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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eBay is going through an identity crisis. The company, which helped shape Web 1.0 e-commerce, now confronts a stark reality: Internet shopping no longer looks as it did a decade ago. Auction commerce—still the company's crown jewel—is losing much of its luster. In order to keep revenue and profit growing, eBay is being forced to reboot its brand.

The earnings eBay announced after Wednesday's market close indicate that the company is making impressive strides at reinventing itself. But eBay's adaptation may really be fundamental change. Will eBay 2.0 still be recognizable as eBay?

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eBay is approaching a typical conundrum for network-effect business models. There's only a fixed number of people who want to sell stuff via an auction, and eBay has reached nearly all of those users already ("market maturity," in Wall Street-speak). The auction site has been around for 13 years—several epochs in Internet time—and has a high profile domestically and globally. eBay.com's reservoir of potential users is running dry, and unless eBay does something, the pool will probably stay dry.

Realizing this, eBay altered its fee structure to charge users less for listing an auction and more when the sale is actually completed. This helped flood the marketplace with listings, which eBay believes provides buyers greater choice. Having more items available, the thinking goes, will eventually lead to greater sales. If you list it, they will come.

As planned, the number of listings—currently eBay adds about 220 million listings a month—has jumped by 19 percent, including a 22 percent spike internationally. Still, eBay's user base has grown by only 1 percent each of the past two quarters (when compared with the corresponding quarters from a year ago). And that growth isn't yet converting into sales: 8 percent less of the total inventory was sold this quarter than in the second quarter of 2007. Obviously, a slumping economy is a factor: More people need money than have money to spend.

The auction business is showing other unhealthy symptoms. By switching the fee structure, eBay also enraged a hefty chunk of its die-hard seller base. Consistent individual auctioneers have been forced to make a tough choice: pay more to use eBay.com's infrastructure, and have access to eBay.com's users, or migrate to a different site and reap more of the profits themselves. Also, power sellers feel as if their wares are being buried under the influx of new inventory, some of which is being listed with immunity to eBay.com's cumbersome fees. Outside observers are worried that a desertion of eBay.com's core users would shake the foundation of the community and the site.

Perhaps the biggest shift is that eBay has been coaxing more nonauction sales to the forefront of the site. After watching listings decline in 2007, eBay began to realize shopping on the Web wasn't what it used to be. These days e-commerce is all about the buyer, not the seller. Convenience is the chief objective; the days of hyperactively monitoring your maximum bid have come and gone. Selling used goods online has become increasingly crowded, with sites like Amazon and Craigslist encroaching on some of eBay's original real estate.

As a result, fixed-price "Buy It Now" listings have been proliferating on eBay. The company has forced the issue by partnering with Buy.com to list the site's merchandise on eBay, all as Buy It Now products. Nonauction sales now account for 43 percent of eBay.com's total sales volume, up dramatically in just a few years. Because of changes to user-rating and search algorithms, those items are showing up before others in search returns. Unsurprisingly, this has also incited irritation in longtime users.

Of course, eBay's future doesn't entirely rest on a rescue of its auction site. For years, it has diversified its portfolio in preparation for the day when eBay.com started to tread water. That day seems to finally be arriving, and eBay is well-positioned to grow revenue on its lesser-known properties.

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