly Microsoft to win such large partnership deals because their competitors have no desire to make either company stronger.

Google has an estimated 42 per cent share of the internet search market -- the largest share of the Web advertising market -- followed by Yahoo at 28 per cent and Microsoft at 13 per cent. At the same time, Microsoft's dominance on the desktop and its huge cash reserves make it a feared competitor in nearly any business it enters.

That strong position makes rivals wary of agreements with either company out of fear they might one day be gobbled up by a fast-growing Google or a large and powerful Microsoft, Richardson said.

Instead, he sees Microsoft and Google making small acquisitions to gain strength and fill in any technology holes either company might have.

"It is going be hard to get big partnerships in this business because no one wants to speed their own demise," Richardson said. "Nobody wants to make Microsoft stronger."

Microsoft, which has said it has a five-year target to gain a bigger slice of the online advertising market now led by Google and Yahoo, is making a big push into Web services.

At the core of this plan is Windows Live, an advertising-funded, one-stop shop for services from email to instant messaging to blogs that targets the online ad market, which is estimated to grow to US$26 billion in 2009 from a current US$15 billion.

The Yahoo-eBay deal also reflects the growing need for the biggest internet companies to consolidate operations in the face of mounting four-way competition and slowing growth.

"I'm surprised Microsoft didn't fight harder to get this deal," said Marianne Wolk, an analyst at Susquehanna Financial Group. "It clearly raises the bar for Microsoft."

- REUTERS