Internet Giants Meeting Middle Age Together

There's a reason the eBay/Yahoo! partnership happened now and not six years ago.
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The news hit at a time when eBay (EBAY) - Get Report, though a respected Internet name, had muddled through a year when its stock barely budged, even as other Web stocks surged higher.

Reports trickled out that the online auctioneer would begin a major partnership with mega-site

Yahoo!

(YHOO)

-- maybe even a merger. It was just the boost the stock needed. eBay popped 15% overnight, reaching its highest level in months.

Yes, it all happened, but not, as you might guess,

last week. This eBay/Yahoo! rumor appeared on the ides of March -- more than six years ago. By the next day, when the

Financial Times

said that the rumors were bunk, eBay investors grew crestfallen. The stock not only gave up the 15% gain, it fell a further 11% that day.

In the end, it was Yahoo! that got the shorter end of the history stick. eBay's stock is up 44% from where it was on March 15, 2000, while Yahoo's is down 58%.

So, why bring up ancient history, a six-year-old speculative rumor of a Yahoo!/eBay tie-up?

Because now that executives at both companies have finally shaken hands and sealed a deal that could just as easily have happened long ago, it offers an interesting now-and-then perspective on both companies. And because it underscores the most interesting -- and most overlooked -- angle of this partnership.

But it's not that Yahoo!'s ads will be spread across eBay's site, the fifth most popular online destination last April with 76 million unique users.

And it's not that the partnership will beef up eBay's advertising revenue, currently less than $100 million a year, or 2% of total revenue. (Susquehanna Financial estimates the new ad money could mean as much as 25 cents a year in earnings per share.)

And it's not that the deal has the potential to make PayPal a common method of payment on Yahoo!'s popular premium services, maybe even doubling the number of PayPal accounts from the current 73 million, in addition to increased activity among its current accounts.

No, the at-long-last coupling of Yahoo! and eBay is remarkable precisely because it didn't happen in 2000, but did happen in 2006. Therein lies a tale of two eBays and two Yahoo!s.

Let me explain through that overused analogy of corporate partnerships and marriages. People get married for two basic reasons: because they want to or because they have to. If two people fall in love, they may want to get married. If people approach middle age and discover that they will either settle down or grow old alone, they may also get married, but only because they have to.

Six years ago, eBay and Yahoo! talked about a partnership and decided they didn't want to. In 2006, they talked again and decided they had to.

Forget the story that the 2000 deal fell apart because of eBay's previous alliance with

Time Warner's

(TWX)

America Online. And forget the argument that the deal now happened only because both companies were threatened by

Google

(GOOG) - Get Report

and needed each other's help to compete.

If that were true, why would Google sign an

equally desperate deal the very same week with

Dell

(DELL) - Get Report

-- a tech giant seeing its star falling, not rising? And why would Google pay between $7 and $8 for every PC shipped with the Google Toolbar installed? That's nearly double the $4 it paid AOL for new users in their deal just last year.

And all this at a moment when Google's latest innovations

have been sputtering in comparison with its core search business.

No, the real explanation is that all of these big Internet companies are realizing that they now face middle age and all its attendant sore joints, hardening arteries and beer bellies. Until now, these companies won their edge through innovation -- by creating a product, a service or a Web site that was simply better than what any other company could achieve.

They now rely on partnering with each other as much as they do on innovation. This would never have happened in 2000. They were all too young, reckless and cocky to settle down.

This isn't necessarily bad; it's just inevitable. Think of how you felt when you learned that Mariano Rivera's fastball was starting to slow down. Or when Madonna, going through her latest contortionist act at the Grammys, suffered a hernia. You cringed (OK, maybe you laughed, depending on how you feel about Rivera and Madonna) and chalked it up to the inevitable.

So it is with eBay, Yahoo! and even Google. They will remain leaders of the Internet sector for some time, but these recent moves are putting investors on notice that their future innovations are likely to come from hungry start-ups they will each buy out -- as Big Pharma buys innovation from young biotech firms -- rather than from their own complacent rank-and-file.

In other words, they're getting ready to pass the baton of innovation to smaller, nimbler companies -- start-ups that can perform extreme moves without risking a hernia.