Online auctions are past their prime. Neither eBay nor Wall Street knows what that means for the future.

Commentary about business and finance.
July 17 2008 11:53 AM

eBay's Identity Is Going, Going …

Online auctions are past their prime. Neither the market leader nor Wall Street knows what that means for the future.

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PayPal, its online payment system, is celebrating its 10th anniversary this year. It's a bigger force than ever; it now comprises 26 percent of eBay's total revenue. The problem, though, is that the majority of PayPal's revenue is still wrapped up in eBay.com transactions. If the flagship site sinks, PayPal is likely to be dragged down with it. To be fair, though, PayPal has consistently made progress in its attempts to build a self-sustaining business model. A year ago, less than 42 percent of PayPal's revenue came from sales away from eBay. Today that number is nearly 49 percent.

StubHub, eBay's ticket retailer, acquired for $310 million in January 2007, is intelligently occupying the middle of the ticket-sale Venn diagram: It both resells consumers' tickets and commissions original sales of its own. This business model dovetails nicely with the kind of site eBay wants eBay.com to become—one that works equally well for both sellers and buyers.

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Skype, the Webby phone service eBay bought a few years ago for a hefty $2.6 billion, is still an odd fit with the rest of eBay's portfolio. But that doesn't mean it can't be profitable. The site posted a record number of users and record revenue. Mobile devices like the iPhone can be either Skype's gravy train or its Achilles' heel. eBay has the chance to determine which it is.

Kijiji, the company's classifieds site, continues to struggle against Craigslist, the Goliath. But the sector holds tremendous growth potential if eBay can just figure out how to crack Craigslist's armor. For now, its best shot is to try and take it down within the halls of justice.

All of this returns us to our frustratingly open-ended rhetorical question. Is eBay 2.0 still the same eBay?

Wall Street, in its own fickle way, has been grappling with that question. Analysts, business reporters, and investors have wrestled with the steady decay of a former stock titan and haven't come to a consensus on whether eBay 2.0 holds the promise eBay 1.0 once did.

As a result, eBay's executives are becoming increasingly accustomed to roller-coaster rides. For months investors and journalists have been climbing over one another to cast doubt about eBay's future. Reports of a seller exodus, a declining interest in auctions, and trouble in the courtroom were interpreted as the first warning signs that eBay had reached the peak of its business model and had no way to go but down.

And even fairly impressive earnings announced Wednesday did not lift the gloom; the stock was down some 13 percent before noon Thursday, after climbing 4.5 percent in anticipation of the report Wednesday. Largely, this is because eBay's outlook for the rest of the year didn't project further growth and therefore wasn't quite up to snuff with analysts' predictions.

On the surface, Wall Street is right—eBay's stock performance and future outlook is so incremental it's not very exciting. But the small top- and bottom-line progress made doesn't tell the whole story. eBay is trying to redefine itself within an evolving medium that it once helped define. The greatest risk for eBay is that while the company shapes its future, it will ignore the immediate crisis at hand—that of profit, not identity.

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