How eBay Can Restore Its Luster

By Robert D. Hof It's not often that a company's quarterly sales and profits both shoot up 44%, only to have its stock plummet by 19% the next day. But that's what happened to eBay (EBAY) on Jan. 19 after it missed earnings expectations by a mere penny a share. Still, panicked as they may have been, investors had latched onto one irrefutable fact: eBay, long the most successful company on the Internet, is slowing down.

Truth be told, a close analysis reveals eBay is far from hitting the skids. After all, it's expected to post a hefty 30% gain in revenues this year, which would be the envy of nearly any other company. Indeed, some analysts slapped new buy ratings on the stock after the initial drop. And to her credit, eBay Chief Executive Margaret Whitman is already making big moves to restore eBay's luster.

eBay is now planning to plow $300 million, 50% more than planned three months ago, into promising new growth initiatives such as its Chinese site and PayPal payment processing service. Whitman says spending could pay off by boosting compound annual revenue growth by several percentage points in 2006 and beyond. "This is the right time to be faster, smarter, and invest more," she told analysts on an earnings call.

Even so, if eBay wants to rekindle its almighty upside surprise -- and keep setting the agenda for all of e-commerce -- it should consider several more moves as well:

Back off the fee hikes. Sure, giving up some revenue may sound counterintuitive. But eBay's merchants scream bloody murder every time fees go up. New hikes on Jan. 13 were no exception, as many vendors threatened to quit eBay and sell somewhere else. Few ever follow through, because no rivals have been able to offer such a vibrant marketplace, with millions of new buyers every quarter. "Will the people leave? I don't think so," says David Steel, CEO of online selling services provider Zoovy.

Even so, the alternatives look more and more attractive. They include Amazon's (AMZN) fast-growing Marketplace,'s (OSTK) new auctions, and search site Google (GOOG), which lets merchants narrowly target potential buyers searching for specific products.

Indeed, a few large eBay sellers have already departed. Mike Lazar, owner of TBC Video, used to sell 1,500 DVDs, videos, and CDs a day on eBay, or about $1 million in sales a year. Last year, his business became unprofitable because of the costs involved with taking care of e-mail, posting items for sale, and tracking down payments. So he moved most of it to Amazon, which takes care of payments and other minutiae. Even though he's selling only about half as much as before, he's now profitable because he needs far fewer people on staff.

Worse, eBay's fee increases don't bring in that much -- about $50 million this time, according to analysts, or just 1% of expected $4.3 billion in sales. Reducing some of them could end up attracting more sellers and, not least, keep existing sellers loyal.

Ditch those TV ads. Remember that eBay ad with a huge crowd of people showing off their vintage clocks? No? Or if you saw it, what did it say to you? Ask Debbie Levitt, president of the eBay merchant consulting service AsWas, and she complains: "It's painting eBay as a sea of obsessive-compulsive people."

With eBay now widely recognized, the money could be better spent elsewhere. Amazon, for one, has bagged TV ads and funneled the savings into reducing prices and offering free shipping. Those moves are credited with recharging Amazon's sales growth in the past two years and moving it into the black.

Diversify! There's so much stuff of all kinds on that a lot of it can get lost in the shuffle. So eBay may need to provide different sites for different kinds of merchandise, merchants, and buyers. Already, it has conceded the point by creating separate sites such as eBay Motors for cars, canceling plans last year to fold its fixed-price outlet into, and recently buying into several online classified-ad sites.

It could do more. Especially valuable might be a site that highlights the large, branded merchants such as Sears (S) and Best Buy (BBY) that sell on eBay. Scot Wingo, whose marketplace-services firm ChannelAdvisor counts them as clients, says those merchants could sell up to 10 times more than they do currently -- if they could advertise their wares more openly.

eBay rightly wants to maintain a level playing field for all sellers on its main site, so it won't give such merchants higher billing on than any other seller. But a separate site for branded merchants might keep them from migrating elsewhere or sticking with traditional liquidators. To maintain its critical mass, eBay could link all its sites to share listings and let buyers and sellers use the eBay accounts, just as it does now with eBay Motors and

Keep hammering fraud. While no hard evidence suggests that fraud is more rampant on eBay than anywhere else, it does happen. And more than anything else, fear of getting stiffed is what keeps buyers from trying eBay or turns them off after one bad experience. Sellers are angry at what they view as a rising number of deadbeat bidders, too. "Fraud is the single biggest issue," says Jay Senese, co-owner of jayandmarie, whose 6,000-plus CD sales a week make it one of eBay's biggest sellers.

The problem: eBay's process to catch crooks, whether buyers or sellers, is difficult and time-consuming. Sellers have to fill out nonpaying bidder forms, which can be unprofitably time-consuming for items sold for only a few dollars. And buyers often have to get local police involved. There's no silver bullet. But eBay's ability to keep growing depends on doing even more to ensure that buyers and sellers trust each other.

None of those moves will get eBay's stock back up to its peak anytime soon, since it was clearly overvalued. But they should help keep eBay at the forefront of e-commerce -- and maybe even cheer up worried investors. Hof is BusinessWeek's Silicon Valley bureau chief

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