eBay Holds Its Turf Against Google

The online auctioneer fended off its new rival in the fourth quarter. Can Meg Whitman keep it going with her recent acquisitions?

by Catherine Holahan

Investors of eBay headed into the end of last year with some trepidation. The concern: an 800-pound-gorilla named Google (GOOG) would give eBay a drubbing during the 2006 holiday season. The search giant aggressively moved into eBay's (EBAY) e-commerce territory in 2005 with a product-listing service called Google Base. Last year, it stepped up the challenge, launching Google Checkout, a competitor to PayPal, eBay's online payment processing service. The new offering was dubbed by press as a PayPal "killer" before it even debuted.

But eBay kept that gorilla in check in the fourth quarter, judging from results released Jan. 24. The company said sales rose 29%, to $1.72 billion, exceeding analysts' expectations. The amount, which was about half a billion higher than what analysts were anticipating on average, grew 29% from last year. For the full year, revenue grew 31% from 2005, reaching $6 billion and meeting what CEO Meg Whitman called an internal company goal for "6 (billion) in '06." Investors liked what they heard, propelling eBay shares 13.3%, to $33.98, in extended trading. The stock gained another 7.8% on Jan. 25, to $32.35 in afternoon trading on the NASDAQ.

Positive Pruning

Whitman attributed the solid quarter, in part, to more product listings turning into actual sales on eBay's site. The company's core auction business had suffered last year from sellers dumping slow-selling and patently unwanted merchandise in their eBay stores, as well as pricing some items too high for eBay's bargain-hunting audience. The result was a poorer experience for buyers and inventory that sat on the site far longer than desired, Whitman explained.

Last spring and summer, eBay raised fees by roughly 6% in order to encourage merchants to sell items people want and to price them to move (see BusinessWeek.com, 7/19/06, "Will eBay Fee Hikes Recharge Growth—or Drive Away More Merchants"). So far, the plan seems to be working. The site saw declines in the inventory that languished in eBay stores before selling or that didn't sell at all. "We are moving toward a better eBay marketplace," Whitman said during the call, cautioning that there was still work to do this year. Company CFO Bob Swan said that conversion rates have yet to reach their 2005 levels, but that they markedly improved since 2006.

In a note to investors, Goldman Sachs (GS) analyst Anthony Noto indicated he was pleased with eBay's efforts to "prune" low-quality listings. "eBay's focus on successful listings, as opposed to listings at any cost, is the key focus and driver of growth for eBay at this juncture," he wrote, adding "improved revenue-per-listing trends reinforce our view that eBay is at the early stages of a multi-quarter period of stabilizing-to-accelerating growth."

PayPal Paying Well

Sales also got a boost from increased holiday traffic due in part to the hype over hard-to-find gifts such as the Nintendo Wii (NTDOY) and Sony PS3 (SNE). Holiday shoppers flocked to the site to bid on the items and, when they lost the bid, frequently continued shopping on the site anyway, Whitman said.

The big surprise of the season, however, was the strength of the services supposed to be suffering at the hands of Google. PayPal posted revenues of $417 million, a 37% growth rate compared with 2005’s fourth quarter. The payment-service company handled a record $11 billion in transactions, up 57%.

In fact, Whitman said that all the hype over Google Checkout actually boosted sales for market-leading PayPal, which reaped publicity amid the coverage of Google's foray (see BusinessWeek.com, 06/28/06, "Google's eBay Challenge").