Dueling Fools
Sitting on the Dock of eBay
The Bear Argument
By
Rick Aristotle Munarriz (TMF Edible)
Make a move on eBay? No way. Sorry. I'm not bidding. Not here. Not now. It's not that I don't like the company. I enjoy the site and have the feedback points to show for it. It's my second-favorite four-letter word online site (Fool.com being the first, naturally).
But, maybe being so close -- having my nose pressed up to its virtual display case on a regular basis -- makes it all too easy to see the growing cracks in the glass.
I don't mean the obvious one. You know, the perpetual outages that are a shocking affront to a company that pretends to be worth its current $14 billion valuation. Remember a few years back when the AOL Time Warner (NYSE: AOL) America Online service was down for a few hours and it made headlines? At eBay, this is a pretty routine occurrence. Members grumble. eBay refunds. It's so commonplace that it isn't even news anymore. Listen up eBay, you're not just a dozen people trading Pez dispensers anymore. Get with the program or risk the consequences of opening up the door to another company that will deliver.
I can't believe I just said that. I'm actually calling eBay vulnerable. Two years ago, when I scribed my then bullish Dueling Fools argument on the stock, I was quick to point out how the site's popularity would be its best defense. Buyers go where the sellers are. Sellers go where the buyers are. That served the company well in fending off the mighty Yahoo! and Amazon.com (Nasdaq: AMZN).
What didn't dawn on me at the time was that eBay could be the one to eventually grow to become its own worst enemy. It didn't occur to me that the quality of the eBay experience would deteriorate. And, believe me, it has. This goes way beyond the site outages. That's just salt for the wounds.
Check this out. In 1999's final quarter, eBay users conducted 41 million auctions. The gross total of auctions completed successfully was $901 million -- or an average of $21.98 for all of the listings. A year later, while the number of auctions shot up to 79.4 million, the gross value of the transactions was $1.6 billion or $20.15 per submission. Forget the huge "gross" sums. eBay's lot in life is to collect the meager middleman fees that lie in between. But, aren't you alarmed in the slightest by the falling auction values?
After all, eBay has gone on to beef up its high-ticket automobile, Premier, and live auctions over the past year. The transaction average should have been higher, not lower. It's clear. These streams are only camouflaging how badly the mainstream site is doing. A casual observer might come to the logical conclusion that, not only are less of eBay's auctions ending successfully, but that the winning prices on those that do land even a solitary bidder has fallen too.
Why? That's where all a casual observer needs is to become a casual visitor. eBay is no longer a haven for unique and desirable offerings. There are companies out there devoted to selling common trinkets for the sole purpose of eBay listing. Really. TakeToAuction.com (AMEX: TTA) is a site built around the concept of providing goods to hawk and providing fulfillment. Can you believe it? eBay has become QVC with an extra layer of fat!
But, it gets even worse than this sea of selfishly marked-up, homogenized vanilla. You're seeing users put up penny auctions of nothingness in the hope that you'll see their ads or sign up for PayPal and net them a paltry $5 affiliate commission. Writer David Langford said it best when he told me last week that, "even flea markets and pawn shops aren't that tawdry -- unmoderated Usenet boards, maybe."
It gets even worse than shilling for dollars, by selling the invisible or site bait-and-switch. Everywhere you turn, auction space is getting filled up by selling guides to eBay. Sold with full reselling rights, they simply get bought and put up for bid exponentially. Viral junk is what I call it. A major nuisance is what you might call it.
There is still a heart beat deep inside eBay. In there, you see art gallery and antique shop owners who were able to close up shop and count on eBay as a virtual storefront with minimal overhead. That's gold, but that's also pretty much run its growth course. Unfortunately, a lot of the incremental sales that eBay is generating these days is from the growing wave of generic garbage, affiliate spam, and MLM for dummies.
Right now, this cesspool of noise is thriving not because there is a sucker born every minute. It's growing because there's a sucker born every minute who believes that a sucker is born every minute. It won't last forever. While eBay has turned the other cheek because the listing fees of these graffiti artists helped prop gross margins past the 80% mark, eventually the site will have to clean house to beautify the experience, or pay the consequences of its blind pursuit of near-term profit. Ponzi and the rest of the Happy Days gang will just have to sit on it.
If not, it'll just be a matter of how much more dirt can fill up the fingernails, as entrepreneurs dig to lower lows. Who knows, it might not be long before Black-Market-Babies.com grows from being a parody site into a viable business model on eBay.
Checking out QuoteTracker.com's unofficial eBay auction tally shows how the high-flying growth has tapered off recently. Quality seems to be packing up, and quantity will be chasing it out the door. For now, it seems the company is too focused on quantity as it aims for $3 billion in revenues by 2005. That means it will have to continue to diversify into lower-margin trading specialties and continue to euthanize what once was the perfect business model. You're a quality investor, right? Get out now. Before quantity stampedes over you.
Rick Aristotle Munarriz has completed 43 successful auctions on the eBay site. However, true to his Duelspeak, he's not an owner of the stock. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.
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