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Commentary: Chinks in eBay's armor

It seems invincible, but the auctioneer could face tough times as it juggles a changing value proposition, risky enterprise seller efforts and ongoing fraud issues.

Commentary: Chinks in eBay's armor
By Forrester Research
Special to CNET
November 22, 2002, 11:40AM PT

By Carrie A. Johnson, Senior Analyst

As the poster child for profitable pure-play Internet companies, eBay seems invincible. But chinks in its armor do exist: eBay could face tough times as it juggles a changing value proposition, risky enterprise seller efforts and ongoing fraud issues.

With online auction sales among U.S. consumers expected to reach $54.3 billion in five years, and eBay's share projected to be 85 percent to 90 percent of that, the company seems on a course to dominate online auction sales. But it's not easy being at the top, because as a market leader, eBay must constantly manage delicate balancing acts to retain its leadership. If we were CEO Meg Whitman, we'd worry about three things, which individually could cause headaches but collectively could change eBay's profits trajectory.

• Value proposition. eBay's value has always been having millions of items at low prices, and those low prices are a primary reason it has attracted so many consumers. But because far more consumers bid on items than sell items, this value proposition is in jeopardy. How? If eBay can't convert more of its bidders to sellers, buyers will outnumber sellers even more dramatically, and prices will inevitably go up. Value-oriented shoppers will then go to or for low prices, and only buyers interested in hard-to-find knickknacks will keep shopping at eBay.

Our advice to eBay: Stop jacking up listing and selling fees that scare away existing sellers, and use TV ads to tout the virtues of buying and selling through eBay to convert bidders to sellers, thereby preserving the buyer-seller balance.

• Enterprise sellers. eBay recognizes that to attract more mainstream consumers, it has to bring in the big guns--brand-name retailers and manufacturers like Home Depot and IBM that bring more legitimacy to the marketplace. But this strategy could hurt eBay in two ways. First, efforts like its partnership with Accenture, which has yet to announce a retail client, could fail miserably, as large retailers remain skittish about the marketplace. Second, if too many enterprise sellers successfully hawk goods at eBay, lower prices and brand advantages will anger eBay's smaller merchants. If enough top sellers, who still account for 90 percent of eBay's sales, join forces,

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call a strike, and take their goods and existing customers to Yahoo Auctions or Amazon, they'll empty eBay's shelves and take their customers with them.

Our advice to eBay: Keep small merchants on board by tiering listing fees by merchant size, and justify the rate hike for large merchants by throwing in account management services--a layer of attention they'll expect after managing portal deals with America Online and MSN.

• Ongoing fraud issues. Despite high-profile fraud cases, consumers still bid and buy online. So far, eBay has been able to prevent fraud from spiraling out of control. But it remains a serious risk, and the company will have a tough time attracting new bidders if one of its merchant partners like The Sharper Image or Sears Roebuck publicizes a high deadbeat bidder rate, or if a high-profile consumer like NBC's Katie Couric speaks on air about an auction purchase gone bad.

Our advice to eBay: Develop and distribute to sellers pattern recognition software that identifies likely buyer and seller scam artists--and triggers immediate alerts to FBI consumer fraud investigators.

© 2002, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.