EBay's New Tough Love CEO

John Donahoe will concentrate on winning back users, even at investors' expense

by Catherine Holahan

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Jessica Brandi Lifland / Polaris

For three years, as the stock of eBay (EBAY) has slid, Chief Executive Meg Whitman has asked investors for patience. On Jan. 23, when the online auction site announced that John Donahoe would take over the top job, he had a clear message for investors: 2008 isn't going to be your year, either.

Managing eBay is one of the toughest jobs in the tech industry. The CEO at the online auction site has the daunting responsibility of trying to keep happy three vocal, and often opposing, factions: eBay's investors, shoppers, and sellers. While Whitman did a stellar job of balancing the conflicting interests for years, she struggled more recently to keep any of the groups satisfied. Buyers and sellers are trying out rival Web sites, and investors' ire has grown as the company's shares have lost half their value over the past three years. "The market is saying that they are in real big trouble," says analyst Tim Boyd of American Technology Research.

Investors Will Need Patience

Donahoe made it clear his first priority as CEO will be revitalizing eBay's core business, even at the expense of investors. He plans to slice some of the fees that eBay charges sellers on the site to draw in more users and to persuade them to offer a greater array of products. He's also planning major investments in technology, including ways that will make it easier for buyers to browse and find goods. "We need to aggressively change our product, our customer approach, and our business model," Donahoe said in his first conference call as CEO designate.

The strategy will put a damper on eBay's financial results, at least for the short term. The company says it expects revenues of $2 billion to $2.05 billion for the first quarter, below the $2.1 billion to $2.2 billion that analysts had expected. After the financials were released on Jan. 23, eBay's stock dropped 6% in post-market trading, giving up almost all of the day's gains.

Donahoe may have no choice but to rankle investors as he focuses on the long-term health of the company. EBay reported solid results for the fourth quarter, with net income rising 53%, to $531 million, while revenues increased 27%, to $2.2 billion. But much of that growth came from its newer and smaller businesses, particularly the PayPal online payment operation and the Internet calling service Skype.

Expansion Queen

The core auction and retail businesses, which account for the majority of revenue, are showing signs of weakness. The number of active users has been flat for three quarters, at 83 million. The number of new products listed on the site has inched up only 4% from a year ago. And the number of stores selling goods at fixed prices on eBay has actually declined from a year earlier, to 532,000.

Some sellers have discovered it's often easier and more efficient to sell their wares on rival sites such as Amazon.com (AMZN). Amazon's investments in technology have made it easier for buyers to find what they want from sellers. There's also more of a sense of trust among its users because Amazon stands behind most third-party transactions. On eBay, it can be extremely difficult to get your money back if you're burned by a seller or buyer. "Sellers are growing like crazy over [at Amazon]," says Scott Wingo, CEO of ChannelAdvisor, which helps sellers manage their merchandise on eBay, Amazon, and other e-commerce channels.

Whitman's focus on expansion and profits pushed eBay's stock to its earlier heights. During her 10 years at the helm, she transformed the San Jose-based company from a simple auction site into a global e-commerce giant by pushing into foreign markets and high-growth businesses related to shopping.

Making eBay "Easier and Safer to Use"

But expansion and diversification have their limits. As Whitman looked for new opportunities, rival Web sites, particularly Amazon, made inroads into the core e-commerce business. "Competition has eroded much of the advantage that eBay once had," says Derek Brown, a research analyst at Cantor Fitzgerald. Whitman has made some of the investments that sellers and buyers want.

Late last year, eBay began rolling out new search technology in certain categories that enables shoppers to look for specific items based on relevancy and to narrow their results by color, brand, size, and other features. The site also launched a new photo-focused service that allows users essentially to window shop for things, rather than read through long descriptions beside small thumbnail images.

Donahoe will certainly benefit from those investments. But he will have to build on them to bring the old vibrancy back to eBay's marketplace. EBay plans to announce additional steps in coming weeks, including a loyalty program for sellers. In addition, Donahoe says eBay will come down hard on fraudulent sellers and offer buyers more protection. "We are going to get very aggressive about making eBay easier and safer to use," he says. "While we have made strides in these areas, we need to do much more."

Holahan is a writer for BusinessWeek.com in New York .