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A Good Old Boston Brawl Featuring Google and eBay

There may be a few party-planners at Google looking for work this morning. By now, you've heard the story, I'm sure, but for scene-setting purposes, here's the rub: eBay prepares to host its massive "eBay Live!" event in Boston this week, with 10,000 of the company's most rabid users getting together to celebrate their online lives and businesses. It's no secret that some eBayers continue to be upset about fees their paying the company and eBay's regular fee hikes.

It's also no secret that Google, a key eBay partner, is now also a key eBay competitor,

Ebay
AP
Ebay

offering its Checkout payment service as an alternative to eBay's PayPal. Google wants more customers for Checkout and what better place to go after some than an event hosted by eBay. So Google's marketing wizards (nameless so far) plan a party at Boston's Old South Meeting House. You know the place: it's where colonists launched the Boston Tea Party back in 1773. Catch the symbolism there? Google called its event "Checkout Freedom Party."

Ebay was so angry by Google's shameless spotlight-grab that it pulled its U.S. participation in Google's AdWords program. Keep in mind that eBay is one of Google's single biggest advertisers.

At first, eBay refused to draw a connection between its AdWords decision and Google's party, calling the move an "ongoing experiment to look at how we market across all media channels," according to eBay's spokesman Hani Durzy. Later, Durzy changed his tune: "When we heard of their plans to have their party and the way they were marketing it, we were disappointed. We felt that it wasn't an appropriate way for one partner to act toward another."

Just a few hours later, Google came to its senses and scrubbed its party plans, issuing a statement on the Google Checkout blog: "eBay Live! attendees have plenty of activities to keep them busy this week in Boston, and we did not want to detract from that activity."

But the damage may be done with several analysts on the Street characterizing all this as a "soap opera," a "cat-fight," "web warfare." No matter how you look at it though, you can't discount the financial ramifications of a spat like this one. Nor can you discount the power and influence of eBay. The fact is, Google makes the cash; but eBay still wields enough influence to force Google to back down from a silly stunt, and suffer the PR body blows in the process.

"The recent debate between Google and eBay is absolutely comical," says Piper Jaffray's Gene Munster. "At the end of the day, eBay had a huge over-reaction to Google Checkout. This is a classic example of eBay feeling that Google gets all the love, and they're trying to flex their muscle to get Google to do what they want. This is childish."

The other key fact is that these two companies, which apparently have a strained, murky relationship brewing beneath their colorful rainbow logos, need each other. Some analysts say eBay gets up to 20% of its web traffic from Google, with Nielsen/NetRatings saying Google users viewed more ads from eBay than from any other company during this year's first quarter.

At the same time, eBay generates millions in advertising revenue for Google. Each can exist without each other, but the Street wouldn't recommend it.

"Last night, we talked to several 'Power Users' at the eBay event and they said their interest and their traffic dropped dramatically after their keywords were pulled from Google, so clearly there is a greater risk to eBay," says Munster.

Mark Mahaney at Citigroup (the one who called this a "Catfight") says in a note to clients: "eBay has consistently been one of Google’s largest customers, accounting for perhaps 2% of Google’s gross revenue and profits in 2006. And Google has been one of eBay’s largest provider of leads, currently accounting for 5% of its traffic, but a smaller percentage of its revenue and profits."

But he also writes: "We view partnership tensions as a negative for both companies. Each has other options: Other companies will bid for Google’s keywords, although effective pricing will decline, and eBay can shift to Yahoo! or MSN, although the quantity and quality of leads may not match. We anticipate current tensions subsiding, but acknowledge long-term competitive/cooperative dynamics."

Ahh, that last part is very telling: long-term competitive/cooperative dynamics is another way of saying "deteriorating relationship." And that's something investors ought to keep in the back of their minds. Analysts, by and large, believe eBay needs Google more than the other way around. But I'm not so sure. Seems these two are the definition of "symbiosis."

Also telling: we have a producer wandering through the eBay Live event and a completely non-scientific poll of eBay users he's talking to either don't know what Google's Checkout is, don't use it, or don't understand what all the hub-bub is about. So all that guff about angry eBayers ready to jump ship may be a little overblown, at least as far as unscientific surveys go. Yet it seems everyone we talked to recognizes the importance of the symbiotic relationship.

"eBay went right for the jugular," says one Power Seller. "I don't think eBay can stay out of Google. The community would have an uproar."

But another Power Seller criticized Google and praised eBay's retaliation: "I think it was right on. If they are going to come to Boston to protest, it's a pretty cheap shot. One cheap shot deserves a reaction. I think they hit them where it counts."

Says another: "I'm pleased. (Google) is a tremendous resource. In the past few years, it has been very international and has helped to expand eBay and open up the market." And another on Checkoutvs. PayPal: "PayPal works well but competition is always a good thing. To have other options that aren't controlled by eBay would be good."

The real question now is whether all of this back-and-forth will lead to some kind of arrangement down the road where eBay starts to offer both PayPal and Checkout. Seems some in the eBay community would like that. eBay doesn't, with PayPal handling about 80% of its transactions, accounting for about $1.4 billion, or 23% of eBay revenue last year. And this scrap likely won't help the negotiations.

These two need each other. They need to work this out. Meantime, millions of eBayers are caught in the middle. And investors are banking on the two being mature enough to come up with a solution. But after this week, they may want to question that.

Questions? Comments? TechCheck@cnbc.com