Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

eBay's Position and Competition
Yahoo!, Amazon, and uBid, oh, no! (Or not.)

By Jeff Fischer (TMF Jeff) (TMFJeff)

ALEXANDRA, VA (August 3, 1999) -- Remember when the imminent online arrival of Barnes & Noble (NYSE: BKS), Borders Group (NYSE: BGP) and even Books-A-Million (Nasdaq: BAMM) was going to destroy Amazon.com (Nasdaq: AMZN)?

Likewise, many predict the demise of eBay (Nasdaq: EBAY) at the hands of proliferating competitors such as Amazon, Yahoo! (Nasdaq: YHOO), and Priceline.com (Nasdaq: PCLN). Can eBay be displaced? eBay is not only the so-called first mover in the consumer online auction market, but it has been the first to scale into millions of users as well, and that is actually much more important than even being first mover -- first to scale.

As our own TMF School reminds us, being first mover doesn't mean that a company is going to win. With strong management, first mover status does help. With weak management, however, a stronger company can steal a first mover's idea and be the first to scale it. Game, set, and match is usually rewarded to the first to scale a good idea, not the first mover alone. In the auction world, that's eBay. It was first to move and first to scale. (Amazon is doing the same in general online commerce.)

eBay's primary competition is Yahoo! Auctions, Amazon, uBid (Nasdaq: UBID) and Onsale (Nasdaq: ONSL). Priceline is also on the move. Last week it was reported that Priceline is considering the sale of consumer retail goods in an auction format. Similar to the site's blind bid system for airline tickets, whereby a user enters the desired price for a flight and then waits to see what he gets, users would enter bids for consumer goods, and the seller would forage among the bids to choose the winner.

Priceline's auction format doesn't sound as satisfying or convenient as the eBay system -- a system where you know who's winning an auction, and you have a ballpark idea of what you need to bid to get on the leader board. Priceline's service will appeal to corporate sellers that wish to unload aging or close-out inventory, however, and it will appeal to adventurous buyers who don't mind bidding on items in a random, "Whatever, I'd pay this much" fashion.

But it isn't eBay. It wouldn't have the intimacy of eBay. It wouldn't have the consumer-to-consumer contact -- the friendliness that makes eBay what it is. It probably wouldn't have the reassuring rating system. And it'd likely lack the community sprit. Heck, though, it doesn't even have a presence yet. Priceline's idea is probably months from fruition.

As Priceline ponders, eBay continues to swim ahead as the dominant online auction leader, and -- depending on how you measure it -- the largest online consumer retailer on the planet, too. Last quarter, gross merchandise revenue at eBay was $622 million, nearly twice Amazon's $314 million. Of these sales, however, eBay collected "only" $38.5 million in commission revenue -- not bad for a two-year-old business. eBay's commission revenue should top $200 million this year and $340 million in 2000, according to average estimates, as gross merchandise revenue should soar into billions of dollars. All the while, eBay will carry zero inventory and it should be profitable to the tune of an estimated $0.43 per share in 2000.

The company ended the second quarter with 5.6 million registered users, up 46% from the first quarter, and pounding into the table average estimates of a high 4 million. The runner-up behind eBay is Yahoo! Auctions. Its auctions are free, but beyond this the benefits compared to eBay are few. Yahoo! lacks the consumer-friendly nature of eBay (though it is improving), the civilized feel of eBay, and the wide array of products that eBay offers.

eBay currently has 2.46 million items for sale on its site, up from 1.7 million this spring. It had 2.2 million items before the outage in June; that number quickly dropped to 1.8 million, and then it steadily climbed again to 2.2 million. Finally, several weeks after the outage, it made new highs at 2.5 million. (As investors, we check the number on eBay's home page regularly.) The number of registered users and items for sale on Yahoo! and Amazon are difficult (make that impossible) to obtain, but estimates place them in the minor leagues compared to eBay -- hundreds of thousands compared to eBay's millions.

Other competitors don't fare any better. Onsale reported second-quarter results that missed expectations. The company is merging with Egghead.com (Nasdaq: EGGS) to create more visibility. Onsale grew registered users 22% to 1.382 million last quarter, making it 4.6 million users lighter than eBay. And anyway, Onsale isn't even a one-on-one contender with eBay on the same broad level. It has a primary focus: selling refurbished and closeout computers, peripherals and consumer electronics. It also sells sporting goods and housewares, all auction style, but these goods aren't the butter on its bread. The butter on its bread is computer goods from manufacturers. Therefore, the site truly doesn't represent consumer-to-consumer auction competition to eBay.

Due to its product offerings, Onsale has higher revenue than eBay (though not higher gross merchandise revenue), but it also shows losses, not profits. A key difference between Onsale and eBay is inventory. Onsale provides it. eBay doesn't. eBay leverages the Internet much more effectively. This is partially why each eBay user is valued so much higher than an auction user at any other site. eBay's users bring value (in the form of inventory) to the site, which eBay leverages.

Next on the block is uBid. uBid is much more a competitor to Onsale than to eBay. The company also focuses on selling refurbished consumer electronic items, auction style, with bids beginning at $7 per item. Over 90 manufacturers provide the usual closeout products that sell on the site. uBid's registered users totaled only 533,000 as of last quarter, up 41%. uBid lost $4.2 million on $45.6 million in revenue in the second quarter. On July 21, uBid filed to sell 2.0 million shares of its stock to the public to raise funds. The stock is at $22, down from a vertigo inducing $189, and just two dollars above its all-time low.

On April 12, eBay sold 6.5 million shares of stock at $170 per share, raising a tidy war chest at an opportune moment. From May 15 to June 14, the stock fell from $196 to $136, a slide instigated by the June 11 site outage. The stock recovered above $160 afterwards, but since then it turned to fall to current prices on word that management would increase spending on international expansion, marketing, and technology. eBay will remain profitable, however, and management is comfortable with year 2000 earnings per share estimates.

eBay has the cash, market lead, and an early highly scaled inventory-free business model that so many others covet. Yahoo! and Amazon are its most formidable competitors, but eBay has a giant leg-up on each, and it commands most mind-share for online auctions. eBay is in such a good position that it almost must mess up in order to lose its lead and momentum. The ball is in its court. eBay is the leading horse taking the first turn, and there is no second place horse close behind.

eBay to win, place, or show. And eBay to win. Our two bets. Not in that order.

If you have thoughts to share on eBay, please visit the Rule Breaker board.

Finally, be sure to read the Fool's new News World for all of today's major investment news, and check out Drip Port -- today we officially begin our food and beverage industry study.

08/03/99 Close
Stock  Change    Bid 
------------------ 
AMGN  -2 1/8     76.63
AMZN  +  7/8     94.88
AOL   -3 15/16   88.94
ATHM  +  7/16    43.38
CAT   -  11/16   57.88
CHV   +1 3/4     93.00
DD    -1 1/8     71.69
DJT   -  1/4      4.63
EBAY  -6 7/8     84.38
GT    -  5/16    54.19
IOM   -  1/16     4.00
SBUX  -  5/16    22.63
TDFX  -  3/4     12.50


                  Day     Month  Year   History   Annualized 
      R-BREAKER  -2.04%  -4.92%   4.90%  952.89%   60.22%
        S&P:     -0.44%  -0.49%   8.14%  202.69%   24.83%
        NASDAQ:  -1.36%  -1.91%  18.03%  259.35%   29.19%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91     88.94    9685.72%
   9/9/97  1320 Amazon.com     6.58     94.88    1342.04%
  5/17/95  1960 Iomega Cor     1.28      4.00     212.40%
 12/16/98   580 Amgen         42.88     76.63      78.72%
  12/4/98   900 Excite@Hom    28.04     43.38      54.69%
  4/30/97 -1170*Trump*         8.47      4.63      45.39%
  2/23/99   300 Caterpilla    46.96     57.88      23.23%
  2/20/98   260 DuPont        58.84     71.69      21.83%
  2/23/99   180 Chevron       79.17     93.00      17.47%
  2/23/99   290 Goodyear T    48.72     54.19      11.23%
  2/26/99   300 eBay         100.53     84.38     -16.07%
   7/2/98   470 Starbucks     27.95     22.63     -19.06%
   1/8/98   425 3Dfx          25.67     12.50     -51.30%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 195662.50  $193663.03
   9/9/97  1320 Amazon.com  8684.60 125235.00  $116550.40
 12/16/98   580 Amgen      24867.50  44442.50   $19575.00
  12/4/98   900 Excite@Hom 25236.13  39037.50   $13801.37
  5/17/95  1960 Iomega Cor  2509.60   7840.00    $5330.40
  4/30/97 -1170*Trump*     -9908.50  -5411.25    $4497.25
  2/20/98   260 DuPont     15299.43  18638.75    $3339.32
  2/23/99   300 Caterpilla 14089.25  17362.50    $3273.25
  2/23/99   180 Chevron    14250.50  16740.00    $2489.50
  2/23/99   290 Goodyear T 14127.38  15714.38    $1587.00
   7/2/98   470 Starbucks  13138.63  10633.75   -$2504.88
  2/26/99   300 eBay       30158.00  25312.50   -$4845.50
   1/8/98   425 3Dfx       10908.63   5312.50   -$5596.13

                              CASH   $9924.87
                             TOTAL $526445.50
 
Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends in the yearly, historic and annualized returns). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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