Changes to eBay’s Pricing Plan Could Whack Shares by 20%

By Martin Denholm

A high-growth retail play? Check.

The firm saw its quarterly revenue growth bounce by 19.7% (year-over-year), while quarterly earnings growth jumped 22.5%. Its users sold $927 million in goods during the second quarter, which dumped $35.7 million into the company’s coffers in transaction fees. Not bad, given the sluggish state of the economy and inflation forcing consumers to cut back on purchases.

A recession-resistant retailer? Check.

The company is one of the most well-known and popular names throughout many parts of the world and has built a rock-solid brand. Ease of use, an extremely diverse range of products, and efforts to boost customer interaction translates to customer loyalty and a lot of repeat business.

Over the years, the company’s robust business model has resulted in some outstanding gains for investors as a high-growth play on events like the Christmas shopping season and as a stock that offers protection during tougher times.

Its strong cash flow (almost $3 billion over the past 12 months) has provided security for shareholders, as has the management policy of consistently initiating large share buybacks in the event of downturns, returning this cash flow to investors. These buybacks prevented dilution from management stock option grants, but also supported the stock price.

The company is eBay (Nasdaq: EBAY). And while that’s the upside part of the story, a new development could shave as much as 20% from its share price.

The Lowdown On Listings

The unique aspect of eBay’s business model that has allowed it to consistently offer security to investors is a pricing model that relies on listing fees.

Listing fees are upfront commissions that a seller must pay in order to have his/her item appear on eBay’s website. As a component of a single sale, listing fees typically account for 50% of the cost to a seller.

However, if an item doesn’t sell on the first auction, online merchants must pay this fee a second time, making listing fees a much bigger factor in the calculation for eBay’s cost.

In categories where eBay has a high sell-through rate, this has less of an impact on its profits. But in categories where the sell-through rates are low, it dramatically drives up the cost.

And a possible change to eBay’s pricing model may force a 20% drop for its shares.

De-Duplication And The Buy.com Developments

Recently, two developments have exacerbated the pain of having to pay eBay multiple listing fees:

1. Searches now limit the number of items that can be seen by an individual seller.
2. Buy.com recently started marketing through eBay’s platform and is not paying listing fees.

Let’s look at each one…

Limited Exposure & Listing De-Duplication: eBay now limits the number of items visible in a search by a given seller to 10. This prevents one seller from flooding the market with his/her items and eroding his/her competitors’ visibility. This category ownership is a strategy employed by eBay powersellers.

But the introduction of Buy.com to the platform forced a rule change, since Buy.com’s business is considerably larger than the $5 million per month power seller who owns a niche category.

With de-duplication, eBay removes items from the same seller that it believes are duplicates. However, this can present confusion in instances when items are similar, but not exactly the same. While de-duplication represents less of an impact to online merchants, it has sellers scratching their heads, asking why they’re paying listing fees for items that aren’t getting immediate visibility.

Buy.com: eBay’s agreement with Buy.com aims to dramatically increase the number of listings on the eBay platform.

This would be great if Buy.com was paying listing fees. But it isn’t - and it’s a fact that initially caused much concern. Since then, it’s come to light that Buy.com is not the low cost provider of goods that results in limited impact on other sellers. In fact, I’ve heard estimates that its sell-through rate is as low as 2%.

This represents the first extremely large seller on the platform and likely also represents the first noticeable point of a change in strategy, where eBay uses one large vendor in a given category to act as an anchor tenant.

Even though Buy.com is not having a material impact on many merchants, the mom and pop sellers are asking themselves why the vendors who helped eBay build its business over the last 13 years are paying upfront listing fees while new large sellers don’t seem to have to.

So what’s the bottom line? Simple…

Could Investors Be Poised To Bid eBay’s Share Price Down?

The days of listing fees on eBay could be numbered - a development that could result in a 20% share price correction.

In fact, there’s a growing rumor among the eBay Powerseller base that the company may well eliminate listing fees before the Christmas season.

Such a move doesn’t mean that eBay will lose the revenue from listing fees entirely; it’s more likely to shift the fees to the back end after a transaction takes place. This would align the interests of the merchant and the marketplace and improve the relationships with eBay’s Powersellers.

What concerns me, though, is that eBay would have to dramatically increase its back-end fees in order to account for the revenue that would be lost from listing fees on items that are listed multiple times.

And that lost revenue translates directly into profits - which are incorporated into the company’s current earnings guidance and Wall Street’s consensus estimates. If the elimination of listing fees does occur - and there are many reasons for it to happen - there would likely either be a reduction in its guidance or an earnings miss that, in my estimation, could bring the stock price down 20%.

Something to consider if you’re a current eBay shareholder. And if you’re not, you could look to play it by taking a bearish position on the stock and/or put options.

Disclosure: None

Comments

[Kevin K2:]

Yes or No? Has eBay peaked? [VOTE] - www.thriveorfail.com/4...

2008 Aug 17 04:18 PM

[Patricia013:]

I think most sellers - mostly small sellers but some pretty big powersellers too will tell you ebay has been woefully mismanaged since John Donahoe and his team took over. In fact it has been a total hell. I'm a 10 year small seller and up until January of this year I had about 50 items running constantly and an ebay store. Well, I closed my store and right now have only 3 items running - no bids and few hits. My feedback is 100 percent and my DSR rating is 5.0 across the board - my standing in the listings is "elevated" which means in the top 10 percent. That said...where are my sales?...where are the buyers? Ebay has so manipulated search with the miserable Best Match - that today Best Match only means sellers that Ebay wants buyers to see! The rest of us pay for nothing and get nothing! I doubt if free listing will help...and if they institute it look for a 15 percent final value fee - exactly what Amazon charges. That will drive listings of everything and anything up for a while but as they fall off without bids fewer and fewer sellers will bother to relist. The only cure right now is to get the present management team OUT of there and put in a team that has solid business experience. Cut all ties to Meg Whitman as well...this had to be partly her idea and its killing a company we built and we love!!!

For anyone even thinking of buying Ebay stock - go to their own discussion boards. Read what sellers are saying and have been saying since January, 2008. Without the sellers of unique, rare, vintage items buyers have no reason to shop on Ebay. Who needs yet another retail site - especially one with no protection for buyers and no protection for sellers with good reputations. Donahoe fails to see this so he pig-headedly plods on...the ship is sinking a little more with every stupid new policy!

ACEOart.net

2008 Aug 17 07:20 PM

[redbaron:]

If you own the stock, sell it. If you don't own it, short it. There is no limit to how low this stock could go. Get out while you can.

If Donahoe goes, along with the consultants, then I would re-think that advice, but until that happens, shop elsewhere.

2008 Aug 17 08:29 PM

[Ina Steiner_:]

FYI, AuctionBytes published an article last week about pending eBay fee changes with an accompanying blog post (and survey).
blog.auctionbytes.com

2008 Aug 17 10:43 PM

[Et tu, Brute!:]

I don't foresee recovery for ebay. Even with all new management, there's a fowl smell abounding.

Patricia013 makes an extremely notable comment above... "a company we built and we love!!!"

It has never at any point "belonged" to any other than the sellers, and their buyers. And yes, Meg Whitman I believe is part of this picture.

I've stated over and over and over: I"ll never go back to using ebay. There's another aspect in play now. I believe many, many other sellers and buyers feel the same. Other sites are growing and growing. Many sellers have their own sites as well. And yes, there's Amazon, who has had it figured accurately from the beginning. You would not believe how many ebay refuge's have flocked to Amazon. AND exclaiming how much better it is! And they're having to grow up REALLY QUICKLY! There are expectations over on the River and you'd best heed them!

One more thing. John Donahoe has opened the flood gates and I don't thing he's EVER going to be able to close them again.

It's too late.

2008 Aug 17 10:52 PM

[Et tu, Brute!:]

Response to Ina:

Thank YOU!!!

2008 Aug 17 10:53 PM

[TheBrewsNews:]

If eBay doesn't change their fee structure, more and more Powersellers are going to list their items elsewhere and then eBay's revenue will suffer since they will lose both the insertion fee and the final value fee. The total costs to eBay sellers are already too high. Total fees to many Amazon sellers is 15-20% and includes the payent processing fee. Total fees to many eBay sellers is 25 - 35% when you factor in all the selling fees and PayPal fees. That fee structure is simply not sustainable.

If eBay lowers insertion fees and raises final value fees, the average selling price will likely increase slightly as more sellers would be inclined to offer items at fixed price rather than auction. Fixed price almost always brings a higher selling price. In addition, with a greater number of listings and other revenue streams such as ad placement, eBay could more than make up for the lower insertion fees which would also be offset by higher final value fees on higher selling prices.

2008 Aug 17 10:55 PM

[TheBrewsNews:]

Three months ago we predicted a change in the eBay fee structure on our blog:

thebrewsnews.wordpress.../

2008 Aug 17 10:57 PM

[Et tu, Brute!:]

By the way. It should be noted that the Amazon catalogue venue does not accomodate much of what the sellers of specialized and unique have on offer. And indeed, there can be no doubt that the SPECIAL and UNIQUE for the most part is what fed and grew ebay from the beginning. THAT is what is so very shameful in all this.

2008 Aug 17 11:04 PM

[RicRoe:]

eBay seems intent on committing suicide.

Zero listing fees will be the headline eBay will tout. What they will fail to mention is an increase on Final Value Fees, possibly to be asessed not only on the sale price but also on shipping and handling as well.

eBay is also looking to force PayPal only for all transactions. This means that eBay will now collect double fees as they own PayPal which already takes a cut on the full transaction amount.

eBay has been salivating at the opportunity to double dip on full transaction value once through eBay and again on PayPal.

Casual sellers have already been leaving in droves. Sellers have been closing stores, and Power Seller listings have been shrinking across the board.

One look at sellerdome.com and the toll on the top 100 powersellers now inactive reveals that 11 of the top 100 worldwide sellers on eBay are now either No Longer Registered Users, or have not listed any items recently. Those numbers are about the same when looking at US top 100 sellers.

Double dipping on full transactions by eBay and PayPal will encourage many more to run toward the exits.

It is no wonder almost every other Internet site is seeing significant listing activity increases.

Best Match Search does not return accurate results.
Many claim eBay manipulates the secretive DSR ratings.
eBay buries seller listings based on manipulated DSR ratings.
Feedback is skewed one way against sellers.
Non paying bidders are increasing.
Buyer fraud is increasing.
New listing pages will display other items for sale.
Commercial display advertising of outside sites is increasing.
eBay changes policies sometimes without notice.
System glitches means systems are unstable.

This company under new CEO John Donahoe is headed for an epic collapse, free listings will just be another item on a long list on eBays pending death certificate.

2008 Aug 18 12:13 AM

[Shelly:]

If eBay lowered insertion fees and raised FVF even 1% it would have to exceed any price reduction that the free listing would offer. Most sellers understand that most often a higher price can be achieved with a BIN than an auction- that increase would more than cover the nickle, dime. 20 cents, or top price of a quarter for the BIN option. If these sellers fail to list a BIN to save at most a quarter when they could sell the item $2 at least more then I don't think free insertion is going to help those sellers.

Insertion fees are like nothing now compared to store FVFs that commission + PayPal + the store fee + picture manager these are what makeup the outrageous fees. With the speculation of FVF on shipping it is even more costly to go this route. As it is I have been considering getting rid of international selling, because the paypal fees are so high for international. I don't even charge full postage fees for domestic or international- nothing for materials- I already pay 3.9% + 2.5% thing + the 30 cents to paypal on that - I can't afford eBay to take 12% on international or domestic. These scheme of we'll give you a dime and we'll take 3 dollars is not going to get the job done in regards to getting anyone to stick around- frankly this will drives them away real fast

On Aug 17 10:55 PM TheBrewsNews wrote:

> If eBay doesn't change their fee structure, more and more Powersellers
> are going to list their items elsewhere and then eBay's revenue will
> suffer since they will lose both the insertion fee and the final
> value fee. The total costs to eBay sellers are already too high.
> Total fees to many Amazon sellers is 15-20% and includes the payent
> processing fee. Total fees to many eBay sellers is 25 - 35% when
> you factor in all the selling fees and PayPal fees. That fee structure
> is simply not sustainable.
>
> If eBay lowers insertion fees and raises final value fees, the average
> selling price will likely increase slightly as more sellers would
> be inclined to offer items at fixed price rather than auction. Fixed
> price almost always brings a higher selling price. In addition,
> with a greater number of listings and other revenue streams such
> as ad placement, eBay could more than make up for the lower insertion
> fees which would also be offset by higher final value fees on higher
> selling prices.
>

2008 Aug 18 05:53 AM

[tula1:]

Free listings would be a great thing for eBay, IMHO. They would need to do some front-end qualification/validati... of sellers, though, to prevent hit-and-run scam artists from dumping crap on the site. Perhaps a seller registration fee of $10 or so would help?

As a small seller of low-to-mid-priced vintage items, I've found that insertion fees can kill any profit I might make due to having to relist multiple times. Some items simply don't have rapid sell-through and need longer exposure than 7 days. Demand can wax and wane for some of these things, so I'd be quite happy with paying more on the back end if I can get rid of listing fees.

One suggestion I'd have is for eBay to allow other payment services, in addition to PayPal. Maybe they could give FVF discounts for those who use Paypal and charge a bit more for other services? This would encourage Paypal use, while still allowing other services, which many buyers and sellers would love. Variety of items + variety of payment options = happy customers.

2008 Aug 18 12:17 PM

[E-Sell-It:]

reetings,
While searching through eBay's announcements I came across a
workshop they were quietly trying to sneak past sellers.

workshops.ebay.com/thr...

This new policy essentially allows buyers to purchase item and
return them for a full refund (Including shipping costs.) within 45 days
from date of purchase. This all sounds like a great step for buyer
protection. eBay controls the money, and buyers will be protected from
potential fraudulent sellers on eBay.

But what eBay does not reveal is how this new policy also opens the
door to fraud from buyers. Essentially buyers are able to open an
account with no verification other then a valid email address. Which as
I am sure you know can be easily made up on any of the major email
providers such as Yahoo, Google, Hot Mail, Etc.

So lets say you want to purchase a diamond ring. You pay $15,000.00
plus $50.00 overnight shipping for this ring on eBay. The seller ships
it to you, and you receive exactly what you purchase. Well under this
new policy. Buyers can simply return a completely different ring, maybe
something from a 25 cent machine. and simply contact eBay and say the
ring was not as advertised. eBay who's only requirement for buyers is
proof of return shipping in the form of delivery confirmation. and eBay
will immediately refund the buyer his purchase price. ($15,050.00)
The seller may complain and file a dispute with eBay. But eBay's
only recourse to this situation is to flag the buyers account and
potentially suspend the buyer if they see a pattern of this type of
activity. eBay will not recollect or re obtain the monies from the
buyer. This becomes the responsibility of the seller. When eBay was
asked how. They said you can contact the local authorities in the buyers
community and they may be able to do something.

This is only one scenario in which sellers can be defrauded from
buyers. Remodeling, buy new tools on eBay and return well used within 45
days for a full refund. Want to a new computer? Get one for the cost of
return postage! Simply buy a new one on eBay, and send back your old one!

It has become clear eBay new President and CEO John Donahoe, and his
management team has never sold an item on eBay before. Their new
policies are absurd and ridiculous and only opens the door for fraud.
Sellers are leaving eBay left and right. Just look at anyones feedback
profile on eBay. Read their feedback and the members that have sold to
them.. How many read "No Longer A Registered User" These are people that
have left eBay for good!

To sum it all up.. With so many sellers leaving eBay, eBay earnings
are certain to drop dramatically this next quarter. Sellers as you may
be aware are eBay's main source of income. Simply put, with every seller
that leaves eBay, eBay stands to loose hundreds, even thousands of
dollars from each lost seller, each month! Investors should be made
aware of these actions being implements and how these many changes is
driving away sellers.

2008 Aug 18 01:26 PM

[Henrietta:]

Some analysts seem to believe that eBay's 'take' is 8.1%, where that figure comes from Lord only knows.

I blogged this issue. tinyurl.com/65ll4t

Using a $9.99 fixed price item for a one time listing sale, with at cost S&H of $5, the combined actual eBay/PayPal take is 19.5%

If we loose the insertion fees and up the final value fee from 8.75% to 15% the combined eBay/PayPal take figure rises to 22.3%.

Note that this is on a single transaction and does not in any way take into account the catastrophic drop in sales directly attributable to the new unfinding eBay experience.

Given the how low can you go sell through rates on eBay today, maybe losing the listing insertion fees would be a fitting punishment for eBay management as they try to discover how to be Amazon without inventory or customer service.

2008 Aug 18 07:31 PM

[Watching th...:]

And to add to all of the above, there has been a definate drop in the overall quality and selection within the site.

2008 Aug 18 09:33 PM

[d-:]

Ebay is all on a witch hunt. I am a power seller who has been with ebay since 2001. Because I have had too many neutral / negatives in the past 30 days they have shut me off. This has happened to a half dozen sellers that I know of. It doesn't matter if you have over 96% of your buyers leave positive feedback in the last year. It doesn't matter if your DSR's average over 4.5. Ebay is making HORRIBLE decisions. I know of several blogging website who are calling for the CEO John Donahoe to step down.

Ebay is in trouble.

2008 Aug 19 11:38 AM

[Shelly:]

"As a component of a single sale, listing fees typically account for 50% of the cost to a seller."

Where did this estimate come from? Insertion fees are not 50% of the cost of eBay sells. Maybe if you used an accurate cost the shave would only be 10%. Drama and Journalism don't mesh well if you don't bother to look up the facts

2008 Aug 19 08:43 PM

[elvensong:]

Nobody who knows how eBay operates actually believes there won't be a major hike in FVFs if this so-called "free" listing fee thing comes to pass. The past fee "reduction" was, in reality, a fee hike - a nickle off listing fees, but much more added on the back end.

Perhaps this thread from the Seller Central discussion board will bring some enlightenment to those who aren't already familiar with what a mess eBay is right now:
forums.ebay.com/db2/th...

...and for this they want more fees?

2008 Aug 19 11:33 PM

[nancy45:]

I used to be an enthusiastic seller, but with the new fee structure and the new feedback policy, I've completely lost my enthusiasm for eBay. Now I take my items to a local reseller or donate them. I just don't care about eBay any more. Sellers are not happy, and if sellers ain't happy, ain't nobody happy.

2008 Aug 19 11:48 PM

[poetryeater:]

I used to sell on ebay, and was an ebay "cheerleader". That ceased when ebay announced the feedback extortion policy in January, which is also when I stopped selling AND buying on ebay. I had (& have) over 450 all-positive feedback. I never left a negative or a neutral feedback.

I agree with those who have said that Donahoe has run ebay into the ground -- IMHO, he, and other ebay executives, have effectively destroyed ebay. I don't expect ebay to be in existence for more than another 3 to 5 years, unless new leadership is brought in, leadership who actually has some business sense and the ability to lead effectively.

For those of you who sell art, handmade items, and vintage items, I invite you to come over to Etsy (etsy.com), where such items are welcome to be sold. As with all other online venues, Etsy is a bit slow right now, but it is SO much more welcoming that ebay!

2008 Aug 20 10:23 AM

[14light:]

It is truly amazing how fast JD and company have destroyed the very thing that made them what they are. People loved it and want more of it - not this idea JD tried to pass off that people are tired of the bidding format, etc. They love it and want their Ebay back. Now we have very few sellers left like there used to be with great deals and unique items you could have fun bidding on. It's like the Walmart of auction sites. We don't need retail mass merchandise on Ebay - you can get that anywhere. What's wrong with these idiots. There stock is falling like a rock and if the rumor that they want it to so they can buy it all back and be in total control is right..... what would be the point of having control of nothing but a destroyed barren business.


On Aug 17 11:04 PM Et tu, Brute! wrote:

> By the way. It should be noted that the Amazon catalogue venue does
> not accomodate much of what the sellers of specialized and unique
> have on offer. And indeed, there can be no doubt that the SPECIAL
> and UNIQUE for the most part is what fed and grew ebay from the beginning.
> THAT is what is so very shameful in all this.

2008 Oct 04 04:39 PM