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eBay is testing Google’s contextual ads on its US site and is considering running them instead of ads it currently carries from Yahoo, Goldman Sachs analyst James Mitchell reports.James says that if eBay (EBAY) does switch to Google (GOOG), it could reduce Yahoo’s gross revenues by 2% and its net revenues and earnings by just under 1%. The impact on Google’s revenues would be immaterial.
The really bad news for Yahoo (YHOO) is that eBay’s switch might just be the first of many to go in a series of defections that could ultimately cost Yahoo $1.5 billion in gross revenues each year.
Goldman: To the extent that other Yahoo! affiliates re-consider their relationships, we expect many to move from Yahoo! to Google. Microsoft has agreed to make Yahoo! whole if a Yahoo! affiliate shifts from Yahoo! to Microsoft once the alliance receives regulatory approval; however, during the transition period, we believe Yahoo! affiliates may switch to Google rather than Microsoft, because Google’s US market share is currently more than 6X that of Microsoft, so Google attracts thus many more advertisers than Microsoft. We estimate that search affiliates (of which the largest is NHN, by our estimates) contribute 20%-25% of Yahoo!’s gross revenue, about 5% of its net revenue, and about 5% of its earnings, and we view this earnings stream as under threat.
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