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eBay ends ad-selling deal with AOL

The Internet auctioneer, finding that online advertising plays an insignificant role in its business, doesn't extend its ad partnership with the media giant.

The high-profile marketing alliance between eBay and AOL Time Warner has begun to quietly unravel as the Internet auctioneer found online advertising playing an insignificant role in its business.

In its annual report filed with the Securities and Exchange Commission, eBay said that its advertising partnership with AOL Time Warner, which was scheduled to end Monday, "has not been extended or renewed." The media giant will continue to provide eBay's online advertising for an unspecified wind-down period.

eBay said it continues to view its business as "primarily transaction driven" and expects "third-party advertising net revenues in future periods to continue to decrease as a percentage of total net revenues."

The decision to terminate the alliance is a blow to AOL, which continues its struggle to regain its luster and--more fundamentally--to staunch its steep revenue declines, stalled subscriber growth and internal executive rifts.

However, because of the prolonged slump in online advertising, AOL could benefit from focusing on selling its own advertising inventory.

AOL said that although its advertising partnership with eBay was ending, it would continue to direct AOL users to eBay for auction services under its marketing alliance.

"We continue to have a good partnership with eBay," said an AOL representative.

eBay and a premerger America Online first signed a marketing agreement in 1997, and completed a new four-year, $75 million pact in 1999. The arrangements called for AOL to promote eBay to AOL users through a co-branded site and later through its AOL Instant Messenger service. AOL also sold advertising placements on eBay.

The first hint that the alliance might fray came last May when eBay amended the deal, decreasing its future payments and making them contingent on performance. The amendments stated that AOL could choose to continue the marketing relationship into 2005, but only if it met certain "performance goals," eBay reported in an SEC filing that year.

Another crack appeared last year when AOL began planning to launch an e-commerce service that would allow vendors to sell discounted surplus items throughout its proprietary network. The service is slated to launch this year. The move is crucial for AOL as it tries to develop new revenue sources amid a weak online advertising market.

In its filing Monday, eBay noted that its third-party advertising decreased from $80.5 million in 2001 to $54.9 million in 2002.

The decrease, eBay said, was primarily a result of a "general deterioration in the online advertising market that adversely impacted our advertising sales through AOL."