The eBay-Yahoo! Deal: More to Come?

Yesterday, eBay [EBAY] and Yahoo! [YHOO] announced a long-term alliance in four areas: (1) search and advertising, (2) integrated online payments using eBay’s PayPal, (3) a co-branded toolbar for browsers, and, (4) developing “click-to-call” advertising functionalities. This move was inline with speculations made by a much-cited JPMorgan research report released earlier this week.

Clearly, this tie-up has a win-win potential for both eBay and Yahoo!. However, I wonder if this is a half-baked deal.

• eBay’s primary business stream is auctions. Here, I see plenty of opportunities to consolidate and leverage each other’s strengths: in Japan, where eBay is absent, and in Europe, where Yahoo! is weaker. eBay (through EachNet) and Yahoo! (through Alibaba-Taobao) fiercely compete in the China auctions market. A consolidation will clearly lead to a market leadership in China.
• The payments deal expands the reach of the PayPal payment service and prepares eBay for a competition with Google Payments. However, this payment service can to be expanded beyond the United States. Again, PayPal competes with Yahoo! and Alibaba’s AliPay payment system in China.
• The third eBay business stream is the Skype communication suite. Consolidation of Skype with Yahoo! Messenger can create opportunities for a broader customer base, efficiencies and consolidation of development efforts.
• The search and advertising deal can be expanded to other markets outside of the United States.

Yahoo! and eBay offer largely complementary services in most markets. I speculate that Yahoo! and eBay will eventually merge by taking the above initiatives and create a stronger global e-commerce leader.