Internet

EBay Outlines Three-Year Revival Plan


With few exceptions, tech companies that get tagged with the dinosaur label have a hard time shaking it. Executives at eBay (EBAY) are making a concerted effort to keep their company off the list.

In Mar. 11 presentations for Wall Street analysts at the company's San Jose (Calif.) headquarters, eBay executives detailed plans to increase revenue in the coming years. "This business has continued to fall short of our expectations and customers' expectations," said eBay CEO John Donahoe, the former Bain & Co. consultant who took over the top job from Meg Whitman last year. "That's not acceptable. The eBay you knew is not the eBay of today or the eBay of the future."

To back up the talk, Donahoe and others spelled out a laundry list of internal changes and specific plans both to improve the auction site and increasingly to focus on other businesses. The overall goal: to create a one-stop shop where customers can make purchases in a wide variety of ways—from bidding in auctions to clicking on ads, scanning classifieds, or making outright purchases. And he promised the site would be easier to use, offer even better deals, and provide a more satisfying experience. "The 'buyer beware' experience has run its course," Donahoe said.

Some investors are giving eBay the benefit of the doubt. The company's shares rose 4.8%, to 11.63, on Mar. 11. "EBay did a respectable job of trying to reposition investors' view onto components of their business that have the most long-term growth," says Stifel Nicolaus (SF) analyst Scott Devitt. Still, the company faces long-term challenges, Devitt says.

Slow to Adapt in the Past

Adding to the credibility was some surprising frankness about the mistakes of the past. Time and again, executives admitted what most investors had long known—that the company spent years sitting on its lead in the online auction market and failed to respond as customers began shunning auctions for fixed-price sales. "We were the biggest and the best. And when you're the biggest and the best, there's a strong tendency to try to preserve that," Donahoe said. "EBay has a storied past. But frankly, it's a past we've held onto too much."

Rather than talk tough about beating Amazon.com (AMZN), the juggernaut of online retailing, eBay says it will focus on so-called secondary channels—making it easier for consumers to hunt for last year's fashions, overstock supplies, and hard-to-find products such as collectibles.

As wide-ranging as eBay's plans may be, the company admits that even an improved site will continue to grow more slowly than overall e-commerce this year. It hopes to grow as fast as the industry in 2010, and to once again start outpacing it in 2011. Sales will rise from $8.5 billion in 2008 to $11 billion to $12 billion in 2011, the company said. Profit will grow at a rate in the "mid-single-digit range" in 2011.

The question is whether eBay's healthier units can make up the difference. It was more than symbolic that the first presentation was from Scott Thompson, president of eBay's PayPal unit. The Boston native, formerly the unit's chief information officer, talked about plans to offer a debit card for students so parents can easily monitor and advance more cash as needed. And he announced plans to make it easier for outside developers to create PayPal-compatible tools. In all, the company expects sales of this unit to grow to $4 billion to $5 billion in 2011, from $2.4 billion in 2008.

Skype: "A Great Stand-Alone Business"

Then there's Skype. While Donahoe stopped short of saying eBay might sell the maker of Internet voice-calling software, he reiterated that the company misjudged the potential compatibility between Skype and the Marketplace business. "We were wrong," about that, Donahoe said. "But we're done apologizing for Skype. This is a great stand-alone business."

Later in the day Skype chief Josh Silverman said the unit generated $550 million in revenue last year and delivered 20% in net profits—so high that his team didn't have time to figure out how to invest all that back into the business. Skype's sales will more than double to more than $1 billion in 2011, eBay said during the presentation. Since eBay's total revenue includes expected growth at Skype, it's not clear whether eBay would need to revisit forecasts in the event Skype is sold or spun off.

No doubt the long-term opportunity for eBay is huge. Donahoe pointed out that e-commerce is just 6% of real-world retail. "We believe e-commerce will get to 15% or 20% and that it will get there in the next five years," the CEO said.

Of course, eBay faces huge challenges. There's Amazon, which is on a tear. There's widespread fury within the community of eBay sellers over fee increases that favor fixed-price sales. Those users also are incensed generally over eBay's decision to place less emphasis on auctions. "The company still has long-term challenges in its core business," says Devitt at Stifel Nicolaus. "But when you add up the numbers, the stock seems very inexpensive even with the risks."

But eBay will face even taller hurdles if its changes don't kick in quickly enough and the e-commerce giant remains mired in its past.

Burrows is a senior writer for BusinessWeek, based in Silicon Valley.

Burrows is a senior writer for Bloomberg Businessweek, based in San Francisco.

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