A Look at eBay - Part I

| About: eBay Inc. (EBAY)
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I have always wanted to buy eBay, but it had always looked too expensive. That has changed recently. Although I haven’t yet, I may finally take the plunge, particularly if the price gets any lower.

The impetus behind this posting is the WSJ article that ran yesterday – on page C1 “Ebay Merchants Seek Management Change.” The article echoes, and more importantly, confirms, what I see as the general sentiment that currently exists regarding this company. Revenue and profit growth has slowed. I can’t say that comes as a big surprise. I mean, the company has been growing at rates in excess of 50%. Obviously that is not sustainable.

The article contends that ebay merchants are upset with declining sales and that, thus, management change is needed. To support this contention, it cites only anecdotal evidence. In particular it references a videogame merchant upset with the duration of his eBay listings. (The videogame industry is in a transitional period right now, so it seems to me this individual’s concern is completely bogus.)

But even if merchants are generally disillusioned with the site, should investors worry? Lets consider the way the business works. The backbone of the ebay shopping system is the feedback rating. Before buying anything on ebay, a buyer can check the feedback the seller has received from previous buyers. The better this feedback is, the more confident the buyer can be in the seller’s product.

I have been an ebay member and seller since 1999. In that time, I have amassed a feedback rating of nearly 300, something of which I am somewhat proud. (For anyone who is interested, you can see my feedback here.) And herein lies the value driver of eBay's business model. It is something that is quite obvious to me as a member, but which I rarely hear discussed in analyses of the company.

By building this nearly unblemished feedback record, I am very reluctant to consider business with one of ebay’s competitors. After all, the feedback profile is a representation of my eBay reputation, and having no reputation outside eBay makes it more difficult to sell outside eBay. This is the networking effect at its strongest – an example that should be studied in every MBA marketing class.

Being active in the ebay forums, I am also aware that other sellers feel the same way. Many have tried unsuccessfully to sell used items on amazon.com, but have difficulty establishing credibility. Also from regularly checking these forums I know that sellers love to whine and complain, so the WSJ article yesterday really comes as no surprise to me. Nonetheless, I am confident that, absent a really disgusting abuse of sellers by eBay management, ebay sellers will stay right where they are. They have options, after all, but no competitor has been able to even launch an arrow at ebay’s moat.

The long term economic prospects of this company are simply outstanding. If the fundamentals and the price are equally appealing, this company is a great investment. This has been Part I. Next I will take a look at these other facets of the business.