Can the Killer Local App Be Far Behind AdContext?

Online auctioneer eBay is moving aggressively to shore up its leading market position by reducing the risk of becoming too reliant on Google's dominant search share. Recently, eBay has negotiated large deals such as the integration of its PayPal unit's service into Yahoo!. Also, eBay announced its intention to distribute auction listings to third-party Web sites through a new program called AdContext.

There has even been speculation that eBay may allow businesses to use its consumer ratings, considered by many to be the gold standard of Internet rating systems, on other Web sites. Although a decision by eBay to share and distribute its ratings may not be in the immediate future, such a move has the potential to alter the landscape of local advertising more than any other program, partnership or acquisition.

According to Meg Whitman, eBay's president and chief executive officer, the company is undergoing a transformation from an auction site to an e-commerce site. New product programs and acquisitions like that of Skype are the results of a move in that direction.

Recently, speculation arose about eBay's growing concern for Google. In a June 19 Newsweek article, Whitman describes Google as "both a competitor and one of our best relationships and notes that she speaks to CEO Eric Schmidt (a Princeton classmate) several times a month."

On the revenue side, the perceived threat stems in part from the fact that fully a third of eBay's revenues come from its "Buy It Now" buttons. This functionality allows consumers to pay a fixed price for merchandise rather than using the site's traditional auction process. As a larger portion of revenues is derived from fixed-price items and more shopping alternatives surface, eBay will seek more integrated solutions with partners. The Yahoo! deal and AdContext are examples of this strategy to integrate functionality and listings across the distribution landscape.

By announcing the AdContext program, eBay is borrowing from the successful strategies of Overture and Google. Michael van Swaaij, eBay's chief strategy officer, made the announcement to a developer conference in Las Vegas last week. The program seeks to mimic the success that ad networks have achieved by creating distribution deals with third-party Web sites.

Google's AdSense program, for example, automatically places contextually relevant ads on publishers' Web sites. Revenues are shared when a user clicks on one of the links provided by Google. The revenue share to the publisher is generally about 70 percent after a 10 percent to 15 percent serving deduction. These pages also contain links that allow advertisers to sign up for AdSense. In the case of Overture, which is now Yahoo! Search Marketing, the vast majority of its advertisers come from these third-party links.

For eBay, the new program allows a Web site operator to embed code on its site, which pulls eBay auction listings into its hosting environment. The appropriate listings from eBay are derived by "spidering" the Web pages' content.

Thus a sports memorabilia Web site theoretically would show appropriate eBay auctions for baseball cards and other collector items. Auction changes are reflected in the feed as they occur on eBay.

This is not a foolproof solution. After Google launched its program, issues surfaced regarding inappropriate contextual links showing up on sites. This is an issue that eBay will likely encounter. It requires clickthrough and query volume to be resolved, since more traffic results in the ability to improve targeting.

On the revenue side, there have been a few reports that Web site affiliates receive a cut of 40 percent to 70 percent of sales. To clarify, the revenue share is similar to that of eBay and is not based on the full sales price. The programs currently in effect allow shares of up to 70 percent commission on eBay revenues and up to US$20 commission for each new active user referral.

The concept of creating a J.D. Power-type rating system for all local businesses is not new. Since the beginning of consumer Internet time, way back in the mid ’90s when 16 million brave people crowded slow dial-up lines that were tethered to the Internet with 25-foot phone-line extensions, start-up companies have been smitten with the idea.

Nearly all these companies failed in their efforts, however, causing them to scale back or reposition themselves into rating systems that covered national chains (with local stores). The idea lives on in myriad Internet products. Sooner or later, the thinking goes, someone will figure this out and control immense amounts of important consumer purchasing decision-based content. Then the local ad money will roll in.

Recently, however, as eBay looks at the threat and opportunity landscape, there have been discussions about sharing its ratings in various forms. This would be an enormous change with far-reaching implications for all local businesses. We expect it would set off a chain of events that would affect even those businesses that do not yet have ratings. Historically, eBay has opposed this idea and has even threatened violators with lawsuits. Given the current competitive landscape, The Kelsey Group believes eBay will create a program to share its ratings. It's simply too valuable an option not to pursue.

We also believe it's likely the ratings will be promoted both online through third-party Web sites and (in the long run) offline through signs on local businesses, marketing collateral, etc. For example, imagine the many local "best of" promotions that hang in store windows replaced by the eBay rating. Given two storefronts, one with a high eBay rating and one without, which would consumers choose? The same goes for the much more lucrative services market.

We expect businesses will likely pay a subscription fee to eBay to license the review, plus a per-lead or per-transaction fee. To create the latter programs, we anticipate eBay will rely on integration with Skype to provide booking and scheduling to the "best" merchants as well as PayPal integration to pay for the "best" services (e.g., contractors and mechanics) and other high-dollar lead categories. These types of integrations plus the ratings display will open up eBay to the much larger local opportunity that includes ratings and transactions both online and offline. Obviously, a program like this would start with their core categories and move into more nontraditional ones. Then eBay will truly be, as Whitman hopes, an e-commerce site.

We see these changes in the long run as inevitable. First, eBay's growth is slowing, so it needs to expand into new markets. Second, Hitwise recently released figures that showed Google's commanding share of the search market has reach nearly 60 percent. This has left eBay feeling a little uneasy about its reliance on Google. Given these two macro conditions, eBay will search for alternatives to mitigate its online risk and grow into new markets. A local product program that incorporates the Internet's premier rating standard plus Skype and PayPal seems inevitable to us.