Internet

EBay Sales: Going, Going...


By his own admission, eBay Chief Executive John Donahoe is "frustrated." With good reason. Fourth-quarter results reflect the company's first-ever quarterly revenue decline, a sign that Donahoe's effort to reignite growth has yet to take effect.

On Jan. 21, the company said sales dropped 6.4%, to $2.04 billion, amid weakness in consumer spending and strength in the U.S. dollar, which reduces the value of overseas sales. "It's a sign that eBay hasn't been able to buck the trend" of poor consumer turnout during the holiday season, says Jeff Lindsay, an analyst at New York-based Sanford C. Bernstein. "All the advantage of the online channel has gone mostly to Amazon."

Fixed-Price Shopping Goes to Amazon

But eBay's (EBAY) most recent earnings reveal deeper problems than a sour Christmas. As CEO since the March 2008 departure of predecessor Meg Whitman, Donahoe has redoubled efforts to cut eBay's dependence on auctions, which have fallen out of favor for many consumers, and raise the company's reliance on fixed-price items. In short, management has tried to make eBay more like online retailing stalwart Amazon.com (AMZN). Fixed-price sales now account for almost half of all transactions.

Yet, consumers who shop online are flocking to Amazon and other retailers. At eBay, the core online shopping business suffered a double-digit drop in revenue, down 16%, to $1.3 billion. Transactions on its site, excluding the especially poor-performing auto category, fell 12% over the same period. "At the end of the day, if you compare the experience of buying fixed-price items on eBay vs. buying them on Amazon, Amazon wins," says Jim Friedland, an analyst at Cowen & Co. who has a neutral rating on eBay's stock. "It's such a better shopping experience."

Amazon doesn't report earnings until next week. But the site surprised analysts in December when it reported its best Christmas ever, with 6.3 million items ordered in the holiday shopping period. According to ComScore (SCOR), traffic to Amazon in December 2008 improved by 9.8% over the same month in 2007, compared with eBay's 2.5% drop in traffic over the same period. EBay still has the most unique monthly visitors, though the gap is narrowing.

Donahoe's Strategy Falls Short

Only a year into his job as eBay's president and CEO, Donahoe has spearheaded efforts to make the site more compelling for both buyers and sellers of goods. He has addressed making the site easier to navigate and making transactions more secure. His strategy for drawing more revenue from the site by helping the most successful sellers—by including a "search by popularity" function, for example—has drawn criticism from smaller sellers, many of whom have defected to other sites.

The company's most recent financials don't help his case. "I am as frustrated as anyone that the changes we made in 2008 didn't lead to immediate results, but I think it sets us up to go after our key priorities in 2009," Donahoe said in the earnings conference call.

Things may get worse before they get better. The company said first-quarter profits will be 32¢ to 34¢ a share, well below the 40¢ estimated by Wall Street. The company didn't provide a full-year outlook. Profits are being helped by the company's plan, announced in October, to eliminate 10% of its workforce. Shares of eBay slid 6.5%, to 12.47, in extended trading, after the results were released.

Economic weakness isn't helping Donahoe's cause. "Unless they can get the core marketplaces business to turn around, and a fair bit of that will depend on the economy, then they're going to have to look at some more strategic measures," says Sanford C. Bernstein's Lindsay, who has a market-perform rating on eBay's stock. Those measures include refinancing its debt, buying back more stock, and even spinning off or selling its Internet-calling unit, Skype.

And now, Amazon is not the only rival eBay has to worry about. Increasingly its auction business is being undercut by classifieds site Craigslist, according to Scott Wingo, CEO of ChannelAdvisor, which helps sellers manage merchandise on e-commerce sites. Those people who are "cleaning out their closet and selling what they find online" are migrating to Craigslist, he says, because "you don't have to deal with the complexity of fees."

Douglas MacMillan is a staff writer for BusinessWeek.com in New York.


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