EBay and Yahoo dropped an announcement bomb early this morning saying that the two Internet giants have agreed to combine their efforts on a number of projects. By 2007, expect an increase in eBay search results on Yahoo!, an increase of contextual text and graphical ads on eBay, PayPal to power Yahoo! Wallet, a co-branded eBay Toolbar, and click-to-call advertising using Yahoo! Messenger with Voice and Skype.

The partnership, which only affects U.S. clients, is thought to be an affront toward Yahoo!'s chief rival in Google, who until recently wasn't considered a threat to eBay. With the arrival of Google Base and a rumored online payment system in the works, eBay has now responded with precision force through its Yahoo! alliance.

The deal will also have a large impact on Yahoo!'s bottom line as the exclusive implementation of PayPal as its third-party payment provider will likely lower the search company's costs in payment processing.

More important to the advertiser and online sellers is the robust mesh of options now available to them through pay-per-call, the increased seller presence though auction listings in organic Yahoo! search results, and delivery of contextual ads on eBay listings.

" This will include testing some sponsored search ads for complementary products and services," said Bill Cobb, president of eBay North America. "For example, a buyer searching for a hair dryer might be presented with sponsored search ads for related items like shampoo or hair brushes. To be clear, we will not place ads on view item pages."

Admitting that eBay's advertising infrastructure "is not as robust as it could be," Cobb said the online auctioneer would be working with Yahoo! to improve its keyword ad program. Part of this involves Yahoo! accepting more keyword purchases from eBay.com to boost eBay's inclusion in sponsored search results.

"These efforts will mean that Yahoo!'s millions of users will have more access to eBay listings, and eBay.com sellers should benefit from increased traffic to the site," said Cobb.

This summer the duo will be testing ad placements at the bottom of empty search results pages that return no matches for queried items. If, for example, a buyer is looking for a particular vintage G.I. Joe action figure, but no listings for the doll are found, ads will appear related to the query instead.

The inclusion of Skype with Yahoo! Messenger creates another targeted opportunity for advertisers as the combination will be a catalyst for pay-per-call advertising where links included in ads allow the searcher to call a merchant directly. All changes will be gradually implemented for the rest of 2006, to be fully realized in 2007.

"Our consumers will benefit from the combination of Yahoo! and eBay's leading technology and services, providing them with one of the best online experiences," said Yahoo! Chief Executive Officer Terry Semel.

News of the massive collaboration effort sent early morning trading into an upswing for the two companies. At 10:30 this morning, Yahoo! shares were up nearly three percent while eBay jumped seven percent. At the same time, Google dropped by 1.27 percent.

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