The eBay of tomorrow
eBay continues to post big growth numbers, but the auction giant is pressed to reinvent itself as consumers’ online buying habits evolve
By Bill Briggs
There’s no denying the power that eBay Inc. has exerted in the online retailing world. Once perceived as the online equivalent to a garage sale, eBay has become a powerhouse of online selling with the value of all goods selling on eBay reaching a record $53.5 billion last year, up 19% over $44.3 billion the year before.
While that’s a big number, some analysts have started focusing on the growth number. And that tells a different story, they say, one that says eBay is right in looking for growth areas outside of its traditional auction model. Some analysts point out that 19% is below the market growth of 25% and that growth has slowed in other areas as well.
“EBay has been losing share since 2005,” says Jeetil J. Patel, managing director of Internet research at Deutsche Bank Securities Inc. Based on a Deutsche Bank formula that includes user growth, listings growth and average selling price, Patel pegs eBay’s 2006 e-commerce market share at 12.7%, down from 13.1% in 2005.
In spite of retailers’ efforts to compete on the auction front, eBay remains the undisputed leader of online auctions. But eBay acknowledges that a continuing focus on auctions as it has conducted them will not be its future. For instance, it recently introduced eBay To Go, which expands eBay’s reach beyond eBay.com. EBay To Go lets registered users place eBay.com content in online social networks and blogs. “EBay To Go is exactly the kind of product we think demonstrates the innovation we’re putting against our goals of reengaging our users and making the auction experience fun,” CEO Meg Whitman said in a July conference call with analysts.
Fixed price
In addition to eBay To Go, the company made a foray last year into the fixed-price world of online selling with eBay Express. And it is slowly building its free classified ad site Kijiji.com to compete with Craigslist.com.
Last year’s numbers show eBay still is generating hefty revenue. In addition to record gross merchandise sales volume, eBay generated consolidated net revenue of $6 billion, a 31% increase from 2005 revenue of $4.6 billion.
But net income for 2006 rose just 4% year-over-year to $1.1 billion. Some of the income erosion can be attributed to costs associated with acquiring Skype, the VeriSign payment gateway and Shopping.com, Patel says, along with new accounting methods and stock-based compensation. Controlling for those costs, year-over-year income growth would have been about 24%, Patel says. By contrast, 2005 net income rose 39% compared to 2004.
Acquisitions have added revenue, but some acquisitions have strayed from eBay’s business model, Patel maintains. “They have made quite a few acquisitions that were not exactly synergistic. They seem to be outside the core business,” he says, singling out the VeriSign payment gateway and Skype, an Internet-based telephone service, both in late 2005. Deutsche Bank notes that Skype is a low-margin business that, along with PayPal, is pulling down eBay’s 2007 gross margin.
More of the same
Second-quarter numbers for 2007 showed more of the same in product sales. Gross merchandise sales rose 12% year-over-year to $14.46 billion for the quarter ended June 30. Active users rose 7% to 83.3 million while product listings dropped 7% to 559.1 million. On the revenue front, things were brighter. EBay’s second-quarter revenue was a record $1.83 billion, up 30% from the year-ago quarter, with net income up 50% to $376 million.
EBay attributes its growth partly to improvements to the eBay selling platform and an expansion of its portfolio of businesses. PayPal reported net revenue of $454 million in the second quarter of 2007, a 34% increase compared with $339 million a year earlier. Skype net revenue totaled $90 million in the quarter, up by 103% from $44 million a year earlier. Revenue at Shopping.com, a shopping comparison site eBay acquired in 2005, rose 32%.
“Providing a great user experience has always been critical to our success and will remain part of our ongoing focus as we expand our business further,” Whitman said in a statement describing second-quarter results.
The number of active users, or those who have bid on, purchased or listed an item on eBay within the past 12 months, rose 7% to 83.3 million from 77.7 million a year ago, as the number of registered users rose 19% to 241 million from 202.7 million.
In spite of such strong numbers, some analysts believe there are cracks in eBay’s foundation. In a July review of eBay’s performance, Deutsche Bank Securities acknowledged a “fine” second quarter, but noted that some metrics continue to decline in step with a first-quarter pattern.
For starters, purchase frequency is down, with the average customer buying 4% to 5% less product per year while growth in active users slowed to 5.6 million in the second quarter of 2007, down from 7.5 million in the first quarter and 13.1 million in the second quarter of 2006. “Consistent with the theme that has now persisted since late 2004, eBay’s users continue to purchase fewer products—on a per user basis—each and every year,” the Deutsche Bank Securities report says. Combining this decline with increasing customer acquisition costs, Deutsche Bank analysts believe “the lifetime customer value for the company’s user base is diminishing.”
New tools
EBay is trying to address some of its shortfalls with new tools, says Aaron Kessler, senior research analyst at Piper Jaffray & Co. “Now that growth is slowing they are paying attention a little faster,” Kessler says.
If some of the new services are not on the tips of web shoppers’ tongues, it might be because eBay has not overcome its own reputation, Kessler says. At eBay Express, for example, new goods sell for a fixed price, but eBay isn’t known for selling new goods. “Plus there is a discount perception problem. Buyers expect discount prices from eBay and on eBay Express they are not discounted much,” Kessler says.
Local marketplace
On another front, Kijiji.com has been somewhat successful internationally, Kessler says. Whether the U.S. version can compete with Craigslist isn’t clear. “EBay realizes it’s hard to crack the local marketplace,” Kessler says.
It’s a good thing that eBay is trying some new products and services, analysts say, because some believe the auction model won’t sustain growth for the eBay of the future. “The prospects are still OK, but it’s going to be tough,” Kessler says. “It’s hard to bring the fun back because the novelty has worn off after 10 years.”
The eBay of tomorrow needs to find a way to restore its original image as an innovator, Kessler argues. “If not, it will continue to lose e-commerce share and will have a hard time getting it back,” he says.
Analysts also note that eBay has lost luster among sellers. Perhaps most relevant to seller unhappiness is eBay’s fee structure, Patel and others say. As sellers become more demanding they are resisting eBay’s front-end listing fees and back-end commissions. The fees are driving some down new paths, such as setting up their own web stores and examining lower-cost options from competitors, including Amazon.com, which charges only a commission on sales.
EBay’s transaction revenue, which Deutsche Banks says reflects the fees charged to sellers, rose 19% year-over-year in the second quarter. “On the other hand, gross merchandise sales, or the value/sales created for sellers, increased 12% year-over-year,” the report says. “This seven-point spread clearly indicates sellers are having to meaningfully pay up for growth on eBay, as was the case in Q1 2007, and therefore could result in unprofitable sales for sellers, potential defections to other e-commerce/search venues, or limited growth in listings/business expansion on eBay.”
For sellers like Ty Schmidt, president of BidZirk LLC, eBay has proven fertile ground for product sales. His consignment business has evolved over the past four years from a physical drop-off store that sold people’s unwanted goods. But ever-increasing costs are driving sellers to seek other ways to attract customers to their web sites, he says. “They are not shy about fees,” Schmidt says. “In early 2006 they announced record earnings, along with a fee increase. That angered a lot of sellers.”
New sales outlets
BidZirk.com sells $50,000 to $60,000 a month through eBay, Schmidt says. He also is using Amazon.com for 5% to 10% of his sales because it provides a different outlet and helps his business sell products as quickly as it can.
EBay sellers haven’t historically had an issue paying fees, says Jonathan Garriss, owner of Gotham City Online, a web-only retailer of brand-name shoes for men and women, as long they got value in return. In the past two years, however, “sellers are getting less and less value for the fees,” Garriss says.
As the growth of shoppers on eBay slows, sellers are feeling the pinch of rising fees, says Garriss, who also is executive director of the Professional eBay Sellers Association. PeSA’s 500 members represent the biggest eBay sellers and account for $500 million in annual sales.
A June PeSA position paper warns that unless eBay delivers more for sellers’ fees, sellers will continue to find new channels through which to sell their wares. The paper charges that in the past two years, sellers have seen eBay’s fees increase “while the value received has diminished. Sellers, not eBay, have felt the impact of the additional cost and lower sales.”
The paper offers recommendations on eBay’s fee policy for sellers: “EBay needs to address the unique needs of each category when implementing fees, setting best practices and optimizing search. A fashion seller has very different economics than a CD seller or an electronics seller, but eBay requires them to use the same fee structure.”
A spokeswoman for eBay defends the company’s fee structure, while declining to be more specific. “If you go back over the last few years and look at the changes in our fees and our earnings you can see that our strategy is working,” she says.
While eBay is designed to benefit sellers, keeping everyone happy might not be possible, the spokeswoman says. “Our interests are aligned with our sellers and getting more buyers to use our site for their purchases benefits everybody,” she says. “With over 241 million users there are going to be some sellers who prefer different approaches, but our fundamental goal is to maximize the health of the overall marketplace.”
Victim of success
In some ways, eBay may be a victim of its own success, some industry observers say. Scot Wingo, president and CEO of ChannelAdvisor Corp., an online auction and marketplace services and software company, says eBay was a good introduction to neophytes looking to sell online, but those customers are now comfortable with other options and are leaving eBay behind.
In fact, they should be looking elsewhere, Wingo says. “They are missing out if eBay is the only thing they do,” he contends. “Sellers are spreading their wings and looking for other options, including paid search and search engines.”
To stem the exodus, eBay needs to provide a more visual experience, says Kessler, the analyst, “as opposed to just a listing. Users want more photos and some sellers are putting videos in their ads. EBay needs more color—like Amazon.”
Whether eBay changes its style or its business model, there’s one thing the company and its critics agree on: tomorrow’s eBay will be different from today’s.
billb@verticalwebmedia.com
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