Friday, June 10, 2005

WSJ on eBay--clueless - EBay Agrees to Acquire "The following excerpt was from the WSJ on the eBay acquisition 'The acquisition is eBay's latest effort to reignite its growth, particularly in mature markets such as the U.S. and Germany.'

The authors had the data needed to understand the real reason for the acquitition when they said, ', for example, relies on Google to place advertisements on its site. Those ads accounted for 44% of the Brisbane, Calif., company's revenue of $28.9 million in the first quarter, according to the company's quarterly filing with the Securities and Exchange Commission. EBay officials declined to address the future of the relationship between and Google, which also declined to comment.' BUT THEY MISSED THE POINT. eBay is Google's largest customer, as they buy ads on Google to redirect traffic to their own auctions. competes with eBay for SUPPLY of words on Google. This competition drives up the price of words on Google, reducing the ROI on marketing spend for both companies. By acquiring, eBay will be able to reduce their marketing spend ($$ to Google) by paying less for ad words because they can integrate's demand rather than compete with it in an acution. eBay bought to reduce their cost and improve margins--the rationale for the acquisition was not motivated by growth.

The Wall Street analysts missed the point too, as the subsequent quotes in the article point out 'There appears to be a substantial amount of interest from buyers and sellers away from eBay,' said Derek Brown, an analyst at Pacific Growth Equities. 'It seems to be a way for eBay to reach a new pool of potential buyers and sellers.'

If the price of Google ad words goes down, Google's revenue growth rate will slow. Given the time it will take eBay to integrate the acquisition, look for this to happen around the time eBay's margins begin to expand late this year."

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