eBay seeks to sail into new territory

Having trounced its online auction competition, eBay is looking for new markets to conquer.

One of the few profitable Internet companies, eBay has consistently beaten earnings estimates and likely will best them again this quarter when the company reports Thursday, said Jeetil Patel, a financial analyst who covers eBay for Deutsche Banc Alex Brown.

And unlike other Internet and technology companies that have seen their revenues stagnate with the economic downturn, eBay continues to grow rapidly. Its first-quarter revenue, for instance, was up about 80 percent from the year before.

Driving the company's growth is the success eBay has had in moving overseas, into Germany, Australia and other markets, Patel said. But the company is also undergoing a transformation that could continue and even accelerate that growth, he said.

Instead of being simply a marketplace for collectibles such as Pez dispensers and Beanie Babies, eBay is becoming a virtual retail site where shoppers can find "practical" products such as televisions, computers and automobiles.

"This year we've seen a much more pronounced shift toward practicals," Patel said, adding that the change has increased the value of goods sold on eBay and, in turn, the company's revenue. "eBay is becoming much more of a distribution channel."

With a goal of reaching $3 billion in sales--and a whopping $30 billion in transactions conducted through its system--by 2005, eBay's ambition is to be the place where things are bought and sold online.

eBay Chief Executive Meg Whitman "has won the auctions game. Now she's firing volleys at Amazon and Yahoo," said Munjal Shah, chief executive of auction service provider Andale. "This is the new battle royal that's emerging."

Competitors stumble
eBay's move to branch beyond auctions comes as its online auction rivals have faltered. Despite high-profile auction efforts by Yahoo, Microsoft and Amazon.com, several have stumbled this year as they instituted new fees or shifted focus to other areas.

• Once seen as the chief rival to eBay, Yahoo saw its listings plummet after it decided in January to charge sellers a fee for listing items. Although Yahoo has said that bidding activity and completed transactions have since increased, the number of listings dropped from more than 2 million to about 200,000, according to independent estimates.

• Amazon has been scaling back its auction effort to focus on its Marketplace initiative, according to Mike George, who heads the company's auction efforts as the general manager of the Seller Platform Integration Group. In recent months, the Seattle company has cut staff in its online auction department, cut back on customer service dedicated to it, and shut down its live-auction affiliate, company and outside sources say. In addition, Amazon no longer has a manager solely dedicated to running auctions.

• FairMarket, which had put together a network of auction sites to compete with eBay, announced a change of heart in February and is now helping companies list goods on eBay. After FairMarket's move, Microsoft announced a pact with eBay through which the software behemoth will move from its FairMarket relationship to incorporating eBay listings on its MSN, Carpoint and other Web sites. Earlier this month, Terra Lycos defected from FairMarket's network to team with eBay on auctions.

• A number of small auction sites such as Gold's Auction and FiredUp, backed by Rupert Murdoch's News Corp., have closed their doors in recent months. Bidland Systems, which helped run auction sites for companies and institutions such as the state of Michigan, shut down operations last month.

While eBay's rivals have been retrenching, the company has been expanding its own operations and cementing its dominant status in auctions.

eBay Stock price from July 2000 to present.
Source: Prophet Finance

In February, eBay teamed with eLance to launch a business-services marketplace. Targeting upscale auction buyers, the company in January relaunched its high-end auction site and teamed with Icollector to create a live-bid auction site, allowing its members to place bids on artwork and collectibles at offline auction houses.

To be sure, none of these efforts is an assured success. eBay relaunched its high-end auction site as eBay Premier, for instance, after its predecessor, eBay Great Collections, struggled to attract sellers and merchandise.

"Expansion of this magnitude is difficult under the best of circumstances," said Derek Brown, a financial analyst who covers eBay for WR Hambrecht. "It becomes an open question as to whether they can continue to manage their growth."

eBay has also been gradually moving into fixed-price trading. Last summer, for instance, the company bought Half.com, one of the leading venues for selling used books, music and videos at fixed prices. During the holiday season last year, the company added a "buy it now" feature to its auctions, allowing buyers to circumvent the auction process.

More recently, eBay added a storefronts feature to its site that includes such mainstream sellers as IBM and the Hard Rock Cafe. Although the feature is still in development, it already allows sellers to set up their own branded stores on eBay and feature goods for auction and at fixed prices.

The move into fixed prices could be huge for eBay, allowing it to expand its appeal to the mainstream, analysts say. U.S. and Western consumers are much more familiar with fixed prices than with bidding at auction. Allowing people to purchase with fixed prices could help eBay tap into customers who might never have shopped on its auction site.

Fixed prices also could help eBay increase sales during the holidays and other times when consumers don't have time to bid or don't want to wait for an auction to close.

eBay has also been expanding overseas. In February, the company bought French-based auction site iBazar, gaining that company's 2.4 million customers and its Web presence in Belgium, Brazil, France and several other countries. And in January, eBay bought a majority stake in South Korea's Internet Auction Company.

eBay successfully moved into the German market by acquiring Alando.de, but the latest acquisitions could prove more troublesome. In a recent regulatory filing, eBay disclosed that iBazar lost $64.6 million on $3 million in revenue last year. Had the French company been a part of eBay, eBay would have posted a net loss of 15 cents per share last year instead of net earnings of 17 cents per share.

Although analysts discount the effect of the acquisition this year, eBay has told investors that it expects iBazar to depress its earnings by about 4 cents per share in the second quarter.

"The challenge for eBay now is to expand its footprint," said Vernon Keenan, a financial analyst at Keenan Vision. "They've got to go beyond being a collectibles-only venue to promote themselves as a universal transaction platform."