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Skype's current growth strategy involves working with device partners to gradually eliminate the need for a computer to make calls, as well as finding ways to integrate the segment with its other business units. The company is also exploring ways to increase monetization and encourage its users to use premium offerings. A recent development toward that end is the introduction of Skype Prime, which allows users to charge incoming callers on a per-call or per-minute basis. Skype's current growth strategy involves working with device partners to gradually eliminate the need for a computer to make calls, as well as finding ways to integrate the segment with its other business units. The company is also exploring ways to increase monetization and encourage its users to use premium offerings. A recent development toward that end is the introduction of Skype Prime, which allows users to charge incoming callers on a per-call or per-minute basis.
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-{| border="1" cellpadding="3" style="border-collapse:collapse" | align=center 
-|+ '''Core Listings Growth, '05 - '06 (in order of total listings) 
-|- bgcolor=lightblue 
-! 
-!% Growth 
-|- 
-|United States 
-|align="center" | 8% 
-|- 
-|Germany 
-|align="center" | 26% 
-|- 
-|United Kingdom 
-|align="center" | 30% 
-|- 
-|France 
-|align="center" | 139% 
-|- 
-|Korea 
-|align="center" | 200% 
-|- 
-|Australia 
-|align="center" | 33% 
-|- 
-|China 
-|align="center" | 69% 
-|- 
-|Canada 
-|align="center" | 16% 
-|- 
-|Hong Kong 
-|align="center" | 154% 
-|- 
-|Italy 
-|align="center" | 21% 
-|- 
-|Rest of World (avg) 
-|align="center" | 92% 
-|- 
-|} 
- 
{| border="1" cellpadding="3" style="border-collapse:collapse" | align=center {| border="1" cellpadding="3" style="border-collapse:collapse" | align=center

Revision as of 22:20, June 11, 2009

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. eBay generated overall revenues around $8.5 billion for FY08, an increase of 11% from $ 7.6 billion reported for FY07. from its 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. The company's key acquisitions include, by year:

  • 2005: Skype (VoIP), Rent.com (real estate), Shopping.com (electronics and other merchandise), Verisign's payment gateway, and several classifieds sites[2]
  • 2006: Swedish auction marketplace Tradera.com [2]
  • 2007: Stubhub (event tickets marketplace) and Stumbleupon (search engine)[2]
  • 2008: Bill Me Later (alternative online payment method)[2]

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 24% operating margin in 2008,[3] in comparison to Amazon, which realized an operating margin of 4.4 that year%.[4] 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.

eBay's attempt to go viral: puzzling, logo-less "Windorphins" ads have been directing the confusedly curious to a sketchy-looking website that seems to want to be the next big Internet phenomenon, but which bears only the tiniest mention of eBay.
eBay's attempt to go viral: puzzling, logo-less "Windorphins" ads have been directing the confusedly curious to a sketchy-looking website that seems to want to be the next big Internet phenomenon, but which bears only the tiniest mention of eBay.

Business and Company Overview

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. In August 2008, eBay announced new pricing for listings that use the "Buy It Now" feature, which offers buyers a fixed price for the item on sale. The price reduction will charge sellers 70% less in fees. By encouraging sellers to use their Buy it Now feature, eBay is attempting to increase total listings and take some market share from competitor Amazon.com.[5] The core eBay business is the most profitable, maintaining an estimated 30-35% operating margin.
  • Payments: PayPal charges a $0.30 flat fee per transaction received, as well as a variable percentage (4.9%, or 1.9 to 2.9% for Premier and Business Accounts). There are also fees for cross-border transactions. PayPal runs at an estimated 20-25% margin.
  • Communications: Skype generates revenue through fees associated with calls from Skype to outside lines (SkypeOut), and vice versa (SkypeIn). There are additional fees for international calls, voicemail service, and other features such as ringtones. Like PayPal, Skype generates an estimated 20-25% margin.
eBay Historical Performance[6]
2006 2007 2008
Total Revenue ($millions) 5,969,741 7,672,329 8,541,261
Net Income ($millions) 1,125,639 348,251 1,779,474
Operating expenses ($millions) 3,289,993 5,296,177 4,237,510

Business Sectors

The Marketplaces unit encompasses all of eBay's online storefronts and e-commerce offerings. eBay's core marketplace consists of their traditional auction format, fixed-price listings through eBay's Buy-It-Now feature and through Half.com, and eBay Stores, which allows sellers to display all their listings and describe their businesses with customized web pages.

eBay Marketplace added over 41 million new users in 2006, and had 82 million active users at the end of the year, up from 72 million at the end of 2005 (these figures imply a churn of 31 million users who became inactive during the same time period). Users accounted for $52 billion worth of goods traded overall during the year, a metric that eBay calculates as gross merchandise volume (GMV). It is important to note that Marketplaces is a trading platform and the company does not manage any inventory of goods, unlike Amazon.com, another e-commerce leader.

Marketplaces also includes:

  • Shopping.com, a comparison shopping website
  • Rent.com, which provides listing services for apartment owners and prospective renters
  • Various classifieds sites throughout the world, including Kijiji (various countries), LoQUo.com (Spain), Marktplaats.nl (Netherlands), mobile.de (Germany), and a minority holding in Craigslist, Inc (various).

eBay's holding in Craigslist, a widely popular personal advertisement web-based company, came into the news in the spring of 2008. Ebay sued Craigslist owners, on the grounds that the owners made plays to dilute Ebay's holding in Craigslist by issuing new shares. In response Craigslist has filed a lawsuit against Ebay with many allegations, but focused on Ebay's alleged attempts to use its position as a minority shareholder to its own advantage.[7]

eBay thus far has thrived on its ability to bring buyers and sellers together with a lower fee structure than other systems, and has proven most effective with markets involving new, scarce goods, out-of-season or end-of-cycle merchandise, and used and vintage items. The company intends to continue growth in their Marketplaces unit by continuing to improve user experience.

Marketplaces Operating Data[8]
2006 2007 2008
Gross Merchandise Volume ($M) $52,474 $59,353 $59,650
% Yearly Growth, GMV 13% .5%

The launch of eBay Express--a more traditionally structured e-commerce site with new merchandise and fixed pricing--is an attempt to reach existing users who may be dissatisfied with eBay's core auction format. eBay also plans to continue expansion into new areas and geographies, as represented by their development of alternate markets outside of the eBay format such as classifieds and Shopping.com.

Net Revenues by Segment[9] ($M)
2006 2007 2008 % Change 06-07 % Change 07-08
Marketplaces $4334 $5364 $5587 24% 4%
Payments $1441 $1,926 $2,403 34% 25%
Communications $194 $382 $551 96% 44%
Total $5,970 $7,672 $8,541 29% 11%

International

eBay also has a considerable international presence, with listings outside of the United States accounting for 55% of net Marketplaces revenue in 2009. 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. However, eBay has also seen its share of trouble overseas: it withdrew from Japan in 2002 after losing the market to Yahoo, and recently changed strategies in China, entering a partnership with TOM Online in 2006 and retaining only 49% ownership.

eBay International[10]
United States International
Net Revenue 2006 ($M) 3,109 2,860
Net Revenue 2007 ($M) 3,743 3,930
% Change 20% 37%
Net Revenue 2008 ($M) 3,969 4,572
% Change 6% 16%

Payments

The Payments unit consists of PayPal, which eBay acquired after the failure of their own online payment system, Billpoint. The PayPal business model builds on the existing structure of bank accounts and credit, while allowing buyers to share only their email addresses with sellers, and providing sellers with lower transaction fees than traditional services such as credit cards.

The acquisition of PayPal has given eBay a payment service it can integrate into nearly all of its other offerings, as well as expand to reach transactions outside of eBay. This also gives them full oversight over the eBay experience from listing to purchase, and gives the company greater ability to defeat potential fraud. In 2008, PayPal processed $60 billion in total payment volume. It has over 70 million active account holders and is accepted in 190 countries and 19 currencies.

eBay plans to expand PayPal by increasing its integration with and penetration into its Marketplaces segment, as well as continue to grow its global presence and expand into off-eBay markets, as with its recent partnership with Yahoo. PayPal is also focusing on improving user experience, largely by addressing perceived issues with security.

Communications

In October 2005 eBay acquired Skype, currently the most popular carrier in the expanding Voice over Internet Protocol (VoIP) market. Skype boasts 405 million users worldwide, is available in 28 languages, and boasted revenues in 2008 of $551MM. Although initially rumored that eBay had acquired Skype to integrate the VoIP calling technology into its core marketplace business, this integration never came to fruition. As of early 2009, eBay was reportedly exploring options to spin Skype back out.

Skype's current growth strategy involves working with device partners to gradually eliminate the need for a computer to make calls, as well as finding ways to integrate the segment with its other business units. The company is also exploring ways to increase monetization and encourage its users to use premium offerings. A recent development toward that end is the introduction of Skype Prime, which allows users to charge incoming callers on a per-call or per-minute basis.

Payments Operating Data (millions)
2004 2005 2006 2007 2008
Total Accounts 63.8 96.2 133.0
Active Accounts 20.2 28.1 37.6 57.3 70.4
% Yearly Growth, Active Users 39.1% 33.8% 52.4% 22.8%
Total Number of Payments 339.9 480.7 610.7
Total Payment Volume $19B $27B $38B $48B $60B
% Yearly Growth, GMV 45% 37% 26% 35%

2009 First Quarter Earnings

EBay reported its 2009 first quarter earnings on Wednesday, April 22 2009, earning $357.1 million, or 28 cents per share, down 22 percent from $459.7 million, or 34 cents per share, in the year-ago period. When excluding items, eBay said it earned 39 cents per share. Analysts polled by Thomson Reuters expected 33 cents per share.[11]

Revenue fell 8 percent to $2.02 billion, just above analysts expectations of $1.94 billion. Revenue from eBay's marketplaces segment -- which includes eBay itself and e-commerce sites such as StubHub and Shopping.com -- fell almost 18 percent to $1.22 billion. The company blamed the drop on the difficult economy and the strengthened dollar. EBay receives about 54 percent of its marketplaces revenue from outside the United States, and deals done in other currencies translate into fewer dollars when the dollar is strong.[12]

Trends and Forces

Recession Resistant Retailer

This firm saw its quarterly revenue in 2008 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.

Ownership Stakes are integral to eBay's success

Ownership stakes like this are integral to eBay’s success, since it garners just over 40% of its revenue from acquisitions. In addition to its latest Gmarket purchase, it also holds a 49% stake in another Asian company, China-based Internet firm, Tom Online. And it owns 18.7% of Latin American online shopping company MercadoLibre.

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).

New users are becoming more expensive to acquire, with overall expenses per incremental user increasing over 300% between 2002 and 2006. This tripling of expense per user has been accompanied by only a modest increase in individual user spending. Part of these rising costs can be attributed to the slowing growth of active users: the ratio of active users to overall registered users has declined from 45% in 2003 to 37% in 2006, with annual growth in active users decreasing from 56% to 14% over the same period.

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 recent 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 commodity 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 has no 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).


Major Product Categories (by number of Listings)
Category Listings (as of 6.12.07)
Clothing, Shoes & Accessories 1,832,925
Collectibles 1,237,242
Jewelry & Watches 918,970
Home & Garden 622,543
Toys & Hobbies 577,733
Sports Mem., Cards & Fan Shop 549,136
Books 421,266


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.


eBay v. Amazon, 2008
eBay Amazon
GMV/Net Sales (mm) $59,650 $19,166
% Growth from 2007 .5% 29%
International Websites (# of countries) in 2009 32 7


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.




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References

  1. EBAY 2008 10K  
  2. 2.0 2.1 2.2 2.3 [ EBAY 2008 10K]  
  3. EBAY 2008 10-K pg. 49  
  4. AMZN 2008 10-K pg. 37  
  5. "EBay Cuts Fixed-Price Fees, Maintains Forecast",Bloomberg News, August 20, 2008.
  6. EBAY 2008 10-K pg. 47  
  7. Craigslist Returns Fire in eBay Suit, www.seekingalpha.com, posted May 14, 2008.
  8. EBAY 2008 10-K pg. 51  
  9. EBAY 2008 10-K pg. 90  
  10. EBAY 2008 10-K pg. 93  
  11. {{cite web=| url=http://finance.yahoo.com/news/EBay-1stqtr-profit-sales-fall-apf-15005814.html?.v=11| title=EBay 1st-qtr profit, sales fall on weak economy| accessdate=4/24/09| author=Rachel Metz| date=4/22/09|
  12. {{cite web=| url=http://finance.yahoo.com/news/EBay-1stqtr-profit-sales-fall-apf-15005814.html?.v=11| title=EBay 1st-qtr profit, sales fall on weak economy| accessdate=4/24/09| author=Rachel Metz| date=4/22/09|
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