eBay's Blunder May Help Google

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

EBay Posts 14% Drop in Profit But Raises Full-Year Forecast

• Summary: eBay's stock rose 6% in late trading after the company issued its Q2 results. Key points: Revenue of $1.41 billion up 30% year over year. Net income of $250 million down 14%; excluding $60 million of stock-based compensation, net income was $310 million, up 6% year over year. EPS of $0.24 matched analysts' consensus estimate. Revenue per auction listing declined 10% according to a Goldman Sachs estimate. CEO Meg Whitman said auction growth was unsatisfactory and that it was impacting the user experience and "has diluted the magic of eBay". eBay's store and fixed-price listings grew faster than its auction listings. In an attempt to promote auctions, eBay said it would raise the price on fixed-price listings. Guidance: 2006 EPS guidance raised to $0.69-0.72 from the prior range of $0.65-0.71, revenue unchanged at $1.36-1.43 billion.
• Comment on related stocks/ETFs: eBay's stock (EBAY) traded up probably because sentiment has been negative and expectations were overly pessimistic. The key issue now is the decline in eBay's auctions relative to its fixed-price sales, and the company's suggestion that it can deal with this by raising the fees it charges on fixed-price sales. eBay's press release [PDF] alludes to this as follows: "The company also announced marketing and pricing initiatives it expects will increase the velocity of trading on the eBay marketplace." There's more and better detail in the conference call transcript. eBay's strategy to deal with the slowing of its auction business is questionable. Perhaps many people prefer fixed-price sales to auctions. Given that eBay's competitive advantage is not in fixed-price sales -- particularly since the growth of search traffic and the roll-out of Google Checkout makes it easier for small online stores to attract customers without using eBay or Amazon -- the least sensible response for eBay is to raise the price on its own fixed-price service to force eBay sellers to adopt auctions. This is the second time that eBay has tried to deal with competition by manhandling its users instead of focusing on improving its products. The first was its banning of Google Checkout. It could drive them instead into the hands of Google (GOOG).

Comments

[dmc500hats:]

david, your analysis is right on target.

over the past few years, eBay has gradually moved to more & more fixed-price formats (more eBay stores w/ store inventory format listings, buy it now, ebay express, off-eBay marketplace PayPal sales, even half.com formats coming back now). primarily this move happened because that's what eBay sellers were asking for, and where the internet retailer market was going -- merchants are most familiar / comfortable with fixed-price formats, rather than the more editorialized auction formats ebay has been historically known for with its collectible items & used goods. fixed-price formats are just simpler & easier for most merchants to deal with.

while it may be true that auction listing formats are more attractive to some ebay buyers due to one-of-a-kind items & principles of scarcity, it's just not the majority customer experience (either online or off) -- most transactions are fixed-price purchases of standard items. delayed gratification auctions are the exception, impulse buy-it-now items are the rule.

by eBay's own admission, fixed-price listings formats are now the majority of its overall inventory (~83%). however, that's also a segment where eBay faces competition from other marketplaces with fixed-price offerings such as Craigslist & Amazon, as well as from non-marketplace PPC advertisers Google, Yahoo, and others that drive customers directly to internet retailer websites.

so does it make sense for eBay to raise prices in a segment where it faces competition & has decreasing pricing power? that would appear to be a capitulation to optimize for profit in the short-term over revenue / market share growth in the long-term. interesting strategy, not sure i agree with it tho...

it's a good thing for eBay that PayPal growth is still going strong, and that Skype user growth appears to be continuing, albeit without as much detail as many of us might like. (full disclosure: i used to work for PayPal, and i'm also an avid Skype user & fan)

for those betting on the future of eBay, perhaps they should be looking to the Power of Two (PayPal & Skype), than the Power of Three...

- Dave McClure
500hats.typepad.com/

2006 Jul 20 08:41 PM