By Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA (Nov. 29, 1999) -- Friday's column on eBay (Nasdaq: EBAY) pleasurably elicited a response from Fools on the Rule Breaker message boards. (Click here for Friday's column.) An ongoing collection of responses is not unusual for any Motley Fool column and is always hoped for.

Many Fools generally agreed with the column, which is nice, although it doesn't challenge us further as a group. Other Fools disagreed that eBay is in a position of power. The primary brave thinker in this vein was a Fool named "plopker," who shared a belief that online auctions will become a faceless, brandless commodity. (More on this in a moment.) Another Fool reminded us that Yahoo! (Nasdaq: YHOO) does indeed get something for its auctions, something other than the auction listing fee that it denies itself: it receives advertising revenue.

Many of Yahoo!'s auction pages contain small advertisements from outside parties. As most Rule Maker investors know, Yahoo! receives a majority of its revenue from advertising. The company has a $60 billion market value on essentially this one revenue stream (though it is creating other streams, of course). eBay, with over 1.5 million page views per month, has yet to place advertisements on its site. If eBay were to do so, it would tap into a potentially very large new revenue stream.

Will eBay do this?

Recently, the company agreed to test advertisements on its eBay AOL site, which it co-manages with America Online (NYSE: AOL). If the advertisement trial goes well on the AOL-branded site, eBay may implement ads on its mothersite. Assuming that eBay carried small ad banners on many of its site's pages, and assuming that the ad revenue generated was granted a valuation multiple similar to what Yahoo! enjoys, ad impression revenue alone could account for (or be valued at) about 25% of eBay's current market value.

So, indeed, Yahoo! does receive something for its auction pages. The auctions add to its community and increases page views on Yahoo!, and with that advertising revenue rises. I'm glad that a Fool raised this point. It reminds us that eBay may tap into ad revenues as well.

Now let's consider plopker's idea that auctions will become a commodity-like property on the Internet due primarily to auction search engines. This idea is similar, in my opinion, to the now aging idea that shopbots (electronic agents that search the Web to find good prices for you) would ruin Amazon (Nasdaq: AMZN) and its ability to compete on any level. So far, this theory has proved anything but true. In fact, Amazon has become a giant "shopbot" itself, making the attraction for such devices wane. Meanwhile, in the auction space, as plopker admits, auction search engines typically link you to eBay after you conduct a search. Because it possesses the largest community and product selection, auction search engines typically show you to eBay's pages. Therefore, as long as eBay continues to be the largest auction house, search engines can't harm eBay much.

Case closed on this issue? Well, no.

Despite some of the benefits involved, eBay is trying to block search engines from accessing its pages under the argument that the search engines slow its site. The company also doesn't want the benefit of its strong community being leveraged by outside parties in a way that demands less time (and fewer page views) from eventual eBay users. For several reasons, eBay would rather have auction shoppers click directly to its site from the get-go. If someone visits eBay from the start, there are more opportunities to leverage the visitor than if they conduct a search and just look at one item on the site.

Overall, I don't believe that auction search engines can undermine or weaken eBay's market position -- a position that is created by an immense and strong community. Just as shopbots couldn't undermine the shopping community that Amazon had created by the time shopbots emerged on the scene, it will take a great deal, I believe, to displace or weaken the eBay community. Some Fools do believe eBay is threatened, however, and these differences in opinion make investing interesting.

Finally, one Fool posted that eBay doesn't have an inexpensive business model that can lead to extraordinary operating leverage. This poster hypothesized that eBay will need to spend more and more on marketing to fight encroaching competition from Amazon, Yahoo! and others. I respectfully disagree on this being an important issue. eBay is now largely growing through a network effect: word of mouth, e-mail, free press, and so forth. The company receives literally hundreds of free mentions in the press every week, from the front page of The Washington Post, to mentions on television sitcoms, to the inside pages of The New Yorker and Time magazine, to much smaller venues. eBay already has something that is difficult to obtain: popular, lasting buzz.

Buzzzzzzz, buzzzzzzzz. This buzz is worth a great deal to a business, especially as the Internet marketspace becomes jam-packed with new names.

This isn't to say that eBay won't need to keep spending on marketing due to positive, widespread buzz alone. The company does spend, but it spends comparably little compared to other online sites. I don't expect a need for this to change. Of course, I could be horrendously, disgracefully, unbelievably off the mark, but I believe that eBay's marketing costs will eventually decline significantly as a percentage of revenue, and its business shouldn't suffer for it. Here is a recent tally and comparison:

Customer Acquisition Costs
(Recent costs per unique registered user)

          Marketing    Dist.    Product      General
Company   & Sales      Deals    Development  & Admin. Total Cost
Amazon      $48.5      $0         $17.1       $5.7      $71.3
eBay         $8.3      $0          $2.0       $3.8      $14.1
E*Trade     $38.3      $0         $16.7      $14.6      $69.6
N2K          $6.8      $5.7        $8.0       $1.3      $21.8
Onsale       $5.3      $0          $1.3       $2.7       $9.3