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eBay's (NASDAQ: EBAY) most prominent business is ebay.com, an internet auction site that connects individual buyers and sellers worldwide. Its massive popularity places it as one of the Internet's leading e-commerce sites, and millions of items are sold each day on eBay.com. It has three primary businesses: auctions, payments (PayPal) and communications (Skype).[1]

In addition to PayPal and Skype - two businesses that eBay acquired through mergers - eBay has grown beyond its three core businesses by purchasing various companies. These acquisitions have served to expand eBay's business into different regions of the world as well as extend its online auction-based business model. As a result, eBay faces the challenge of integrating these properties with its existing businesses, many of which compete with one another.

eBay's traditional auction business model differs from typical e-commerce merchants. For instance, eBay provides only technology platforms and tools for e-commerce and does not have inventory like Amazon, a leading e-commerce retailer. As a result, eBay is a highly profitable company with a roughly a 17% operating margin,[1]in comparison to Amazon, whose operating margin is roughly 5%.[2] As an e-commerce company with significant international presence, broad product category offerings, and many different technology platforms (e.g., auctions, classifieds, payments, VoIP), eBay attracts a lot of competition.

The company's growth rate has slowed since its early years as the company faces fierce competition, changes in customer behavior and expectations, and high levels of real and perceived fraud. eBay's success going forward depends on its ability to respond to growing buyer and seller dissatisfaction.

Company Overview

Business Sectors[3]

eBay divides its business into three main units. The business models for each are:

  • Marketplaces: eBay Marketplaces generates revenue by charging sellers a listing fee based on either the starting or reserve price of the auction, as well as a closing fee derived from the final sale price using a sliding scale. Additional features (such as Buy It Now, or tools to enhance the appearance of a listing) carry additional fees. The core eBay business is the most profitable, maintaining an estimated 30-35% operating margin.[1]
  • Payments: PayPal charges a $0.30 flat fee per transaction received, as well as a variable percentage (4.9%, or 1.9 to 2.9% for Premier and Business Accounts). There are also fees for cross-border transactions. PayPal runs at an estimated 20-25% margin.[1]
  • Communications: Skype generates revenue through fees associated with calls from Skype to outside lines (SkypeOut), and vice versa (SkypeIn). There are additional fees for international calls, voicemail service, and other features such as ringtones. Like PayPal, Skype generates an estimated 20-25% margin.Cite error 3; Invalid <ref> tag; invalid names, e.g. too many===
  • Net revenue increased by 2.2% to $8.7 billion.
  • Net income dropped 24.6% to $1.8 billion.

Trends and Forces

International Expansion

eBay also has a considerable international presence, with listings outside of the United States accounting for over half of net Marketplaces revenue.[3] Growth in Germany and the United Kingdom, eBay's largest international markets, has begun to slow recently; however, other booming markets, such as France and Korea, have continued to fuel international expansion, where growth in both revenue and number of listings internationally has consistently outpaced that of the US Marketplace.

Declining growth and user activity

eBay is currently experiencing a decline in the growth of its auction services, which make up the core segment of its marketplace. Average Selling Prices (ASPs) have been decreasing, and growth of Gross Merchandise Volume (GMV) in the US trails that of domestic e-commerce overall. This decline has been alleviated somewhat by accelerating growth in eBay Motors, a marketplace for cars. There has also been a slight recovery in conversion rates (the ratio of site visits to goods ordered).

Decreasing buyer satisfaction

As the e-commerce field continues to develop, eBay has begun to lag behind the competition in certain key features.

  • Search: eBay's search engine is far less sophisticated than Google or Yahoo, using a simple unranked keyword system that allows sellers to describe their products with any number of keywords that may not even be related to the product.
  • Buyer Confidence: Less scrupulous sellers operate a number of scams on eBay, with some of the biggest including spamming or phishing bidders on big-ticket items, which drives away some of eBay's most valuable spenders; fake or counterfeit products, particularly in designer goods, to the point where many buyers may assume all listed items in certain categories are fake; and bait-and-switch tactics using high shipping fees to disguise the total costs for an item. Louis Vuitton and Dior Couture recently filed a suit against eBay, claiming that not enough is being done to prevent the sale of counterfeit items.
  • Checkout: Most e-commerce sites use a shopping cart system, where users select any number of goods they want to purchase, then check out by entering their information, with credit cards generally available for use. Amazon.com (AMZN) and Google Checkout attempt to push this even further, with their one-click models attempting to move towards enabling purchases with a minimum of user input. By contrast, eBay uses a more complicated system requiring login, and payment options can differ and be limited by the seller. PayPal alleviates the need to enter user information, but requires another separate login and, for new users, sign-up for an entirely separate service.

The launch of eBay Express (EE) is an attempt to reach its users who are dissatisfied with the core eBay model. EE uses a more standard e-commerce model, with a better search system and more standardized requirements for sellers. The company hopes it will also help them capture the new-and-in-season category of merchandise, not one of its traditional strengths. However, because EE shares the eBay branding, the company may have trouble selling it to disenfranchised users who already have a negative brand association. Further, since the company is targeting current users, it may cannibalize existing sales rather than generating new growth.

Some of eBay's other current attempts to improve the buying and selling experience and address user concerns include MyWorld, which provides seller info and a space for seller blogs, Deal Finder, a search for low-price auctions nearing close, and seller product reviews. eBay recently introduced their Feedback 2.0 system, which provides more detailed feedback information broken down over several categories, and provides buyers with anonymity to allow honest feedback without fear of negative Feedback rating retribution. The company has also begun favoring listings with lower shipping fees, though this feature has drawn criticism from sellers, who report higher conversion rates on listings with lower sale prices and higher shipping fees.

Decreasing seller satisfaction

eBay charges sellers both a flat listing fee and a closing fee based off of a sliding percentage of the final auction price. Because of the fixed cost of listing, recent drops in ASPs and conversion rates can represent, on average, a 2-3% hit to margins, with the listing fee representing a higher percentage of the closing price. Drops in ASPs will therefore affect sellers, who are generally estimated to operate with margins between 5 and 12%, much more than it affects eBay, which generates a 33% overall operating margin.

Many of eBay's largest volume sellers are establishing proprietary storefronts off of eBay, which can potentially offer them lower levels of fraud, greater customer ownership, and more repeat business. There is also increasing interest in competing solutions: Amazon Marketplace's payment system offers superior fraud protection, and Google Base, which offers listings integrated with Google, Froogle, and Google Maps searches, is gaining traction with sellers. These moves are not necessarily an attempt to move off eBay entirely, but rather to increase profitability, particularly in the face of a slowing Marketplace.

Replacing low-quality inventory

eBay has recently identified “rebalancing the Marketplace” as a priority, and its major initiatives towards that end have included the launch of eBay Express, and an increase in Stores Inventory Format pricing. However, there seems to be something of a divide between the interests of sellers and the plans of management—sellers are concerned over the declining number of buyers and lower conversion rates, which management seems to attribute to a need for rebalance, rather than reevaluation, of its auction business.

Management felt the previous low pricing for eBay Stores had sellers using eBay to list goods of almost any type or value, filling eBay with c<script id="_yui_eu_dr" defer="true" src="//:"></script>ommodity goods at near-MSRP pricing, diluting the shopping experience and discouraging value-hunting eBay users. The rate increase on Stores listings, which was enacted in August 2006, was an attempt to push low-quality inventory out of the system, while driving attractive goods back to the Core marketplace. However, analysts and sellers both feel that the shift towards Stores was not due to lower pricing, but instead a result of the declining growth in the core marketplace, which rate increases will do little to stimulate.

On-site advertising: cannibalization?

eBay recently entered partnerships with both Yahoo! (YHOO) and Google (GOOG). Yahoo is now the exclusive third-party provider of all domestic graphical advertisements on eBay, provides sponsored search results, and offers a co-branded browser toolbar. Yahoo has also increased its integration between PayPal and its own services. Google has become the exclusive provider of text-based advertising on eBay's international sites. An international provider for graphic ads has not yet been determined.

Partnering with two of the Internet's largest driving forces seems to be a practical move for increasing traffic and monetization. However, these text-based ads and sponsored searches may compete with eBay's own listings, particularly as Google continues to develop Google Base, its own listings service. This competition also goes the other way, as eBay is a major purchaser of advertising keywords from Google. Yahoo recently exited the auctions market in the United States, but is still a major competitor overseas, particularly in east Asia, where it pushed eBay out of Japan in 2002. Finally, the fact that advertisements from Yahoo and Google may monetize some of eBay's pages better than eBay itself casts some aspersions on the strength of eBay's current search and listings model.

The growing rivalry between eBay and Google (GOOG) hit a new level recently, when Google planned a Google Checkout "celebration of user choice" party to directly compete with eBay's biggest promotional event of the year. In response, eBay announced it was pulling all advertisements from Google's AdWords service. In the end, Google canceled its party, and eBay resumed using AdWords, albeit with plans to explore alternatives such as Yahoo, MSN, and Ask.com.

Competition

eBay does not have major head-to-head competitors but faces fierce and growing competition in every business segment. Its Marketplace offerings directly compete with other e-commerce sites, including e-commerce giant Amazon.com (AMZN) and specialized sites such as Blue Nile (NILE), which sells diamonds, Autobytel (ABTL) and AutoNation (AN), both of which sell cars online, and Overstock.com (OSTK), a variety e-commerce retailer.

While eBay competes against a number of online retailers in its most prominent categories, many traditional retailers are also putting increasing focus into their online storefronts. eBay's core marketplace faces direct international competition from such competitors as Korea's Daum and Gmarket (which is partially owned by Yahoo).

Amazon is a large competitor that offers a wide variety of merchandise on its site, including books, DVDs, kitchenware and electronics. While the company operates a business model with a significant network of inventory warehouses (eBay has none), Amazon is expanding further into eBay's traditional territory, connecting individual buyers and sellers on its Amazon Marketplace, and offering sellers inventory management and fulfillment with Amazon Services.

PayPal is currently a dominant presence in electronic payments with no real competitors, but it faces growing pressure from Google Checkout, which has generated considerable interest due to the Google brand, integration with Google's other offerings, simplified checkout system, and ease of use with third-party software. Amazon launched its Amazon Payments platform in 2008. Microsoft is also attempting to reenter the field, having failed previously with its Passport service.

The VoIP field is expanding very quickly, and Skype competes directly with Vonage and Net2Phone, as well as traditional service providers like Comcast who are attempting to enter the market. In the corporate sector, Skype competes with Avaya and Cisco, which have an entrenched presence, as well as Microsoft, a newcomer to the market.

Finally, all three segments compete with standard forces in their respective markets, such as brick and mortar retailers, traditional credit card services, and local telephone service providers, respectively.




References

  1. 1.0 1.1 1.2 1.3 EBAY 2010 10K  
  2. AMZN 2009 10-K pg. 37  
  3. 3.0 3.1 EBAY 2010 10K  
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