January 30, 2009, 12:00 AM

Transforming eBay

The online giant is fast becoming a mainstream web shopping mall featuring fixed-price merchandise as well as auctions. Will this strategy fly?

Using the power of the Internet, eBay Inc. created the nonstop, global garage sale that made eBay a household word and a giant in online retailing. But the evolution of the web into an everyday shopping tool for many consumers made the auction format less appealing, and eBay has steadily lost market share in recent years. A new leadership team is working to turn that around.

Led by CEO John Donahoe, who took over in March 2008 from longtime chief Meg Whitman, eBay is carrying out sweeping changes, putting more emphasis on the kind of “here’s the price, buy it now” listings that consumers are used to on other e-commerce sites, wooing larger merchants with vast inventory to sell on eBay, and, most important, putting the interest of the eBay shopper first, even if that means offending the thousands of small merchants that make a living selling on eBay.

And eBay’s new leaders are not mincing words about the challenge they face. “We have been losing ground,” says Stephanie Tilenius senior vice president and general manager, eBay North America. “That’s why we’ve been driving so much change, and we’re going to do more in 2009. Change is hard for everyone, but we are committed to making sure there are no bad experiences for buyers.”

The change that’s coming has broad implications for online retailers, even beyond eBay sellers. EBay’s new strategy of partnering with larger online merchants such as Buy.com and SmartBargains.com opens the door for other e-retailers to sell to eBay’s still-massive customer base. And for other web merchants, eBay’s transformation could mean the emergence of a new, powerful competitor for the loyalty of online shoppers.

While eBay is not going to abandon the online auction business that it still dominates, a lot is riding on whether the company can also appeal to the fixed-price shopper.

By the numbers

For now, consumers are registering with their clicks their declining interest in eBay, a trend most evident when comparing eBay with Amazon.com, by far the two most-trafficked retail web sites.

From Dec. 1 to 24, 2008, traffic to eBay fell 4% from the comparable period a year earlier, while Amazon’s traffic increased 7%, comScore Inc. says. And in November, after years atop Nielsen’s monthly ranking of the most-visited retail web sites, eBay yielded that title to Amazon.

Sales at eBay are taking a hit, too. Merchandise sold on eBay declined for the first time in history in the third quarter, falling 1% to $14.28 billion from $14.40 billion a year earlier. And in the fourth quarter of 2008, sales of merchandise, excluding vehicles, fell 12% year-over-year from $13.10 billion to $11.47 billion. Amazon’s third-quarter sales increased 31%.

Wall Street has registered the contrasting fortunes of the two companies, slashing eBay’s stock price by 60% from January 2008 to January 2009 while Amazon’s share price, also suffering during the market meltdown, fell 41%. As of mid-January, Amazon had a market value of $22.1 billion compared with $16.9 billion for eBay. A year earlier, eBay’s market value was $36 billion and Amazon’s was $34 billion.

“One of the key themes emerging in the e-commerce industry over the past two years is the shift of marketplace momentum to Amazon from eBay,” says Colin Sebastian, an equity analyst at Lazard Capital Markets.

EBay aims to regain momentum by focusing intently on what it believes today’s online shoppers want: more merchandise on offer at fixed prices for easy purchase, lower prices and better customer service from eBay sellers. If the changes eBay makes in catering to consumers irk some eBay sellers-and they do-eBay appears willing to pay that price.

One of the clearest signs of eBay moving toward the mainstream of web retailing is its strategy to encourage eBay merchants to offer more items at set prices for immediate purchase. “Consumers today want to get in and get out,” Tilenius says. “Fixed price is a format that people understand and it’s the fastest. We wanted to create incentives to grow it.”

EBay did just that in August when it announced a new fee structure that charges just 35 cents for 30-day fixed-price listings, down from as much as $4 for seven days. In the new structure, eBay now gets most of its fees only after a fixed-price item is sold, bringing it more in line with Amazon, which only charges merchants that sell through Amazon.com a fee after a shopper makes a purchase.

The strategy seems to be working, albeit gradually. By the end of the third quarter of 2008, fixed price listings accounted for 46% of total listings, up from 41% a year earlier. What’s more, the new fees appear to have encouraged merchants to list more items: new listings were up 26% in the third quarter of 2008 from a year earlier.

In another step to attract shoppers, eBay last year introduced a new top-tier category of merchants called diamond sellers. The category, designed for merchants that sell upwards of $500,000 a month, offers special fee discounts and incentives to large, reliable sellers who offer extensive inventory.

EBay didn’t issue a press release about the new program, and it is vague about qualifications for the tier. But Tilenius says diamond merchants pay no listing fees, and the final value of fees paid to eBay after a sale are “negotiated,” which suggests they are lower than eBay’s posted rates.

Online electronics and general merchandise retailer Buy.com and off-price e-retailer SmartBargains.com are among the first members of the diamond club.

Buy.com started selling on eBay under the radar in late 2007 before eBay announced the special tier, says president and CEO Neel Grover. “We went to them,” Grover says. “We said, ‘We have the second largest catalog of merchandise on the web, and you have the most traffic. Let’s talk.’” Buy.com attracts six million unique visitors each month.

Grover says Buy.com lists on eBay about 1 million products of the 4.5 million items on its own e-commerce site. “It’s all priced the same-it’s our A-stock merchandise,” Grover says. He doesn’t say how Buy.com chooses the items to put on eBay.

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