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 user 2005-03-06 at 10:13:00 am Views: 73
  • #10697
    EBay’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
    their lives.

    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
    complaining about.

    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.”