Hostilities begin

The uneasy peace between the two internet giants is finally, undeniably, over. Google's stock is down 1% this morning after a report that Ebay's stopped purchasing text ads on the search engine. The offense? Google, which is trying to lure away stores from the online auction site, is throwing a party tomorrow night on the fringes of Ebay's Live event in Boston for its sellers. The shindig — announced with an invitation to "let freedom ring" — is designed to persuade stores to take credit cards through the Google Checkout service instead. You don't think Ebay would be so petty as to cut its ad spending? Think again. A Deutsche Bank analyst describes Ebay's ad boycott as a "truly retaliatory" move by the online auction behemoth. So, why have the Silicon Valley allies fallen out so badly?

Well, largely because they were never allies. Meg Whitman's online auction monopoly identified Google as its most dangerous future challenger early on. The two companies' deal in 2003 had a hidden agenda: Ebay promised to buy text ads on Google, in amounts up to $100m a year, I heard, if Google would stay clear of online retail. The ad buy was a bribe. It helps explain why Froogle, Mountain View's stillborn shopping search engine, was so starved of investment.

It was the internet equivalent of the Molotov-Ribbentrop pact between Soviet Russia and Nazi Germany, a cynical and temporary alliance between two natural enemies. Which never holds.

The profits from the online retail marketplace — employees used to joke that Ebay was such an intrinsically profitable business that monkeys could run it — were bound to draw in Google sooner or later. Google charges advertisers by the click; it's a pretty small step to charge only when a transaction is completed, which is Ebay's model.

Google Checkout, a credit-card payment service for stores which advertise on Google, is that step. The launch was bad enough. So it's no wonder that an aggressively promoted party for the service, challenging Ebay's monopoly tax on all transactions, would provoke such a strong reaction.

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