EBAY’S JOY RIDE : GOING ONCE …
EBAY’S JOY RIDE : GOING ONCE …
2005-03-06 at 10:13:00 am #10697EBay’s Joy Ride: Going Once …A Seller’s Rebellion May
Be the Least of Its Worries
San Jose, Calif. (March 05) — THE open revolt began almost
instantly among eBay’s sellers – a hodgepodge of hobbyists, slick entrepreneurs
and quirky collectors who conduct daily virtual auctions of everything from
samurai swords and refrigerator magnets to an unread copy of an “Archie and
Veronica” comic book (Volume 55). In January, eBay announced steep fee
increases, which took effect two weeks ago, prompting sellers to post caustic
comments on community bulletin boards both on and off the company’s Web site.
Petitions have been circulated, sellers have debated an eBay boycott and those
unhappy with the company seem evenly split over whether “FeeBay” or “GreedBay”
is the most apt epithet for it.
Inside eBay, the reaction to all this is: So what else is
Five times in five years, the company has raised the price
of doing business on its site, and each increase – whether a bump in the charge
for listing an auction item or a jump in the commission the company collects on
a completed sale – has provoked strident outbursts. The practiced nonchalance
with which eBay executives greet even these harshest of pronouncements starts
with the chief executive, Meg Whitman, possibly the most powerful woman in
corporate America today. Speaking at the company headquarters here last week,
she sounded almost nostalgic when talking about past protests, like the “Million
Auction March,” hatched in 2000 by those who were upset when eBay announced that
it would be selling banner advertisements on its site.
“The thing to know about the eBay community,” she said, “is
that it’s been vocal from Day 1.” Ms. Whitman allowed that the dissatisfied had
lately “perhaps been a tad more vocal than in the past.” But to her mind, that
is because eBay is so much more vast today than it was only a few years ago.
Despite the Million Auction March and what William C. Cobb,
who oversees the company’s North American operations, called the “constant
drone” of complaints on the company’s message boards, the collective worth of
merchandise sold through eBay has surged since 2000, to $33.8 billion from $5.2
Even so, others in the eBay universe are convinced that the
company has a far bigger problem on its hands than it is willing to acknowledge.
They include many longtime sellers and Wall Street analysts, long bullish on
eBay, who now say they are uncertain about the company’s ability to sustain its
torrid rate of growth. As they see it, Newtonian physics may finally be catching
up with eBay after one of the most magical rides ever for the stock of a young
It is too early to assess the fallout from the recent furor
over fees, but this much is clear: the company has never before imposed so sharp
a rate climb. Hardest hit were those who operate virtual stores on the eBay
worldwide mall. As of Feb. 18, store owners must pay eBay an 8 percent
commission on each sale, up from 5.25 percent.
“Imagine the reaction if a state raised its sales tax by
nearly three percentage points,” said Ina Steiner, the editor and publisher of
AuctionBytes.com, an online newsletter that has reported on the online auction
world since 1999. It is no surprise, Ms. Steiner said, that in recent weeks she
has heard an outcry not only from those who tend to bark loudly whenever eBay
raises a fee, but also from those who “might have rolled their eyes over a fee
increase in the past but kept selling.”
SINCE the end of January, more than 24,000 people have
added their names to an online petition protesting the new fees. A according to
PowerSellersUnite.com, a site run by a fed-up former eBay seller, more than
7,000 eBay stores have shut down in the five weeks since the company announced
the fee increase. EBay said it had 161,000 stores on its North American site at
the end of 2004.
“People stay on eBay because they get value from it,” Ms.
Steiner said. But Ms. Steiner, among others, worries that dishonest practices by
sellers – shipping a knock-off instead of the genuine article, for example – are
eroding the trust essential to eBay’s continued health. EBay says it now has
more than 1,000 employees working to eradicate fraud, but Ms. Steiner says she
is convinced that the problem is getting worse.
Sellers, Ms. Steiner said, “feel there are so many
problems, including fraud, including technical issues, including frustration
that eBay is great at bringing on more sellers but not as good at bringing more
buyers. I don’t think people would seriously consider leaving eBay, or at least
expanding beyond eBay, if they felt eBay was improving in the areas they care
In other words, the short-lived repercussions from the
unpopular fee increases may be the least of eBay’s problems. For months, sellers
have been fulminating over a long list of complaints, from fraud to fewer
bidders per auction and lower selling prices to poor service from eBay.
“My complaint with eBay isn’t that I’m paying more,” said
Candice Darr, who since 2000 has made her living on eBay selling software at a
store she named Darrsoft. “The way I look at it, rent goes up. That’s just
reality. My complaint is that my rent is going up but I’m getting less for my
Ms. Whitman likes to reminisce about the early days of
eBay, when skeptics dismissed the company as a niche player that would have
roughly the same impact on Internet commerce as a flea market on a town’s
economy. EBay went public in September 1998, during the madness of the dot-com
bubble, but as Ms. Whitman recalls it, as many as half the prospective investors
who attended the road show preceding its stock offering declined to buy shares.
Back then, Amazon.com and Yahoo, not eBay, were the darlings of those interested
in becoming rich from the consumer Internet.
Now eBay reigns as one of the kings of Internet commerce.
Amazon.com has twice eBay’s revenue, but it operates warehouses around the world
and carries inventory, while eBay basically sells nothing other than a spot in
its worldwide bazaar. As a result, eBay is nearly three times more profitable
than Amazon, and its market capitalization, at $56 billion, is nearly four times
as great. And though Google’s market cap is almost as large, eBay posted twice
the profits last year.
Yahoo is eBay’s competitor for the crown. Yahoo booked
slightly more revenue and profit than eBay did in 2004, but eBay’s market cap is
25 percent larger than Yahoo’s. EBay boasts that it is “the most valuable
e-commerce franchise in the world,” and it may be just that.
EBay has 66 million registered users in the United States
and 135 million worldwide, and its revenue has grown 70 percent a year,
annualized, since going public in 1998. And the company’s share price has moved
accordingly, increasing 21-fold since the initial public offering. The company
went public at a split-adjusted $1.97 a share and now trades at $41.75.
Yet eBay is again facing skeptics. Among the analysts who
wonder aloud if its stock market ride has come to an end, at least temporarily,
are Derek Brown at Pacific Growth Equities and Safa Rashtchy at Piper Jaffray,
both based in San Francisco. Mr. Brown described eBay as “one of the most
extraordinary engines to emerge on the Internet,” but since the fall of 2003 he
has had an underweight recommendation on the company. And Mr. Rashtchy, though
he used the word “phenomenal” to sum up eBay’s business, recently downgraded
eBay to market perform from buy.
Both check in periodically with those who make their living
through eBay, like sellers or those in the business of providing technical help
and other support services for sellers. Mr. Rashtchy, for instance, had dinner
last month with a group of top eBay sellers, and Mr. Brown speaks regularly with
a group of 10, including several “seller-service providers who in turn are in
touch with hundreds, if not thousands, of sellers.”
“They’ve taken on a much more negative tone in the last 12
to 18 months,” Mr. Brown said of sellers. “They have a variety of different
complaints, but the bottom line is that our research indicates customers have
grown increasingly frustrated and disenchanted with the platform. Many of them
have indicated to us that they’re running twice as hard to stand in place.”
Mr. Brown also began seeing signs that people were not just
complaining; they were acting on their disenchantment. He noticed that the
average number of items per seller was decreasing, as was the growth rate in
another important statistic: the revenue that eBay generates on everything but
the commission on a sale, from the basic cost of listing an item to a long list
of optional features like a “buy it now” button.
AT the same time, he and others spotted data that suggested
an abrupt slowdown in the growth of the company’s North American site, such as a
sharp decline in the number of new sellers joining the site.
Yet in 2004, eBay’s stock climbed by an extraordinary 80
percent. “I’m watching the degradation of the metrics, and I’m hearing the
grumblings by sellers get louder and louder and louder, and the stock was
hitting 52-week highs,” Mr. Brown said. “There was a disconnect between
perception and reality.”
Then, on Jan. 19, eBay announced its results for the fourth
quarter of 2004. Its earnings per share fell a penny short of analyst
expectations, largely because of a sluggish start to the holiday buying season.
The company’s stock fell 19 percent the next day as a half-dozen investment
banks cut their ratings. The shares are down 28 percent so far this year – and
Mr. Rashtchy is among those who doubt that eBay can continue to grow at anywhere
near the pace it set in its first six years as a publicly traded company.
“The market kept the valuation of eBay very high because
people could be confident that the company could grow into the numbers,” Mr.
Rashtchy said. “But with a stock like eBay, when it keeps going up and up,
investors are always nervous. They always have in the back of their minds that
the company will eventually hit a wall.” When it misses the numbers, he said, it
is hit hard.
Jonathan Garriss is the co-founder of Gotham City Online,
an online shoe store that does so robust a business on eBay that he paid the
company nearly $500,000 in fees last year. Given the fee increases, he figures,
he will pay an additional $75,000 in 2005, assuming the same volume in sales. By
contrast, Chel Ramsey is a mother of three who until recently was paying only a
few hundred dollars in fees each month to operate a children’s clothing store
called ScuttleBugs on eBay.
Both discovered their inner retailer courtesy of eBay – and
yet both are now keenly frustrated with a service that has meant so much to
Ms. Ramsey, who recently decided to move her store to its
own site off of eBay, lamented that her eBay business was suffering a slow death
from a thousand nicks. Eighteen months ago, she figured that she earned $800 to
$1,200 a month selling children’s clothes through eBay. Her profit, she said,
dropped to $400 to $500 in recent months.
“They get you when you list, they get you when you sell,
they get you when somebody pays,” Ms. Ramsey said. “They even take a bite out of
First there is the monthly $15.95 that eBay charges to be a
host of a store on its site – compared with $9.95 a month until the most recent
fee increase. Ms. Ramsey paid an additional $10 a month to show pictures of her
inventory, largely children’s clothes costing 99 cents to $3.99 an item.
Listing each item for sale costs only 2 cents but that’s
only the start, she said. The eBay search engine typically points shoppers only
to auction items, not to fixed-price items sold in its stores. So Ms. Ramsey put
a dozen or more items on auction each month to drive traffic to her site, and
the listing fees on those, she said, ranged from 55 cents to $1.25 an item.
Often, she ended up selling those items for less than cost – an advertising
expense, as she saw it.
She typically racked up several more charges on a sale,
beyond the commission. Virtually all her customers used an eBay payment service
called PayPal that serves as a middleman between seller and shopper and charges
the seller a fee, as a credit card company would. For the typical seller, that
runs 2.9 percent of the total charged, including shipping and handling. Ms.
Ramsey also used eBay’s shipping features, which meant paying an additional 20
cents for every label printed.
The e-mail that satisfied customers sometimes sent to her
was free, but she worried that the message they often conveyed might have a
price. She said, “They’ll say: ‘I’m so happy to have found an honest seller. I
was ready to give up on eBay.’ “
Where Ms. Ramsey said she felt “nickeled and dimed,” Mr.
Garriss, of Gotham City Online, who has been selling shoes on eBay since 1999,
described deterioration of another important measurement inside the world of
eBay: the average selling price of an item. Mr. Garriss is also the executive
director of the Professional eBay Sellers Alliance, a trade group started in
2003 for eBay sellers who do at least $25,000 in business each month.
EBay executives contend that the average selling price has
gone up in some categories. But that does not seem to be the experience of most
of the 600 or so sellers who belong to Mr. Garriss’s trade organization.
“For a lot of our sellers, the average selling price is
getting less and less and their eBay fees continue to go up,” he said. “So their
profitability is declining.” As a result, he said, “a lot of sellers have
disappeared off eBay” – a trend that eBay’s “aggressive” fee increases, he said,
are likely to accelerate.
Where will they go? Some sellers will do what he did, Mr.
Garriss said: realize that it is much more economical to operate your own online
store and to buy keywords from search companies like Google and Yahoo to point
potential buyers to your site. He maintains a presence on eBay, he said, but
outside the confines of eBay, where hard-to-believe deals are the coin of the
realm, he can charge more for the same shoes.
Others will do as R. J. Moore did. Mr. Moore, who started
doing business on eBay in 1999, was selling $2 million to $3 million in jewelry
a year. But increased competition, he said, cut into profits, and last June he
left eBay altogether. He now sells his jewelry at a smaller eBay rival,
“There’s far less action there,” Mr. Moore said, “but they
offer a much better deal.”
More recently, Bob Lee decided to do the same. Mr. Lee had
sold video games via eBay but decided to shut down his eBay store after
calculating that his fees would be rising by hundreds of dollars each month. He
knew that it was time to leave, he said, “when I figured out that eBay would be
making more money on each video game we sold than we were.”
Ms. Whitman, eBay’s chief executive, said she felt the pain
of sellers who believe that eBay no longer offers the same money-making
opportunities as it did in the past. When told about the plight of people
working so much harder to remain in place, she nodded her head, a slightly
pained expression on her face. She spends part of each day, she said, reading
the company’s message boards. She appreciates, she said, that a lot of people
are disappointed that once-thriving eBay businesses have fallen on hard
But her job, Ms. Whitman said, is to maintain the overall
health of the wider eBay ecosystem, not to worry about individuals. To make her
point, she recalled the dust storm that sellers kicked up a few years earlier,
when the selling price of collectibles fell.
“People asked us what we were going to do about that,” she
said. “The answer was, we’re not going to do anything.” Since then, of course,
eBay has continued to thrive and grow, and plenty of people are now making a
good living in the collectibles category.
That is the laissez-faire nature of life on eBay, as Ms.
Whitman and others explain it. A few homesteaders staking out a new category may
feel as if they have struck gold in their first months, but their good fortune
is guaranteed to pique the interest of other entrepreneurs. The entry of others
causes prices to fall – but if they fall too steeply, sellers stop selling,
thereby driving prices back up. In this view, eBay is a perfect manifestation of
capitalism as perceived by Adam Smith, efficient and self-correcting. Ms.
Whitman’s job – and the job of those who work for her – is to help people buy
and sell but otherwise to stay out of the way.
Some sellers contend that there has been a decline in the
percentage of auctions that end in a sale. If that were true, Ms. Whitman said,
she would be worried. But she maintains that the percentage of auctions that end
successfully has remained fairly constant. “That has not swung very much since
the day I walked in the door in 1998,” she said.
Indeed, it was a concern for the “balance of the
marketplace,” not a desire to bump up eBay’s bottom line, that explains the most
recent set of fee increases, said Mr. Cobb, who runs eBay’s North American
operations. The feeling inside eBay, he said, was that a kind of equilibrium
needed to be restored between those using auctions and those selling items for a
flat price in an eBay store. A sharp increase in the commission charged on all
store sales, this reasoning went, would lead more sellers to embrace the auction
The company also said it believed that too large a
proportion of sellers were using the “gallery” feature – choosing to have a
picture accompany a listing – so the company raised its fee for the feature by
40 percent to restore its premium status.
DESPITE the hailstorm of criticism, Mr. Cobb sticks by the
fee increases, saying only that he could have done a better job in explaining
all this to what everyone inside eBay calls simply “the community.” As a kind of
penance, the company announced last month that it would provide telephone
customer service to every shop owner – a service previously reserved for
high-volume eBay vendors known as power sellers – defined as the top 2 percent
in sales – and would not charge the $15.95 monthly rent for April. Mr. Cobb also
promised to slow down the rate at which the company introduces new features on
the site. The frequent addition of new bells and whistles has been blamed for
the broken links and other technical difficulties that eBay sellers have been
If nothing else, the fee increase has demonstrated to eBay
executives that they do not have quite the pricing power that they thought.
Ultimately, however, the company’s fortunes hinge less on the growth rate of the
company’s American site than on its foreign operations and the use of PayPal
beyond the eBay site.
PayPal is the default method of payment on the American
site, and it is slowly gaining momentum as eBay struggles, country by country,
to translate the service into a foreign language while seeking approval from
local regulators to operate within their borders. Already, it accounts for
one-quarter of eBay’s revenue, which the company expects to reach roughly $4.3
billion this year.
But the company’s deepest hope for PayPal, which eBay
bought for $1.5 billion in 2002, is that more and more Web sites not related to
eBay will adopt it as a preferred payment method. According to data provided by
eBay, only about 2 percent of the Web’s small- and medium-size outposts – which
the company defines as sites doing less than $5 million in e-commerce a year –
offer buyers the PayPal option.
EBay now operates independent auction sites in 32
countries. The company’s footprint is especially wide in Europe, where it has
had phenomenal annual growth rates, reaching triple digits in some
That overseas success has been largely factored into the
company’s stock price. The battle now is over Asia. On the upside, eBay is
strong in South Korea and has first-mover advantage in China. On the downside,
it has conceded e-commerce in Japan to Yahoo, which is trying to parlay its
strength in Hong Kong and Taiwan to pursue the nascent Chinese e-commerce
Earlier this year, eBay announced that its international
arm would spend an additional $100 million on the Chinese market, which Ms.
Whitman has declared “critical” to eBay’s continued success.
For the moment, though, the company can at least take
solace that people care so much about eBay that they are bothering to rant at
all about the North America site. “What we’ve found over time is this is like
when fans of a team call in to a talk radio station,” Mr. Cobb said. “For the
most part, while they’re screaming at us they’re also wearing that jersey for us
on Sunday and rooting for us, with paint on their face.”