Is Google Gunning for EBay?

When Google began testing a payment system in February for Google Base, its virtual catalog product, Internet pundits assumed the company was moving ahead with efforts to go head-to-head with eBay, the online marketplace giant. Not so, Google executives claimed.

That's standard operating procedure for team Google, which is constantly rolling out new products while insisting they are not meant to compete with established players. But in this case, the company may be more ingenious.

While it is clear that Google intends Base to be a place where sellers and buyers can meet to conduct business, the real value for the company may not be in creating competition for eBay. Instead, it appears as if the company is trying to extend its core advertising business, the source of almost all of the $6.2 billion in revenue the company racked up last year.

At a March 2 analyst meeting, Google Chief Executive Eric Schmidt dismissed the idea that his company would compete with eBay, focusing instead on the benefits of a payment system that would allow advertisers to streamline sales.

“The quickest way to improve the quality of an ad is to have the ad instantaneously turn into a purchase that is 100 percent perfect,” he said. “We now have a solution that we believe enables advertisers to offer a digital product on the Web so that when people click on it, through a credit-card mechanism, it is automatically taken care of.”

While Schmidt didn't elaborate, it appears as though he will be offering advertisers the ability to link their ads directly to Google Base. When Base leaves its testing phase, Google executives say, AdWords advertisers will be able to direct customers to the online marketplace, where the products they advertise will be available for purchase.

That could be attractive to small advertisers who don't have their own e-commerce abilities or want to augment their own by hopping on Google’s back, and brand.

And the Google Base/AdWords combination could also help small advertisers buff their own brand via a feedback system that attempts to rank Base sellers' credibility. Once a Google Base seller had established a credibility ranking, it could conceivably brandish the ranking on its AdWords ads.

If that happens, says, Matt McMahon, vice president of marketing services for Fathom Online, a consultancy for search-engine advertising, it would give a previously unknown advertiser a look at what could be seen as a Google seal of approval. “By using the quality of another company's brand name, you get clout," he says. "Buys on the web are anonymous, so they need that trust.”

Still, even if Google really isn't gunning directly for eBay, the two companies are going to inevitably end up in competition.

Google Base's take for matching buyers and sellers -- 25 cents plus 2.5 percent of the total sale for every paid transaction -- undercuts the average of 30 cents plus 2.9 percent eBay charges. And Google already draws more eyeballs than eBay -- the company had 89 million visitors in February, compared with eBay's 52 million, according to Nielsen NetRatings.

“Google’s M.O. is always to deny that they’re competing with anyone head-on,” says Sucharita Mulpuru, an e-commerce analyst with Forrester. “It’s a natural inclination for them to say that they’re in their own league, but since they are about to become a marketplace for buying items, they’re encroaching on this category.”