Bronte Media

In my quest to analyze all public companies who have significant online advertising revenues, I thought I would throw in a bonus – the venerable eBay.

eBay had a disappointing quarter (although I am sure we will redefine the meaning of disappointing in the next few months) with revenue in its marketplaces business down 16% year on year, driven by a meltdown in car sales. But what does all this mean for online advertising?

Well eBay is important for two reasons:

1) It is the largest buyer of online advertising and in particular search advertising on Google. The company buys both directly but also indirectly through its humongous affiliate program where thousands of laser sharp independent micro-businesses efficiently purchase and price keywords.

And the news is even worse on this front for Google and others. Sales and marketing revenue for the quarter, of which a large portion is online ad buying related, plummeted 17.5% from $507m in Q407 to $418m last quarter.

This suggests that the company (and its affiliate network) pulled back on spending driven by lower ROI because consumers are spending less (i.e. conversion rate went down). This shift suggests the ultimate in media buying efficiency and if I were an eBay investor I would be happy that they can control and react so quickly to the environment.

But that doesn’t help Google. I always hear the nails on the chalkboard when people say that search offers a great ROI because it’s measurable. This is a complete fallacy. In fact because it is measurable then the industry will always offer a very low ROI: over time marketers will bid up the value of keywords to their natural break even value. That’s great for Google’s bottom line but not for a marketer’s ROI (the two forces are absolutely and completely mutually exclusive).

2) eBay has a growing online ad business of its own, mainly consisting of classifieds business and shopping.com with various ad sundry in Skype and other businesses.

How did these do? Marketing services revenues were essentially flat year over year for their main market place (classifieds+shopping.com) going from $222m to $221m.

Flat revenue in this climate is likely to be a decent bellwether for what is to come. I expect the fourth quarter to be worse than the first simply because people freeze in the face of such a crippling event of what went on in October and there is some demand that is shifted to the coming quarters.

Conclusion: It’s not pretty but eBay managed to lower their online ad spend in line with the detoriation. That’s bad news for Google, whose biggest customer essentially shifted their spend down 17.5% year on year. eBay’s ad businesses had a ho-hum vanilla quarter, essentially flat year on year.