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March 8, 1999

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Subject: EBay and Advertising
Author: scrubbo

I'm worried.

I'm worried about ads.

Not seriously, but I'm worried.

For awhile now, we've been hashing and rehashing (ouch, expensive computationially speaking) EBay's merits and flaws. One of the arguments that we've heard multiple times hinges on this :

1) EBay is the #2 site (on one ranking system) for visitors. And earns no money from ads. All it's income (which is significant) comes from selling auctions.

2) Yahoo is the #1 site, selling only ads, and has a cap of about 43 bn (I could be wrong on the actual number here.)

3) When EBay starts selling ads, it ought to be worth what Yahoo is, plus plenty more because of it's profitable "real" business.

4) Ergo, Ebay is grossly undervalued, and ought to be worth tons more.

There it is. For those of you who have been reading this board, you know I'm extremely bullish on Ebay, and the reason I originally bought the stock was because I liked their site, their business plan, and because they were profitable without ads.

Now all the discussion of how EBay is going to crush the market and Yahoo and everything when they start raking in the dough from ads has made me uneasy for awhile now, but I couldn't figure out why. So I've been thinking.

Why would EBay NOT already have ads on their site? It's one of the biggest (and oldest, har har) ways to make money on the net. I think it's because they don't want them and don't plan on having them at all. Which would totally sink the above argument. (Much as I hate to admit it.)

DON'T PANIC

Let me tell you WHY I think it might be this way.

Who places ads? Companies and people with things to sell. You wouldn't place an add saying "Hi! I'm Bob! Never mind!" unless you were very eccentric. So, it stands to reason that if you are placing an ad, you want people to come give you money in exchange for services/goods.

Ebay provides a service, which is facilitating your aquisition/divestment of goods. So WHO is ebay going to get to place ads on their site that wouldn't be cutting into their business? On-line stores? Chances are EBay has an auction on those items and would prefer it if you bought the items at their site.

If you went to WalMart, a store that tries to sell items, would you expect to find ads for K-Mart notifying shoppers of the blue-light specails at THEIR store? Of course not! So WHY would EBay do the same thing?

The ads for other places, like ETrade and specialty services that don't step on EBay's shoes are better placed on other sites. (Like Motley Fool. We know why you want us to click the links that say "Over 2,000 Mutual Funds to choose from!" and "We told you about Dell 2000% ago!" (both Ironic ads on the Fool) You can't Fool us, Gardners!) and the people who would WANT to advertise on EBay would be cutting in on EBays action.

That's why there aren't any ads on Ebay. And why there might not BE any ads on Ebay any time soon.

*GASP!*

Before we stampede for our on-line trading accounts to jump out of an investment we were SURE was going to generate more ad revenue than Yahoo, let's calm down for a second.

The problem EBay has isn't with advertising, it's with the current paradigm in on-line advertising. Links to sites that sell stuff, links to other sites that do the same thing. Ebay SHOULD have nothing to do with this kind of stuff, it'll just take people outside of EBay, and Ebay makes money by drawing you IN to all of their auctions. It's a sticky site, and who wants random links going everywhere else on the web and not into our store?

I've thought about this for awhile, and I have what may be a neat new idea in on-line advertising. We as a share-holders in a huge internet company with tons of cash and no ads right now that would have to be removed, we might be in a unique situation to change part of the way the web works.

One of the types of advertisements I HAVEN'T seen all over the Web is Brand placement ads. These are the Budwiser frogs during the superbowl. The "Got Milk" adds in all the magazines, and the Nike billboards everywhere. Manufacturers have yet to have a serious Web based advertising presence. They all have sites telling you how cool they are but nobody goes there much. Even banner ads don't get a lot of traffic per person because people don't really click on ads to sites all that much (think of how often you click a banner ad vs how many of them you see on a typical on-line session. Which annoys the site owners who are hosting the ads because they get paid per click! That's what that little red message above the ads on the Fool is for. Encourage us to earn the Fool some cash. Click on em and hit the back button and the Fool has just earned $.002 or something like that.) The people clicking on ads these days are the ones who do want a SERVICE or to buy GOODS. That's what EBay is pusing.

To the tar pits with that! Instead of clickable banner ads that take you to other people's sites, let's get some product placement, brand pusing ads. A Nike ad! How many people look at EBay a day? How many people would see the cute little swoosh? Coke! Advertise on Ebay! Drink Coke ads seen by hundreds of thousands of people are a pretty hefty argument. Even linking to Coke's main site in the ads wouldn't be bad. Coke's not out to steak EBay's customers.

These companies throw millions of dollars into all sorts of TV/movie/magazine ads. But none of them get eyeball time on the major web sites. What if Ebay were to start offering banner ads, or corner ads, unobtrusive and slick, for a certain fee a month? You could pick which page/pages you wanted your ad on at a given price per page (which would depend on the number of unique hits per day, not the number of people who click on the ad.) Instead of ads for other places selling things, let's let the big $$ advertising come to us.

You're pusing your Brand name in a new media, which hasn't really been done. Yes, they have cool pages, but nobody LOOKS at these pages. People look at EBay all the time.

The good thing is we don't have any advertising currently, so we wouldn't be shifting off of milking one cow and trying to milk a new uncertain cow. We'd just be trying a new advertising strategy that won't cut into our product selling.

What do you guys think? Am I crazy? As partial owners of the company, we can send our ideas in. If there are enough Fools rooting for it, it may come to pass, or perhaps something similar that they've had a marketing/economist type person approve. (Hey, I'm just a Software Engineer, not a market strategist.) Anyway, as partial owners, we can voice an opinion. I feel that there is a definate potiental for advertising on EBay, but it's not the traditional Web Ads that we should be going for.

Anyway, the point of this post is :

1) Don't count on advertising to rocket EBay high. Instead, count on it's rock solid business plan, it's great execution, it's name recognition, and everything else that we've discussed on this board.

2) Don't panic because I said I don't think we'll EVER see conventional ads on EBay. There may be a better way. And what more Foolish thing to do that to tell our company managers that we are interested in the ad market and understand that there are concerns with it.

3) EBay is in a great position in more ways than one. What might be looked at as a weakness (can't put traditional ads in place) may actually turn out to be a strenght. But it's all a gamble.

4) When I said I was worried, I meant I was worried that people were using a valuation for the company that they probably shouldn't use as a given. I still own EBay and will continue to do so. I'm not worried about my money, I'm worried about people over-anticipating something. Ads, lucrative as they might be, may take awhile and a lot of work.

5) Would any of the EBay fools be interested in talking about alternative advertising means for EBay with me? I think we're all pretty smart people on these boards, and oughta be able to come up with some good ideas to pass on to EBay.

6) GO EBAY!

Fool on!

Scrubbo

P.S. Sorry this is so long! I just previewed it and it's huge, but I don't know what to cut. Maybe I should cut the rambling P.S that I put in a...

(Disclosure : 30 post-split shares, and not selling! Go find your own shares!)

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