August 29, 2007, 12:00 AM

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.

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 To Go lets registered users place 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 to compete with

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, 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, 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, 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.

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